ECONOMICS The Cost of EVERYTHING…really. UNIT 6. Essential Questions: How do the basic factors of production influence the choices made by producers

ECONOMICS

The Cost of EVERYTHING…really.

UNIT 6

Essential Questions: How do the basic factors of production influence the

choices made by producers and consumers? How are the four factors of production used in

satisfying wants and needs?

Read Pgs. 496 – 499 Create flashcards for

today’s key terms

Homework:

Want Need Land Labor

Capital Entrepreneurship (Enterprise) Economics

1

The Fundamental Economic Problem

Our wants exceed our capacity for satisfying those wants.

Economic resources are scarce, wants and needs (uses for

those resources) are unlimited.

Economic Resources: Land – Nature-made (soil, trees, water, animals)

Labor – Human effort (workers)

Capital – Goods used for producing other goods (machines, tools, factories)

Enterprise – Managerial function that coordinates other resources (business owners, risk takers)

Economics defined:

Study of how to use our limited resources to satisfy our

unlimited wants and needs as fully as possible.


LAND LABOR CAPITAL ENTERPRISE

ALTERNATIVES (?) ALTERNATIVES (?) ALTERNATIVES (?) ALTERNATIVES (?)

Essential Question: What effects do limited natural resources have on the

choices made by producers and consumers?

Read Pgs. 499 – 502 Create flashcards for today’s key terms

Homework:

Microeconomics Macroeconomics Renewable natural resources Nonrenewable natural

resources Limited resources Scarcity

2

MicroeconomicsStudy of individual economic decision makers, small units that make up the whole (consumers, firms, government).


MacroeconomicsStudy of the economy’s overall performance, outcomes of the micro decisions (state, national, international).

Economic Models :

Economic Systems, briefly…

Economic system – set of institutions and mechanisms for answering the three fundamental questions of economics – what, how, and for whom.

We will discuss Economic systems in detail later in the unit; this is helpful to know for now!

Class Activity - What should be on your desk?

NOTHING! – clear it all off…you don’t even need a pen, pencil, or writing utensil!

Where should you be ? Gathered in groups of SIX.

Some groups may have more or less at my choosing.

GO ! ! !

FOOD: four 3-inch strips of green paper

SHELTER: 2-inch white square attached to a yellow triangle

CLOTHING: a four-color paper chain

EDUCATION: a four-page book with color cover

Economics and Resources Scarcity – occurs whenever we do not have enough resources

to produce all the things we would like to have.

Renewable/ Nonrenewable Resources – How would we categorize….

Resources – the things used in making goods or providing services. They include:

Tools Natural resources such as wood, soil, and water. Human Resources – people who provide the necessary

labor and skills.

Can any of these last forever? They are limited.

The Three Fundamental Economic Questions

What to ProduceWhat goods and services will our economy produce, and in what quantities?

How to ProduceHow will these goods and services be produced? What materials and methods will we use? More labor intensive or capital intensive? Will we ship by truck, train or boat?

For Whom to ProduceFor whom will these goods and services be produced, and how will we distribute them? Divide equally? Should those who produce more receive more? First come first served?

Essential Question: What factors influence producers to increase or

decrease output? What factors influence consumers to increase or

decrease the consumption of goods?

Read Pgs. 506 – 509 Create flashcards for today’s key terms

Homework:

Trade-off Opportunity Cost Marginal Cost

Marginal Benefit Cost-Benefit Analysis

3

Cost Benefit Analysis (CBA)

Individuals, businesses, and governments engage in systematic comparisons of costs and benefits in order to decide a course of action.

Often costs and benefits can be subjective, difficult to measure, incomparable, or hidden.

How do we measure a human life? Should humans be valued differently? If so, by what criteria?

How much is the last spotted owl worth? What is the cost of letting it die? Is that cost the same for everyone?

What are the benefits of making consumption of tobacco illegal? What are the costs?

“There’s no such thingas a free lunch.”

Milton FriedmanNobel Laureate, Economics, 1976

(1912 - 2006)


Everything has an economic cost! Yes, EVERYthing.

When you decide to do or have one thing, you give up the opportunity to do or have something else.

Opportunity cost – the next most highly valued alternative you must sacrifice in order to take a particular action.


Opportunity cost – the next most highly valued alternative you must sacrifice in order to take a particular action.

The opportunity cost of military spending = the government program that would have been funded if military spending did not increase.

Opportunity costs MUST be included in cost benefit analysis.

What would you be doing if you weren’t in class today?

Upon graduation, you get a $75k/yr job offer. What is the opportunity cost of going to college instead?

Five Economic Goals

1) Full employment of economic resourcesWhen resources are not fully employed, society is sacrificing goods and services that could have been produced.

2) EfficiencyEconomic efficiency means getting the most benefit out of limited resources. Goods and services that society wants and needs the most should be produced with as few resources as possible.

3) Economic growthEconomic growth is expansion of the economy’s capacity to produce, providing more goods and services. This is necessary for standard of living to increase over time.

Five Economic Goals

4) Fair distribution of incomeHow will income be divided among members of society? In modern economies, distribution of income determines how output will be shared or divided. Should higher incomes get a larger share of output, or should it be divided equally? Should income be redistributed until there is no poverty?

5) Stable price levelSocieties fear inflation (rise in average prices). Inflation redistributes incomes randomly. Those whose incomes rise faster than inflation will get a larger share of output than those whose incomes rise more slowly.

Conflicts and Trade-offs

Full employment vs. Stable Prices

Economic Growth vs. Environmental Protection

Equality vs. Efficiency

Trade-off – the alternative you face if you decide to do one thing over another




Read Pgs. 517 – 519, 539 Review flash cards

Check them against information in your notes and textbook

Homework:

4

Marginal Analysis Using marginal benefits and marginal costs to make a

decision.

Marginal = additional, or extra

Costs and Decision Making

If MB > MC, do it. If MB < MC, don’t do it. Keep doing it til MB=MC.

Maximum utility, maximum profit, can be found where MB = MC

Marginal costs and marginal benefits are the relevant costs and benefits to compare. Marginal costs (MC) = additional costs of doing (producing,

consuming, buying) something. Marginal benefits (MB) = additional benefits of doing (producing,

consuming, buying) something.

GDP, or gross domestic product, is the market value of all final goods and services produced in a country in a given time period. US GDP, 2nd quarter 2008 ($ billions) :

Nominal GDP $14,312.5Real GDP $11,740.3 (+2.2%)

US GDP, 1st quarter 2009 ($ billions) :Nominal GDP $14,097.2Real GDP $11,360.5 (–2.5%)

Source: BEA.gov

Measuring Total Output

GDP measures production within a nation’s borders – domestic production – no matter who owns the resources.

Cars produced in a Japanese-owned factory in the US counts in US GDP.

Cars produced in a US-owned factory in Mexico counts in Mexico’s GDP.

Measuring Total Output




Read Pgs. 517 – 519, 539 Create flashcards for today’s key terms

Homework:

5

Goods Services Salary Wages Consumer

Producer Pricing Gross Domestic Product (GDP) Standard of Living

The quality of life based on the possession of necessities and luxuries that make life easier.

Standard of Living

Is there a right to work? To own a home? To get equal pay for equal work?

Are these the same for everybody? The majority?

What is a necessity of life? What is a luxury?

Defining an Economic System

Economic system – set of institutions and mechanisms for answering the three fundamental questions of economics – what, how, and for whom.

Two Questions to Ask: Who owns the means of production used to produce goods

and services?

Who makes the economic decisions? (who answers the 3 fundamental questions?)

Defining an Economic System

All economic systems combine elements of two models at the extremes of a continuum:

Question Pure CapitalismPure Command

Socialism

Who owns the means of production?

Resources are privately owned

Resources are publicly owned (owned by the state)

Who makes the economic decisions?

Buyers and Sellers interacting in markets

Central planning authority

The Model of Pure Capitalism

Elements of Capitalism :

1) Private Property & Freedom of Choice Private owners of means of production can

choose how they sell or use their resources (labor, machinery, raw materials, farms, etc).

Firms can decide freely what they will produce and from whom to purchase the necessary resources.

Consumers are free to spend or save their income however they choose.

Are these things true of the US economy?


Elements of Capitalism:

2) Self-Interest Adam Smith (Wealth of Nations, 1776) described a

capitalist economy as one in which the primary concern of each player (producer, consumer, worker) was to promote his or her own welfare.

Smith’s “invisible hand” doctrine said that as individuals pursue their own interests, they would be led by an invisible hand to promote the good of society as a whole.




2) Self-Interest (cont.) To maximize profits, producers generate products

consumers want most. To earn higher wages, workers offer their services

where they are most needed. To maximize buying power, consumers favor producers

offering superior products at fair prices. The result? An economy that produced goods and

services desired by society, with no need for central government direction.




3) Markets and Prices Economic activity coordinated through markets

(interaction of buyers and sellers of a good or service). Markets determine prices, which serve two

important functions:i. To divide up, or ration, goods and services. Only

those willing and able to pay the price will receive the product.

ii. To motivate firms to produce more of some things and less of others.




4) Competition For Smith’s invisible hand to work, pursuit of self-

interest must be guided and restrained by competition.

Pure competition – large number of relatively small buyers and sellers interact to determine prices.

No individual buyer and seller is powerful enough to have influence over price.

Market prices MUST be determined by market forces, not powerful buyers or sellers.




5) Limited Government Intervention Pure capitalism is a laissez-faire (roughly translated, “let

the people choose”) economy. Not the role of government to answer

fundamental questions (what, how, for whom). Role of government is to ensure environment

where market can function. Must define and enforce private property rights,

and provide means of arbitration and penalties (laws, courts and prisons).


How Capitalism Answers the 3 Questions

1) What to Produce

Consumer Sovereignty – economic condition in which consumers dictate which goods and services firms will produce.

Firms are motivated by profits. The most profitable products tend to be those desired most by consumers, so firms must be responsive to consumer preferences.

“The consumer, so it is said, is the king... each is a voter who uses his money as votes to get the things done that he wants done.”

Paul SamuelsonNobel Laureate, Economics, 1970

(1915 - )


2) How to Produce

Many goods and services can be produced using alternative methods and materials – steel or fiberglass, machine or human, computer or pencil and paper, telephone or internet, brick or wood, skilled labor or unskilled labor.

Capitalist producers will tend to select the least-cost approach to maximize profits.


3) For Whom to Produce

In a capitalist economy, goods and services will be distributed to those with:

a) The ability to pay, andb) The willingness to pay

A consumer may be able to buy a particular good, but will choose not to, or to consume something else instead.

In general, those with higher incomes will always have more choices than those with lower incomes, and will receive a larger share of the economy’s total output.

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ECONOMICS The Cost of EVERYTHING…really. UNIT 6. Essential Questions: How do the basic factors of production influence the choices made by producers