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Topic 2: Day 1. Basic Economic Concepts. What is Economics?. Definition of Economics A social science (like history, geography, political science) Studies, analyzes, predicts and explains economic activity Study of Scarcity. Handy Dandy Guide to Economics. People choose - PowerPoint PPT Presentation
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Topic 2: Day 1
Basic Economic Concepts
• Definition of EconomicsDefinition of Economics– A social science (like history, A social science (like history,
geography, political science)geography, political science)
– Studies, analyzes, predicts and explains Studies, analyzes, predicts and explains economic activityeconomic activity
Study of ScarcityStudy of Scarcity
1. People choose2. Choice involves cost3. People respond to incentives – which
can be predicted4. People create economic systems that
influence choices and incentives5. People gain when they voluntarily
trade6. Choices have consequences
Handy Dandy Guide to Economics
What goes into the production of something?
Ex. Make a sandwich
Ex. Baking a cake
The Fundamental Problem All Economies Face:
• Scarcity: When peoples’ needs/wants exceed available resources
These are known as: FOPs (Factors of Production) OR
Productive Resources
Capital: Human (intelligence/skills); Financial (Money); Physical (tools, equipment, buildings/factories)
Entrepreneurs: “Risk Takers” – people who risk savings in order to gain a profit; increase competition by bringing new g/s to the market; lower prices
Land: Consists of any natural resources (raw materials; land for people to build homes/offices; trees, oil)
Labor: Fluctuates (growth/decline; life expectancy; work skills) and can impact an economy’s productivity
What to Produce? Usually based on available FOPs in an economy.
How to Produce? Usually based on available technology and decided based on EFFICIENCY.
For Whom Are we producing?
Go for the “target audience” – where the demand is.
Traditional:
• BEQs dictated by tradition, ritual, habit
• Everyone knows their role
• Little change, no risk, no new ideas, stable
Are individuals Free to make Economic Decisions?
Command:
• BEQs decided by central authority – set the needs and goals of a country (often use quotas)
• ADV: Economies can change quickly (no debate)
• DISAD: doesn’t meet n/w of people; lacks incentives; lack consumer goods; little to no innovation
Are individuals Free to make Economic Decisions?
Market:
• BEQs decided by supply and demand (consumers; producers)
• NO gov’t involvement
• ADV: lots of g/s; Laissez-Faire; satisfies n/w; incentives; innovation; private ownership
• DISAD: mkt failures (monopolies); rewards only productive resources
Are individuals Free to make Economic Decisions?
Mixed-Market:
• Most BEQs are determined by demand
• SOME gov’t interference
• ADV: protects consumers; preserves competition; private AND public ownership; incentives
• DISAD: More gov’t regulation and involvement
Are individuals Free to make Economic Decisions?
Free Enterprise Consumers & business owners
decide what to produce, not the gov’t
Needs Wants
Basic g/s necessary for survival
Ex: food, water, shelter, clothes
Expressions of needs (not essential to survive)
Ex. Transportation, technology, luxurious g/s
Capital Good/Serv.
Consumer Good/Serv.
Durable Goods
Non-Durable Goods
Free Products
Manufactured good used to produce another g/s (tires for car, truck used for delivery)
Good purchased for final use by consumer (car, haircut)
Goods that last 3 or more years (car, appliances)
Goods that least less than 3 years (most foods, clothing)
Provided by nature that produce g/s (solar energy, wind power)
Products
Free Products
Sunshine, air, wind
Economic Products
Goods ServicesPerformed
by other people:
nurses, food serving, etc
Consumer CapitalUsed by the Consumer
Used to make other
goods
There Is No Such Thing As A Free Lunch
Even when a g/s appears to be “free”, there is always a cost involved (labor and wages, RM used to make the g/s, someone else paid along the way)
Ex: “Buy One Get One Free” – you are paying for the first one, but the price had been increased so that profit is still being made on the second; AND somebody somewhere got paid to make that second good…so it’s not “free”
Diamonds VS. Water Theory
Diamonds are rare, limited, and a WANT…..expensive
Water is abundant and a NEED….more affordable
Thus, when something is SCARCE, it creates value (regardless of need or want)
When something is not scarce, it’s cheap.
Economies are DEPENDENT on each other:•Actions in one part of the world or country have an impact on other parts of the world or country.•For example – a candy bar purchased at Stewart’s may have been manufactured in New York, but the sugar, cocoa and corn syrup came from all over the world
Adam Smith: The Wealth of Nations, (1776):
“Economies/Workers are MOST EFFICIENT when they produce what they are best at” (The Invisible Hand)
• Assembly Line – specialize in one task instead of many
• Trade – produce and trade your most efficient FOPS
Topic 2: Day 2
The PPFThe Production Possibilities Frontier
Review: Thinking at the Margin
When you decide how much more or less to do, you are thinking at the margin.
Options
1st hour of extra study time
2nd hour of extra study time
3rd hour of extra study time
Benefit
Grade of C on test
Grade of B on test
Grade of B+ on test
Opportunity Cost
1 hour of sleep
2 hours ofsleep
3 hours of sleep
The Production Possibilities Frontier
Axes: categories of goods & services or specific goods or services on 1 axis and 1 on another
Using the factors of production to make one product means that fewer resources are left to make something else
The production possibilities frontier is the line that shows the maximum possible output for that economy.
Production Possibilities Frontier
Watermelons (millions of tons)
Shoes(millions of pairs)
Sh
oe
s (m
illi
on
s o
f p
air
s)
25
20
15
10
5
0252015105
Production Possibilities Graph
Watermelons (millions of tons)
0
a (0,15)8b (8,14)
A productionpossibilities frontier
c (14,12)
d (18,9)
e (20,5)
f (21,0)
0 15
8 14
14 12
18 9
20 5
21 0
Production Possibilities Frontier
What does the PPF show?
The various combinations of TWO g/s produced using all FOPS efficiently
A
B
CD
E
ButterButter
Gu
ns
Gu
ns
What does each point represent?
A=
B=
C=
D=
E=
Production Possibilities Frontier
A
B
CD
E
ButterButter
Gu
ns
Gu
ns
Wartime
Attainable; depression
Unattainable;
Without growth
Peacetime
Normal Production
Point A: normal production 50/50 Point B: wartime (80/20) Point C: post war (30/70) Point D: underutilization
(unemployment) Point E: can’t produce enough unless
more factors of production (population growth & borrow money) increase shift right more FOPs = more production
What does this all mean?
Sh
oe
s (
mil
lio
ns
of
pa
irs
)
25
20
15
10
5
0 252015105
Watermelons (millions of tons)
Production Possibilities Graph
g (5,8)
A point of underutilization
c (14,12)
d (18,9)
e (20,5)
f (21,0)
a (0,15)b (8,14)
S
Efficiency Efficiency means
using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.
When the PPF shifts to the right, it means that there was an increase in FOPS (more capital, labor, etc)
What would it mean if the PPF shifted to the left?
Law of Increasing Costs As production switches from 1
item to another, more and more resources are necessary to increase production of the 2nd item
Therefore, the opportunity cost increases
Concept Review:Trade-Off: Trade-offs are all the alternatives that we give up whenever we choose one course of action over another.
Opportunity Cost: The most desirable alternative given up as a result of a decision
In the words of the Rolling Stones: You Can’t Always Get What You Want
The Decision Making Grid:
I am giving you $100 for fun. How are you going to use this money?Alternati
vesCost
($100 or less)
Durable Parents Approve
Future Expenses
Can Use Anytime
What is the best alternative?
What are the tradeoffs?
What is the opportunity cost?
Why is this grid effective?
Topic 2: Day 4Topic 2 Test:Multiple ChoiceArticle Response