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Economic Basic Concepts
BIG IDEAS = Responsibility, Choices, Changes, and Relationships
Essential Questions:
– What is scarcity and how does it affect society?
– Why are the factors of production needed after the 3 economic
questions are answered?
– How does the circular flow of economics work?
* Remember you are responsible for answering one of these essential questions at the end of this unit as an assessment.
Why it matters?
Understand: All economic decisions require you to make responsible
CHOICES about how to best use limited resources and that scarcity is
the biggest economic problem.
1
LEARNING GOALS:
1. Explain how scarcity drives businesses and political decisions and why
societies do not have enough resources to satisfy everyone's unlimited wants
and needs.
2. Understand that scarcity forces societies to answer the 3 economic questions
of what, how, and for whom to produce in order to best manage resources.
3. Describe the 4 factors of production that must be present in order to produce
goods and services.
4. Explain the relationships in the circular flow of economic activity and why it
needs to keep flowing.
What you need to Do and Be Skilled at:
• Creating and explaining a graphic organizer of scarcity and the factors of
production
• Identifying and providing examples of goods and services from various
companies
• Illustrating and explaining the circular flow of economic activity
2
Enter Lesson #1 Vocabulary – KNOW
11 Vocab words
• scarcity
• economics
• need
• want
• factors of production
• land
• capital
• capital good
• labor
• entrepreneur
• gross domestic product (GDP)
3
Lesson #1 The Scope of Economics Economics:
• Analyzes how societies satisfy wants through the use of scarce resources.
• Social science — behavior of individuals as they satisfy unlimited and competing wants through the use of scarce resources.
• People decide how to allocate scare resources in order to satisfy needs and unlimited wants and the urgency of those needs and wants.
•4 elements to the study of economics:
*Description – by *Gross domestic product (GDP) is a measure of economic output produced. Total dollar value of goods and services within the USA in a year.
*Analysis
*Explanation
*Prediction
4
The Economic Problem
Societies do not have enough productive resources to satisfy everyone’s unlimited wants and needs.
Scarcity is the economic problem facing all societies .
Society does not have enough resources to produce all the things people would like and need.
The study of how scarcity affects most decisions we make is economics.
• Macro = study of the entire economy (country/world)
• Micro = study of choices by individuals, households, companies,
and markets.
5
The Economic Problem (cont.)
6
•Economists talk about people’s needs and wants.
•A need is necessary for survival. Ex:
•A want is something we would like but not necessary for survival. Ex:
•Everything we do has a cost, due to limited resources.
•TINSTAAFL—There is no such thing as a free lunch. Ex:
3 Basic Economic Questions
Scarcity forces every society to answer 3 basic questions :
1. What to produce? Ex:
2. How to produce? Ex:
3. Whom to produce? Ex:
We make CHOICES regarding scarce resources in the world. Society has to carry out the decision effectively by being productive and effective.
7
Scarcity Example:
Society needs to decide how to distribute limited resources to satisfy unlimited wants and needs.
8
Capital Entrepreneur Labor Land
The Factors of Production
4 factors of production—must be present to produce goods and services.
All 4 factors of production are required to produce goods and services. (C,E,L,L)
–Capital (sometimes called capital goods)
–Entrepreneurs
–Labor
–Land
9
Factors of Production: 4 factors of production are required to produce goods and services.
10
Ex: Ex: Ex: Ex:
Exit Lesson #1
Factors of Production
Capital: Tools,
equipment,
machinery,
and factories
Entrepreneurs: risk-takers
Individuals in
search of profits
Labor: people with all
their efforts,
abilities, and
skills
(human
capital)
Land: natural
resources on
Earth
Enter Lesson #2 Vocabulary – Know
18 words
• good
• consumer good
• durable good
• nondurable good
• service
• value
• paradox of value
• utility
• wealth
• market
• factor market
• product market
• economic growth
• productivity
• human capital
• division of labor
• specialization
• economic interdependence
11
Goods, Services, and Consumers
• Economists determine if resources are being used wisely by studying behaviors and productivity – which is the level of output that results that results from a given level of input.
• Efficiency is the smallest amount of resources to provide the greatest amount of output.
• Economic products are goods or services that are useful, scarce, and transferable.
• Economics is concerned with economic products—goods and services that satisfy our unlimited wants and needs. They command a price because they are scare and useful.
12
Goods, Services, and Consumers (cont.)
• There are different economic products and services that consumers use.
– A good is a useful, tangible item.
Capital goods are goods used to produce other goods and services
– Consumer good is for use by an individual
– Durable good is a good that lasts for years
– Ex:
– Nondurable good is a good that does not last
– Ex:
– Service is a work performed for someone
– Ex: 13
Value, Utility, and Wealth For a good or service to have value, it must also have utility (usefulness) , which varies by person. The value of a good or service depends on its scarcity and utility.
• Value refers to worth that can be expressed in dollars and cents.
• Money / price
• Adam Smith, a Scottish social philosopher, came up with the term paradox of value in 1776.
• Ex: Water has utility and is not scarce. It is a need, but it does not cost a lot. Diamonds have utility and are scarce. It is a want, but it costs a lot.
•If a product has utility and satisfaction then it has value. Scarcity can create value.
• The more scare = more value = more $$$ 14
The Circular Flow of Economic Activity Economic activity in markets, which is the meeting place between produces and consumers to exchange goods and services, connects individuals and businesses.
• The circular flow of economic activity generates wealth.
• The market is the key to this circular flow.
• Individuals earn their incomes in factor markets. (C,E,L,L)
• After individuals earn their incomes in factor markets, they spend it in product markets.
•Businesses then use this money to produce more goods and services.
•This cycle of economic activity repeats. The larger the circle the better – the small not good – if 1 part stops flowing – EW!
15
Productivity and Economic Growth
A nation’s economic growth is due to several factors.
• When the circular flow becomes larger, with more factors of production, goods, and services flowing in one direction and more payments in the opposite direction, there is economic growth.
• Productivity is the most important factor contributing to economic growth.
• Efficiency is producing more goods and services with the same resources.
17
• Ways to increase productivity:
– Invest in human capital
• Ex:
– Division of labor and specialization
• Ex:
• Ex:
– The U.S. economy has a great degree of economic interdependence. Development in 1 region of the world influences development in other regions. As a result, events in 1 part of the world may have a dramatic impact here.
– Societies can specialize in the production of certain goods and services and exchange these goods and services that the other wants but does not have to provide unmet needs and wants.
EXIT LESSON #2
Productivity and Economic Growth (cont.)
18
Enter Lesson #3 - Trade-Offs and Opportunity Cost
Economic choices involve trade-offs and evaluation of opportunity costs.
• There are alternatives and costs to everything we do.
• Every decision has trade-offs.
• One good is sacrificed for another.
• Ex:
• Similarly, each decision has an opportunity cost.
• Value of the next best alternative.
• Ex:
– Even time has an opportunity cost.
19
Production Possibilities
Economies face trade-offs when deciding what goods and services to produce.
• Economists use the production possibilities frontier to illustrate opportunity cost.
•This curve shows all possible combos of goods and services that can be produced within a stated time.
•This diagram takes into account various factors.
–Identifying possible alternatives, fully employed resources, the cost of idle resources, opportunity costs, and economic growth. Economic growth is efforts to increase the amount of goods and services by each worker.
20
Thinking Like an Economist
Economists help people make the best choices by using 2 strategies:
• Building an economic model is a simplified equation, graph, or figure based on assumptions.
• Cost–benefit analysis for investing in projects that give the highest return per dollar spent.
The study of economics helps people become better citizens.
– We get a better understanding of our free enterprise economy. (we decide w/ little government involvement)
– Our standard of living is based on supply and demand, pricing, productivity, property rights, inflation, and economic growth, among other factors.
–We become better decision makers in our personal and political lives.
EXIT LESSON #3 24