Basic Economic Concepts Basic Economic Vocabulary Needs are Necessities for survival Wants are Ways...
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Basic Economic Concepts
Basic Economic Concepts Basic Economic Vocabulary Needs are Necessities for survival Wants are Ways of expressing needs and/or goods and services consumed
Basic Economic Vocabulary Needs are Necessities for survival
Wants are Ways of expressing needs and/or goods and services
consumed beyond what is necessary for survival. Goods are physical
objects that can be purchased Services are actions or activities
performed for a fee
Slide 4
Economics is the study of scarcity and choice. We have limited
resources and unlimited needs and wants. Every economics issue
involves personal choice. Scarcity: there is not enough of it
available to satisfy the way a society wants to use it. This leads
us to making choices. Opportunity Cost is what is sacrificed when
one choice is made over the next best alternative Every decision
has an opportunity cost
Slide 5
Opportunity Cost to every decision!
Slide 6
The Six Core Principles of Economics 1.People choose 2.People s
choices involve costs. 3.People respond to incentives in
predictable ways. 4.People create systems that influence individual
choices and incentives. 5.People gain when there is voluntary
exchange. 6.People s choices have consequences that lie in the
future.
Slide 7
1. People Choose We always WANT more than we can get and
PRODUCTIVE RESOURCES (HUMAN, NATURAL, CAPITAL) are always limited.
Therefore, because of this major economic problem of SCARCITY, we
usually choose the alternative that provides the most BENEFITS with
the least COST.
Slide 8
2. People s choices involve costs. All Choices Involve Costs
The OPPORTUNITY COST is the next best alternative you give up when
you make a CHOICE. When we choose one thing, we refuse something
else at the same time.
Slide 9
3. People respond to incentives in predictable ways. INCENTIVES
are actions, awards, or rewards that determine the CHOICES people
make. Incentives can be positive or negative. When incentives
change, people change their behaviors in predictable ways.
Slide 10
4. People create systems that influence individual choices and
incentives. People cooperate and govern their actions through both
written and un written RULES that determine methods of ALLOCATING
scarce resources. These RULES determine what is produced, how it is
produced, and for whom it is produced. As the rules change, so do
individual CHOICES, INCENTIVES, and behavior.
Slide 11
5. People gain when there is voluntary exchange. People
SPECIALIZE in the PRODUCTION of certain GOODS and SERVICES because
they expect to gain from it. People TRADE what they produce with
other people when they think they can gain something from the
EXCHANGE. Some BENEFITS of voluntary TRADE include higher STANDARDS
OF LIVING and broader choices of GOODS and SERVICES.
Slide 12
6. People s choices have consequences that lie in the future.
Economists believe that the COSTS and BENEFITS of DECISION MAKING
appear in the future, since it is only the future that we can
influence. Sometimes our choices can lead to UNINTENDED
CONSEQUENCES.
Slide 13
Key Assumptions in Economics People are rationally
self-interested __They seek to maximize their utility (happy
points) People generally make decisions at the margin __They weigh
the marginal benefit against the marginal cost of a decision
Ceteris Paribus _ Economists hold factors constant, except for
whats being considered.
Microeconomics vs. Macroeconomics MICROeconomics (think of
small picture) Individual markets The behavior of firms (companies)
and consumers Supply and demand Competition Resource markets Market
failures
Slide 16
Macroeconomics Examines: (Think of the Big Picture) National
Markets Total output and income of nations Total supply and demand
of the nation Taxes and government spending Interest rates and
central banks Unemployment and inflation Income distribution
Economic growth and development International Trade
Slide 17
Eight Economic Goals Economic Growth 1. Economic Growth
[Increase in Real GDP or per capita GDP] 3% 3% annual growth will
increase our standard of living. 1929-Per capita=$ 792 1933-Per
capita=$ 430 2007-per capita= $ 44,000 1929-Per capita=$ 792 ;
1933-Per capita=$ 430 ; 2007-per capita= $ 44,000 Full Employment
95-96 % 2. Full Employment about 95-96 % employment is full
198210.8% employment. In 1982, unemployment was 10.8% [12 M
unempl.] Doing the best with what we have. Economic Efficiency 3.
Economic Efficiency obtaining the maximum output from available
resources or maximum benefits at minimum cost from our limited
resources.
Slide 18
Eight Economic Goals In 1945, $1.50 bought what $1.00 did in
1860. Today, it takes $11 to buy what $1 bought in 1945. Price
Level Stability 4. Price Level Stability sizable inflation or
deflation should be avoided. We had over 10% in 73, 79, & 80.
Inflation 2% in the 1950s2.3% in 1960s7.4% in 80s was 2% in the
1950s, 2.3% in 1960s and 7.4% in 80s. A person making $25,000 a
year at age 30 would need (with average inflation of 5%) $125,000 a
year at age 65 to have the same standard of living. 1972 82,
$2.14=$1.00 In 1982, it took $2 to buy what $1 bought in 1972. 2008
1982 2008 1982
Slide 19
Eight Economic Goals A n Equitable Distribution of Income 5. A
n Equitable Distribution of Income. One group shouldnt have extreme
luxury while another is in stark poverty. The richest 1%(3 mil.)
have as much total income after taxes [average $400,000 a year as
the bottom 40% [100 million people]. The richest 1% have greater
wealth than the bottom 90% of the population.
Slide 20
. E conomic Security 7. E conomic Security provision should be
made for those not able to take care of themselves handicapped,
disabled, old age, chronically ill, orphans. Protection from
lay-offs [unemployment insurance]. Also no discrimination. 43
million Americans have some type of disability. A. Hearing
impaired: 22 million (including 2 million deaf) B. Totally blind:
120,000 (Legally blind: 60,000) C. Epileptic: 2 million D.
Paralyzed: 1.2 million D. Paralyzed: 1.2 million E. Developmentally
disabled; 9.2 million F. Speech impaired: 2.1 million G. Mentally
retarded: up to 2.5 million H. HIV infected: 900,000 Economic
Freedom 6. Economic Freedom guarantee that businesses, workers, and
consumers have a high degree of economic freedom. Balance of Trade
$400 billion a year complementaryeconomic growthF.E. ]
conflictF.E.price level stability 8. Balance of Trade. O ver $400
billion a year the last few years. Some of these goals are
complementary [ economic growth & F.E. ] and some conflict
[F.E. and price level stability].
Slide 21
ECONOMICS - science of scarcity choices - the study of the
choices people make in an effort to satisfy unlimited needs and
wantslimited resources their unlimited needs and wants from limited
resources. Individual Choice: Decisions by individuals about what
to do, which necessarily involve decisions about what not to do.
Think Target and the size of your house.
Slide 22
SCARCITY Marginal decision making = the result of an additional
change Marginal benefits vs. marginal costs is the basis for making
the decision Examples: 1 more hour of sleep vs. eating breakfast
Part time job vs. goofing off College vs. full time job
Slide 23
WHAT IS AND WHAT SHOULD BE: Positive vs. Normative Economics:
Positive economics deals with facts and therefore addresses what
is. Normative economics attempts to determine what should be based
on value judgment. Normative statements express an individual or
collective opinion on a subject.
Slide 24
"with other things the same," or "all other things being equal
or held constant."
Slide 25
INCOME (per week) $ 0 100200300400 $ 50 100150200250CONSUMPTION
(per week) Table of Values Construction of Econ Graphs
Slide 26
INCOME (per week) $ 0 100200300400 $ 50 100150200250CONSUMPTION
(per week) Table of Values Construction of Econ Graphs CONSUMPTION
(C) $400 300 200 100 Vertical Axis
Slide 27
INCOME (per week) $ 0 100200300400 $ 50 100150200250CONSUMPTION
(per week) Table of Values Construction of Econ Graphs CONSUMPTION
(C) 0 100 200 300 400 0 100 200 300 400 INCOME (Y) $400 300 300 200
200 100 100 Vertical Axis Horizontal Axis
Slide 28
INCOME (per week) $ 0 100200300400 $ 50 100150200250CONSUMPTION
(per week) Exists Between Consumption & Income CONSUMPTION (C)
0 100 200 300 400 0 100 200 300 400 INCOME (Y) $400 300 300 200 200
100 100 a bcd e a b c de A Direct Relationship... C 150 250
Slide 29
Direct ( positive ) Relationship Direct ( positive )
Relationship Independent variable induces (cause); Dependent
variable responds (effect) Direct 2 variables move in same
direction. Econ, Econ Econ
Slide 30
TICKETPRICE $50 40 403020100048121620ATTENDANCE(thousands)
Inverse ( Negative ) Relationship Inverse - 2 variables move in
opposite directions TICKET PRICE (P) 0 4 8 12 16 20 0 4 8 12 16 20
ATTENDANCE IN THOUSANDS (Q) $50 40 40 30 30 20 20 10 10 a b c d e a
b c f e f d I n Economics the independent variable can be on either
axis.
Slide 31
INFINITE & ZERO SLOPES Price of Bananas Purchases of
Watches Consumption Divorce Rate Slope = Infinite Slope = Zero
Construction of Econ Graphs Increasing X has no effect on Y. Y X X
Y Increasing Y has no effect on X.
Slide 32
What you should know from Chapter One Define economics Describe
the economic way of thinking State some important reason for
studying economics Explain the importance of ceteris paribus List
eight economic goals and give examples Differentiate between micro
and macroeconomics Differentiate between positive and normative
economics Explain and illustrate a direct relationship between
variables, and define and identify a positive sloping curve Explain
and illustrate an inverse relationship between two variables and a
negative slope