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WELCOME TO WELCOME TO ECONOMICSECONOMICS
Are YOU as EXCITED as I AM?
Top Ten Reasons Top Ten Reasons to Study to Study
EconomicsEconomics
• 1. Economists are armed and dangerous: "Watch out for our invisible hands."
• 2. Economists can supply it on demand.
• 3. You can talk about money without every having to make any.
• 4. You get to say "trickle down" with a straight face.
• 5. Mick Jagger and Arnold Schwarzenegger both studied economics and look how they turned out.
Spending Time Spending Time with Mrs. Burton?with Mrs. Burton?
• 6. When you are in the unemployment line, at least you will know why you are there.
• 7. If you rearrange the letters in "ECONOMICS", you get "COMIC NOSE".
• 8. It is the only discipline where two people can share a Nobel Prize for saying contradictory things. i.e. Dr. Douglas North & Mrs. Burton
• 9. When you get a failing grade, you can tell everyone that you are just researching the law of diminishing marginal utility.
• 10. When you call 1-900-LUV-ECON and get Kandi Keynes, you will have something to talk about. Don’t understand this? You will later this semester.
Why Are You Studying Why Are You Studying Economics?Economics?
• 1. It explains why things are as they are
• 2. It predicts what is likely to happen under certain conditions.
• 3. It makes us wise decision makers in our democratic world
• Understanding– Economic ideas are all
around you. You cannot ignore them.
Educational Attainment
Unemployment Rate
Average Annual Earnings
1-3 years of high school
9.3 $25,300 (HS dropout)
4 year of high school no diploma
8.1 NA
HS graduate 4.7 $32,300
Some College, no degree
4.0 $38,500
Associates 3.3 $38,900
Bachelors 2.4 $52,400
Masters NA $70,900
Doctorate 1.6 $86,400
Why is Economics Worth Why is Economics Worth Studying?Studying?
• Expanded Career Opportunities– Most students of
economics don’t become economists.
– But knowledge of economics is vital in many fields such as banking, finance, business, management, insurance, real estate, law, government, journalism, health care and the arts.
Chapter 1: The Economic Chapter 1: The Economic Way of ThinkingWay of Thinking
NO!
Section 1: Scarcity: The Basic Section 1: Scarcity: The Basic Economic ProblemEconomic Problem
• Economics is about CHOICE driven by SCARCITY. • 1. What is Economics?• 2. Define wants.• 3. Identify 5 ‘wants’ in your life.• 4. Define needs.• 5. Identify 5 needs in your life.• 6. What is scarcity?
What is Scarcity?What is Scarcity?• ScarcityScarcity is a situation in which resources are limited but can be is a situation in which resources are limited but can be
used in different ways; so one good or service must be sacrificed used in different ways; so one good or service must be sacrificed for another. for another.
• 7. What is the Fundamental Problem in Economics?7. What is the Fundamental Problem in Economics?• 8. What are the 2 principles which govern scarcity?8. What are the 2 principles which govern scarcity?
What is Economics?What is Economics?• 9. Define goods.• 10. List 5 goods in this room.• 11. Define services.• 12. Identify 5 services provided here at school.• 13. Are you a consumer or producer?• 14. Identify 5 producers which supply goods/services to our
school.
Scarcity Leads to Three Scarcity Leads to Three Economic QuestionsEconomic Questions
15. What is question 1?
16. What are we producing in this classroom?
17. What is question 2?
18. What is question 3?
The Factors of ProductionThe Factors of Production(Resources)(Resources)
• 19. What is the 19. What is the definition for Factors of definition for Factors of production? production?
The four categories of The four categories of resources are:resources are:
• LandLand• LaborLabor• EntrepreneurshipEntrepreneurship• CapitalCapital
– Human capitalHuman capital– Physical capitalPhysical capital
LAND and LABORLAND and LABOR• 20. Land includes all
_______________ • 21. These can be renewable.
Give 5 examples.• 22. Or nonrenewable. Give 5
examples.• 23. Labor is human
_________, _____________, and _________ used by workers in the production of goods and services.
Physical CapitalPhysical Capital
24. Physical capital is all the resources made and used by people to __________ and ________ goods and services.
What is Your Human Capital?What is Your Human Capital?• 25. People invest in human
capital, which is all the _______________ and __________ gained through experience.
• 26. When workers posses human capital, they are more ___________ and therefore have better chance at securing and holding a job.
EntrepreneurshipEntrepreneurship• 27. Entrepreneurship is the
combination of what four components?
• 28. THINK: What is the difference between an inventor and an innovator?
• 29. What do they risk in the hopes of making a profit?
• 30. THINK: Why are entrepreneurs important in an economy?
• Entrepreneurs take risk and commit time and money to a business without any guarantee of profit.
Section 2: Economic Choice Section 2: Economic Choice Today: Opportunity CostToday: Opportunity Cost
• 31. Productive resources are limited. People cannot have all the goods and services they want. What encourages people to act in certain ways and guides their resources?
• 32. What are 5 incentives you value?
• 33. Define utility.
• 34. What are 5 items with high utility in this classroom?
• 35. When we make decisions based on the most profitable use of our resources it is known as _________________.
Unlimited Wants with Limited ResourcesUnlimited Wants with Limited Resources
• 36. What does your text mean “There is no such thing as a free lunch”?
• 37. Record an example in your life where you had to make a choice.
• 38. What people give up when they make a choice is known as a
______________. • 39. Define opportunity cost.
• Scarcity necessitates choice; therefore trade-offs cannot be avoided.
• As a result, they must choose some things and give up others.
• 40. Give 5 examples of trade-offs you have experienced.
COST: What You Must Give UpCOST: What You Must Give Up
• 41. What is Opportunity cost?• Represents the value of forgone Represents the value of forgone
alternativesalternatives• Only actions have costs; "things"
have no cost independent of decisions about using them.
• 42. What is a Sunk Cost?
• A previously incurred and irreversible cost.
• Examples?• Your reputation• Your GPA
45. What is meant by Ceteris Paribus?
Ceteris paribus means “other things being equal.”
Is a Choice ALWAYS Is a Choice ALWAYS Rational?Rational?
• 43. Why is the success of a market economy dependent on Rational Choices?– Using the available
resources to satisfy most effectively the wants of the person making the choice.
• 44. What type of economy does NOT have an incentive mechanism of price and profits to guide the decisions?
Choosing is RefusingChoosing is Refusing
In making our choices, we respond to In making our choices, we respond to incentives.incentives.
45. THINK: What are incentives? • An incentive is a reward or a penalty—a “carrot” or a “stick”—that encourages or
discourages an action. • If the cost of something rises, we try to find a less costly alternative. (substitution
effect)– If the benefit of something rises, we do more of that thing. – A falling price (or a low price) means that buyers bear lower opportunity costs.
• 46. What is an incentive YOU respond to?
Tuition and books(4 years at $10,000 per year)
$40,000
Opportunity cost of college time(4 years at $20,000 per year
$80,000
Total opportunity cost $120,000
Making Decisions at the MarginMaking Decisions at the Marginmeans looking at the incremental changes a decision means looking at the incremental changes a decision
causes.causes.
• This involves weighing and balancing the marginal costs and benefits of any given action.
• 47. What is marginal cost?
• 48. How is this political cartoon an example of marginal cost?
• 49. What is marginal benefit?• 50. Give an example of ONE
good or service you choose which has given you a marginal benefit.
Marginal AnalysisMarginal Analysis
• Marginal benefit: The extra benefit resulting from a small increase in some activity.
• Marginal cost: The additional cost resulting from a small increase in some activity.
• Cost and price are not the same, in economics terms.
• Prices reflect opportunity costs and help buyers make decisions.
• Few choices are "all or nothing" decisions.
• A person’s willingness to bear costs is ‘situation-specific’ – would change if the situation changed!
51. Cite an example of a “situation-specific” choice
you have made.
The Marginal Principle The Marginal Principle and TV Timeand TV Time
• If the opportunity If the opportunity cost of TV time is cost of TV time is $0.35 per hour and $0.35 per hour and pedaling is not pedaling is not required for TV time, required for TV time, the marginal the marginal principle is satisfied principle is satisfied at point at point nn, and the , and the child will watch 20 child will watch 20 hours of TV per hours of TV per week.week.
If Pedaling is RequiredIf Pedaling is Required
• If pedaling is required If pedaling is required and the discomfort of and the discomfort of pedaling is $0.85 per pedaling is $0.85 per hour, the marginal hour, the marginal cost of TV time is cost of TV time is $1.20 (equal to $0.35 $1.20 (equal to $0.35 + $0.85), and the + $0.85), and the marginal principle is marginal principle is satisfied at point satisfied at point mm, , with only 3 hours of with only 3 hours of TV time per week.TV time per week.
Opportunity Cost andOpportunity Cost andProduction PossibilitiesProduction Possibilities
• A drought decreases the amount of electric power available for aluminum smelting and irrigation, shifting the production possibilities curve inward.
• The region’s economy The region’s economy moved from point moved from point ii to to point point ff, with aluminum , with aluminum production dropping to production dropping to zero.zero.
How do Nations Decide?How do Nations Decide?
• The same way you do – Cost-Benefit Analysis
• Determine the costs of each choice and the benefits derived.
• Use your brain, not your heart!
So What are the Possibilities?So What are the Possibilities?• 52. What do
economists call the diagram they use to show the combinations of goods and services our economy can produce?
• A production possibility frontier is a model that illustrates both SCARCITY and CHOICE by assuming only 2 goods may be produced
AA
BB
CC
DDEEFF
11 22 33 44 55 FishFish
1010
1616
1919212222
CoconutsCoconuts
Production Possibilities Frontiers
Production Possibilities FrontierProduction Possibilities Frontier• We also must assume that all
resources depicted on the PPF are fixed and will not change.
• Given that all productive resources are fully and efficiently employed.
• The points directly on the curve represent a nation’s resources fully employed.
• Points inside the curve do NOT fully use all resources
• Points outside the curve can never be reached in the nation’s current economic situation, unless you go in DEBT
Resources NOT fully Resources NOT fully employedemployed
• When the economy is at point i, resources are not fully employed and/or they are not used efficiently.
NOT attainable with Given NOT attainable with Given ResourcesResources
• Point g is desirable because it yields more of both goods, but not attainable given the amount of resources available.
Resources FULLY and Resources FULLY and EFFICIENTLY employedEFFICIENTLY employed
• Point d is one of the possible combinations of goods produced when resources are fully and efficiently employed.
Scarcity and the Production Scarcity and the Production Possibilities CurvePossibilities Curve
• To increase the amount of farm goods by 10 tons, we must sacrifice 100 tons of factory goods.
Resources NOT Resources NOT perfectly adaptableperfectly adaptable
• The PPF curve is bowed out because resources are not perfectly adaptable to the production of the two goods.
• As we increase the production of one good, we sacrifice progressively more of the other.
Shifting the Production Shifting the Production Possibilities Frontier Possibilities Frontier
CurveCurve• To increase the
production of one good without decreasing the production of the other, the PPF curve must shift outward.
ECONOMIC GROWTHECONOMIC GROWTH53. The PPF curve shifts outward
as a result of what 2 changes? a. An increase in the
economy’s resources, or
b. A technological innovation that increases the output obtained from a given amount of resources.
• Whenever the production Whenever the production possibility frontier possibility frontier shifts shifts outwardoutward, the economy is , the economy is said to have experienced said to have experienced economic growtheconomic growth..
Additional Goods Additional Goods PossiblePossible
• From point d, an additional 200 tons of factory goods or 20 tons of farm goods are now possible (or any combination in between).
• This is most often created by an increase in resources.
Negative Economic Growth can be Negative Economic Growth can be caused by the Destruction of caused by the Destruction of
resources.resources.
Good X
Goo
d Y Examples are Examples are
disasters or war.disasters or war.
Examples are Examples are disasters or war.disasters or war.
Specialized growthSpecialized growth
PretzelsPretzels
Pu
mp
kin
sP
um
pk
ins
Starting PPFStarting PPF
New PPFNew PPF
General GrowthGeneral Growth
PretzelsPretzels
Pu
mp
kin
sP
um
pk
ins
Starting PPFStarting PPF
New PPFNew PPF
Specialized GrowthSpecialized Growth
pivots the production possibility frontier in the direction of more output in pivots the production possibility frontier in the direction of more output in the industry affected by the technological change.the industry affected by the technological change.
The Economy of Castaway The Economy of Castaway IslandIsland
Data Point Fish Caught per Day Coconuts Collected per DayA 5 0B 4 10C 3 16D 2 19E 1 21F 0 22
53. On your paper create a Production Possibilities Graph from this data.
PPC Shows the Opportunity PPC Shows the Opportunity Cost of Each ChoiceCost of Each Choice
• 54. What is the name for the condition in which 54. What is the name for the condition in which economic resources are being used to produce the economic resources are being used to produce the maximum amount of G and S ? maximum amount of G and S ? (allocative efficiency)(allocative efficiency)
• 55. If they are not being used to their full potential we 55. If they are not being used to their full potential we have what situation? have what situation? (market failure) (market failure)
• 56. How does a government try to inhibit or decrease 56. How does a government try to inhibit or decrease market failure?market failure? (policy changes and regulation) (policy changes and regulation)
Law of Increasing Law of Increasing Opportunity CostsOpportunity Costs
• 57. As production 57. As production switches from one switches from one product to another, product to another, increasingly more increasingly more resources are needed resources are needed to increase production to increase production of the second product, of the second product, which causes which causes WHATWHATto rise?to rise?
Changing Production PossibilitiesChanging Production Possibilities
• 58. If a PPF shifts to the right or outward, what can we interpret that to mean about our economy?
• 59. If the PPF shifts to the left or inward, what assumption can we make about our economy?
Microeconomics and Microeconomics and MacroeconomicsMacroeconomics
Microeconomics and Microeconomics and MacroeconomicsMacroeconomics
60. What is Microeconomics? Examines the individual components of the economy, through interactions of consumers and producers
61. What is Macroeconomics? The analysis of economic aggregates that describe the whole economy
62. What is the concern of 62. What is the concern of POSITIVE ECONOMICS?POSITIVE ECONOMICS?
• Positive economics concerns the forces that affect economic activity, and predicts the consequences of alternative actions.
• Positive economic Positive economic statementsstatements have to do have to do with facts.with facts.
• They may involve They may involve current, historical, or current, historical, or even future facts. even future facts.
• It is the focus of most modern economic reasoning.
63. 63. What is the concern of Normative What is the concern of Normative Economics?Economics?
Normative economic Normative economic statementsstatements have to have to do with behavioral do with behavioral norms.norms.
They are judgments They are judgments as to what is good as to what is good or bad.or bad.
• Normative economics answers the question, What ought to be?
• Most economists shy away from normative questions.
Did Mrs. Burton invent Did Mrs. Burton invent EEconomics?conomics?
• In 1776 Adam Smith wrote Wealth of Nations.
• He identified the value of capitalism and discouraged government intervention in trade and exchange.
• This was called “Laissez faire”.• Adam Smith used the metaphor of
the invisible hand to explain how producers, acting in their own self-interest, are guided by the INVISIBLE HAND to produce what consumers want to consume.
64. What is the invisible hand?
Chapter 2Chapter 2Economic SystemsEconomic Systems
• 65. What is a traditional economy?
• 66. What are the 4 disadvantages for a traditional economy?
• 67. THINK: What would be an advantage of a traditional economy?
Command EconomicsCommand Economics
• 68. What is a “command and control” economy?– Economies that do NOT use the market to answer the
economic questions of society and do NOT have INCENTIVE MECHANISMS of price and profits to guide the decisions.
• 69. Who developed the theory that all of history is a struggle between factories and workers?
• 70. In which system does the government own just some of the FOP?
• 71. In which system does the government own all FOP, there is no private ownership of any resources?
• 72. THINK: What are the two most notable command economies today?
Command and ControlCommand and Control
• 73. What are 2 advantages of a command economy?
• 74. What are 3 disadvantages of a command system?– Motivating workers– Quota systems result in
emphasis on quantity over quality
– Can not match production to consumption
Market EconomiesMarket EconomiesEssential ingredients for Invisible Hand:
– Competition among producers for customers– Prices act as signals for scarcity and desirability.
• There are 5 features of a market economy
Private Property and Markets
Limited Government Involvement
Voluntary ExchangeIn Markets
Competition and Consumer Sovereignty
Specialization And
Markets
Circular Flow of Economic ActivityCircular Flow of Economic Activity
7575. What are the two markets in our economic system?. What are the two markets in our economic system?
Businesses
Product Markets
Individuals
Factor Markets
Goods & Services Goods &
Services
Land, Labor, Capital,
Entrepreneurs
Payments for Resources
Red dashed Lines indicate MONEY
Impact of Market Impact of Market EconomiesEconomies
76. What is the primary advantage of a market economy?
77. Individuals are free to develop their _____ and ______ in work they find rewarding rather than an assigned job.
78. The driving force in a market economy is __________________!!
• Market economies are not all sunshine and roses.
• 79. There is no means for providing for ________ goods and services such as national defense.
• There is no security for those who through age or sickness are not economically productive.
• 80. There is often an unequal distribution of _________.
• THINK: Does the US have a pure market economy? Why?
Markets and the Invisible Markets and the Invisible HandHand
• What is a market? An arrangement that allows buyers and sellers to exchange PRIVATE PROPERTY:
• A buyer exchanges money for a product
• A seller exchanges a product for money.
81. Identify a market you are in.• MarketsMarkets make possible the make possible the
voluntary exchange of resources, voluntary exchange of resources, goods, and servicesgoods, and services
• Market pricesMarket prices serve as signals that serve as signals that guide the allocation of resources.guide the allocation of resources.
• 82. Competitive markets are based on WHAT? voluntary exchange.
MIXED ECONOMIESMIXED ECONOMIES• Meaning they choose with a combination Meaning they choose with a combination
of both markets and government.of both markets and government.
• 83. What is an example of a traditional 83. What is an example of a traditional economy in the United States?economy in the United States?
• 84. Where can we find an element of a 84. Where can we find an element of a command economy?command economy?
• 85. What is the term for movement 85. What is the term for movement FROM FROM private ownership to government private ownership to government ownership?ownership?
• 86. What is the term for movement 86. What is the term for movement FROM FROM government to private ownership?government to private ownership?
Resource Allocation Encourages Resource Allocation Encourages InterdependenceInterdependence
When something is When something is scarce we must scarce we must choose.choose.
87. What term 87. What term refers to the uses refers to the uses to which resources to which resources are put? are put? Resource Resource allocationallocation
• 88. Specialization requires interdependence, between people and between countries. What is interdependence?
When something is When something is scarce we must scarce we must choose.choose.
87. What term 87. What term refers to the uses refers to the uses to which resources to which resources are put? are put? Resource Resource allocationallocation
• 88. Specialization requires interdependence, between people and between countries. What is interdependence?
EXPANDING CONSUMPTION EXPANDING CONSUMPTION POSSIBILITIES THROUGH TRADEPOSSIBILITIES THROUGH TRADE
• For their own self interest economies & people engage in trade with other economies or people
• Exports:Exports: Goods and Goods and services a country sells to services a country sells to other countriesother countries
89. What does the US 89. What does the US export?export?
Imports:Imports: Goods and Goods and services a country buys services a country buys from other countries.from other countries.
90. What does the US 90. What does the US import?import?
91. What is the 91. What is the Paradox of Value?Paradox of Value?
• Value – the quality that makes something desirable
• Utility – the usefulness in a given time and place
• Wealth – abundance of resources
When a necessity carries little monetary value, while a
luxury costs a great deal.
92. What is Specialization?92. What is Specialization?
• The Tortoise and the Hare live in a very nice village. The animals of the village own different businesses and their specialization works very well. Daniel Hare is the very fast mail carrier and Mr. R.S. Tortoise is the slow, methodical inventor. Everyone benefits from their special strengths!
Whenever individual workers do fewer tasks than before they specialize because then have shown they can do one task more efficiently
Chapter 3Chapter 3The American Free Enterprise SystemThe American Free Enterprise System
• 93. What is the fundamental freedom in a capitalist economy?
• 94. The situation in which everyone has the same economic rights under law is ?
• 95. The option for people to voluntarily exchange their work for an income is ?
• 96. The incentive that guides resources is the ?
How Does Free Enterprise How Does Free Enterprise Allocate Resources?Allocate Resources?
• 97. In a free market, producers seek what?
• 98. And consumers vote with what?
• 99. Give an example of a vote you have made recently in our market.
Government in the US EconomyGovernment in the US Economy
• The US economic system is actually called a mixed free enterprise economy OR FREE MARKET
• 100. WHY?
• 101. Give 5 examples of things you consume which are supplied by our government.
Section 3Section 3Government and Free EnterpriseGovernment and Free Enterprise
• 102. When people who are NOT part of a marketplace interaction benefit from it or pay part of its costs what do we find?
• 103. Products provided by any level of government and consumed by the public are called what?
• 104. What are the 2 characteristics of public goods?• 105. When a person chooses not to pay for a G or S but
benefits anyway, that is called a “free rider”. Give an example of an instance when you were a free rider.
• 106. The G and S needed for a society are called what?• 107. Give 5 examples of Infrastructures.
CommandCommandCommandCommand Laissez-FaireLaissez-Faire
Free MarketsFree MarketsLaissez-FaireLaissez-Faire
Free MarketsFree MarketsMixedMixedMixedMixed
Will the Real Capitalism Please Will the Real Capitalism Please Stand Up?Stand Up?
The Spectrum of Economic SystemsThe Spectrum of Economic Systems
Will the Real Capitalism Please Will the Real Capitalism Please Stand Up?Stand Up?
The Spectrum of Economic SystemsThe Spectrum of Economic Systems
In answering the three basic questions society must In answering the three basic questions society must choose among three kinds of choose among three kinds of economic systems. economic systems.
No nation has a pure market economy and none has a pure command economy, so we can describe economies in terms of a continuum, from those with a preponderance of strong capitalist institutions to those with few or none.
SpilloverSpillover PRINCIPLE PRINCIPLE
or or ExternalitiesExternalities
Spillover Spillover PRINCIPLEPRINCIPLEFor some goods the costs or benefits For some goods the costs or benefits associated with producing or associated with producing or consuming those goods are not consuming those goods are not confined to the person or organization confined to the person or organization producing or consuming them.producing or consuming them.
109. Give 5 examples of externalities in 109. Give 5 examples of externalities in your life. your life.
• 108. What is a Spillover? 108. What is a Spillover? A cost or benefit A cost or benefit experienced by people who are external to the experienced by people who are external to the decision about how much of a good to produce or decision about how much of a good to produce or
consumeconsume..
Comparative Comparative Advantage Advantage vs. Absolute vs. Absolute AdvantageAdvantage
An economy has a An economy has a comparative advantagecomparative advantage in producing a good if it can in producing a good if it can produce a good at a lower opportunity cost than could other countries.produce a good at a lower opportunity cost than could other countries.110. In what good does the US have a comparative advantage?110. In what good does the US have a comparative advantage?An economy has an An economy has an absolute advantageabsolute advantage if it is able to produce something if it is able to produce something with fewer resources than others could.with fewer resources than others could.111. In what good does the US have an absolute advantage?111. In what good does the US have an absolute advantage?112. What is another country with an absolute advantage and what is their 112. What is another country with an absolute advantage and what is their good?good?
An economy has a An economy has a comparative advantagecomparative advantage in producing a good if it can in producing a good if it can produce a good at a lower opportunity cost than could other countries.produce a good at a lower opportunity cost than could other countries.110. In what good does the US have a comparative advantage?110. In what good does the US have a comparative advantage?An economy has an An economy has an absolute advantageabsolute advantage if it is able to produce something if it is able to produce something with fewer resources than others could.with fewer resources than others could.111. In what good does the US have an absolute advantage?111. In what good does the US have an absolute advantage?112. What is another country with an absolute advantage and what is their 112. What is another country with an absolute advantage and what is their good?good?
Specialization According Specialization According to Comparative to Comparative
AdvantageAdvantageCountry Computer Memory Chips Barrels of OilJapan 10 units per day 4 per day
England 5 units per day 3 per day
Productivity per worker in Productivity per worker in
Japan and EnglandJapan and England
Productivity per worker in Productivity per worker in
Japan and EnglandJapan and England
Allocative Efficiency?Allocative Efficiency?
Good XGood X
Goo
d Y
Goo
d Y
Allocative efficiencyAllocative efficiencyimplies a specific pointimplies a specific pointon the PPF that is the on the PPF that is the most valuable most valuable combination of combination of outputs.outputs.
Allocative efficiencyAllocative efficiencyimplies a specific pointimplies a specific pointon the PPF that is the on the PPF that is the most valuable most valuable combination of combination of outputs.outputs.In general, thereIn general, there
will be only onewill be only onepoint on the PPFpoint on the PPF
that is allocativelythat is allocativelyefficient. efficient.
Different methods can be used to Different methods can be used to allocate goods and services.allocate goods and services.
• I have 3 CDs, Frank Sinatra, Beatles and All American Rejects.
• Who wants them for free?• How should I solve the
dilemma?• What process and/or
criteria should be used to distribute or ration the CDs?– first-come-first-served,– lottery, – contest – winner-take-all, – money-price, – need, – auction, – sharing equally
The opportunity cost (what is refused or given The opportunity cost (what is refused or given up) may change as the available alternatives up) may change as the available alternatives
change and as people's tastes change.change and as people's tastes change.
• How much will you pay for an old (and sweaty?) T-shirt that I brought to sell?
• Is it’s value different if it belonged to Brad Pitt or Orlando Bloom instead of belonging to me? Why?
• If I give you a choice between the old T-shirt or a new one, which would you choose? Which would you refuse?
• What was your opportunity cost to obtain the new shirt?
• Was that a high or low cost?
Identify the Opportunity Cost in each of Identify the Opportunity Cost in each of the Following Dilemmas.the Following Dilemmas.
113. why farmers often wait until a rainy day to do errands in town, while a man in a new suit will decide to forego his errands on the same day;
114. why a highly talented person who travels a lot might hire a chauffeur;
115. why young women in India cut the grass surrounding the Taj Mahal with kitchen shears rather than using lawn mowers;
116. why movie stars, fashion models, and rock singers have higher divorce rates than the rest of the American population.
Section 3: Analyzing Production Section 3: Analyzing Production PossibilitiesPossibilities
Section 3: Analyzing Production Section 3: Analyzing Production PossibilitiesPossibilities
117. What are 117. What are Models?Models?
They emphasize They emphasize features central features central to the questions to the questions we are trying to we are trying to answer.answer.
To keep models To keep models simple, economist simple, economist make assumptions.make assumptions.
One common One common assumption is termed assumption is termed ceteris paribusceteris paribus::
“Ceteris paribus” is Latin for “all else being equal.”
To study the relationship
between two variables, we assume that other variables do not change.
This enables us to clearly see the effects of choices made AT THE MARGIN!
Economic AssumptionsEconomic Assumptions
Examples of Choices at the MarginExamples of Choices at the Margin
• Choices Facing a Choices Facing a Consumer:Consumer:o Should I eat the Should I eat the
last slice of Pizza?last slice of Pizza?o What is the best use What is the best use
of the next hour of of the next hour of time?time?
o How should I spend How should I spend the last dollar in my the last dollar in my pocket?pocket?
CHOICES FACING A BUSINESSCHOICES FACING A BUSINESS
o Should revenues be used Should revenues be used to hire another worker or to hire another worker or to upgrade the office to upgrade the office computer system?computer system?
o Should one more entrée Should one more entrée be added to a be added to a restaurant’s menu? restaurant’s menu? Should one be deleted?Should one be deleted?
o Should the restaurant Should the restaurant stay open one hour later, stay open one hour later, or close an houror close an hour earlier? earlier?
CHOICES FACING GOVERNMENTCHOICES FACING GOVERNMENT
Should we add Should we add another freeway another freeway exit ramp?exit ramp?
Should a new new Should a new new elementary school elementary school be built?be built?
How badly does a How badly does a city need another city need another water plant?water plant?
What are the two goals in our What are the two goals in our economic system?economic system?
The first is objective The first is objective equityequity,, which refers which refers to fairness.to fairness.Equity is ultimately a Equity is ultimately a matter of personal matter of personal perceptionperception
The second The second objective is objective is efficiencyefficiency..Efficiency means Efficiency means resources are used resources are used in ways that in ways that provide the most provide the most value.value.
What is What is Economic Economic
Inefficiency?Inefficiency?
• Market failuresMarket failures occurs in situations occurs in situations when markets fail to achieve anwhen markets fail to achieve an
efficient outcomeefficient outcome..
118. What is the result of market 118. What is the result of market failure?failure?
119. What 119. What is an is an
InstitutionInstitution??
• Established behavior practices and patterns that form the foundation for community life.
• Institutions evolve in market economies to help individuals and groups accomplish their goals
120. What are the Four Key Institutions 120. What are the Four Key Institutions of Capitalism?of Capitalism?
MarketsPrivate propertyThe rule of lawEntrepreneurship
Going to a school building
One teacher in a classroom of
students
Homework
Public schooling paid
for by government
The persistence of the summer vacation model even though few work in agriculture
121. What is the Rule of Law?121. What is the Rule of Law?
Societies may have laws, stable governments, and even benevolent rulers, and still be without the rule of law.
The key requirement of the rule of law is that both the governed and the governors are subject to the law.
Defined Property Rights Defined Property Rights to Goods and Personto Goods and Person
• Well-defined and enforced property rights free owners from the restriction of constant vigil over the land, business, homes, or buildings they own and allow them to spend more time producing
• They also affect the ability to acquire capital by determining whether property will be accepted as collateral for productive debt.
Societies may define, allocate, and enforce Societies may define, allocate, and enforce property rights in one of 3 ways: property rights in one of 3 ways:
• by the rule of physical force, or anarchy by the rule of men, or by the rule of law.
• The methods differ in the extent to which they encourage investment and economic growth.
Rule of Physical Force Rule of Physical Force (Anarchy)(Anarchy)
• 122. In Rule of Physical Force, how are property rights secured? – coercion by physical force.
• Access to property is restricted to those with the physical ability to take and defend it.
• Peaceful transfer of property rights is difficult and uncommon.
123. What is Rule of Men? 123. What is Rule of Men?
• The rule of men is “the ability of government officials to govern by their personal whim or desire.“
• Formal law may exist, but the elite determines if, when, and how it is applied.
• Decisions are frequently arbitrary, tinged with political favoritism.
• Because ownership continues only at the whim of the elite, assets are of little use as collateral.
124. What are the Benefits of 124. What are the Benefits of the Rule of Law?the Rule of Law?
a. Government officials are not exempt from the law.
b. Government power is limited by a system of checks and balances.
c. The court system guarantees the provision of due process before life, liberty or property is taken.
United StatesUnited States• The U.S.
economy is the largest in the world, and most products are sold in private markets where prices reflect the interaction of supply and demand.
Starting a New BusinessStarting a New Business
• It is relatively easy and affordable to start a business in the United States.
• Procedures – for incorporation or obtaining a tax ID, for example – are relatively uncomplicated and inexpensive.
• From 2000-2001, approximately 725,000 new businesses were started and 675,000 establishments went out of business for various reasons.
Government and Public GoodsGovernment and Public Goods
• A very limited number of corporations (examples include the U.S. Postal Service and Amtrak rail) are government owned.
• The government provides a number of public goods like police and fire protection and highway construction and maintenance.
Protection of Property RightsProtection of Property Rights
• There is a trend toward restricting private property rights, as seen in increasing land seizure by local
governments using eminent domain powers, and in growing regulation and land-use controls (zoning, growth controls, use permit requirements, and environmental and habit restrictions)
• 125. What is the principle of eminent domain?
• The World Bank’s “governance indicators” rank the United States in the 91st percentile (out of 100) for rule of law and 92nd percentile for control of corruption.
Value and Opportunity Value and Opportunity CostCost
126. The opportunity cost of a new city 126. The opportunity cost of a new city police contract is:police contract is:
a.a. the amount of money it takes in order to the amount of money it takes in order to provide the city with the most highly provide the city with the most highly qualified personnel.qualified personnel.
b.b. the value of the other goods and services the value of the other goods and services that the city and taxpayers will be forced to that the city and taxpayers will be forced to give up in order to pay for the contract.give up in order to pay for the contract.
c.c. the cost to victims of crimes that the new the cost to victims of crimes that the new contract would prevent.contract would prevent.
d.d. the value of the opportunities that city the value of the opportunities that city policemen acquire by accepting it. policemen acquire by accepting it.
Outputs and InputsOutputs and Inputs127. A production possibilities frontier 127. A production possibilities frontier
shows combinations of:shows combinations of:a.a. inputs that can produce a specific inputs that can produce a specific
quantity of output.quantity of output.b.b. outputs that people consume.outputs that people consume.c.c. outputs that can be achieved as outputs that can be achieved as
technology improves.technology improves.d.d. outputs that can be achieved in a outputs that can be achieved in a
given time period with all available given time period with all available resources employed using current resources employed using current technology.technology.
Production Possibilities Production Possibilities FrontierFrontier
128. As a nation develops 128. As a nation develops economically, and new resources economically, and new resources are discovered, invented, created, are discovered, invented, created, its production possibilities frontier:its production possibilities frontier:
a.a. remains stable.remains stable.
b.b. shifts towards the origin.shifts towards the origin.
c.c. shifts away from the origin.shifts away from the origin.
d.d. becomes steeper, but does not becomes steeper, but does not shift.shift.
128. As a nation develops 128. As a nation develops economically, and new resources economically, and new resources are discovered, invented, created, are discovered, invented, created, its production possibilities frontier:its production possibilities frontier:
a.a. remains stable.remains stable.
b.b. shifts towards the origin.shifts towards the origin.
c.c. shifts away from the origin.shifts away from the origin.
d.d. becomes steeper, but does not becomes steeper, but does not shift.shift.
What Kind of Advantage?What Kind of Advantage?
129. When a country can produce a 129. When a country can produce a good with fewer resources than good with fewer resources than any other country, the country any other country, the country has:has:
a.a. a comparative advantage.a comparative advantage.
b.b. a resource advantage.a resource advantage.
c.c. an absolute advantage.an absolute advantage.
d.d. an unfair advantage.an unfair advantage.
129. When a country can produce a 129. When a country can produce a good with fewer resources than good with fewer resources than any other country, the country any other country, the country has:has:
a.a. a comparative advantage.a comparative advantage.
b.b. a resource advantage.a resource advantage.
c.c. an absolute advantage.an absolute advantage.
d.d. an unfair advantage.an unfair advantage.
What is Economics?What is Economics?What is Economics?What is Economics?
130. Economics is primarily the 130. Economics is primarily the study ofstudy of
• stocks and bonds.stocks and bonds.• allocating limited resources to meet allocating limited resources to meet
unlimited wants.unlimited wants.• methods to eliminate scarcity.methods to eliminate scarcity.• why consumers want what they do.why consumers want what they do.
131. The three basic questions an 131. The three basic questions an economy must answer areeconomy must answer are
131. The three basic questions an 131. The three basic questions an economy must answer areeconomy must answer are
a. a. why produce; how much to why produce; how much to produce; who to produce it.produce; who to produce it.b. what to produce; how to b. what to produce; how to produce it; who to consumes produce it; who to consumes it.it.c. what to produce; why c. what to produce; why produce; how to produce.produce; how to produce.d. when to produce; how to d. when to produce; how to produce; what to produce.produce; what to produce.
a. a. why produce; how much to why produce; how much to produce; who to produce it.produce; who to produce it.b. what to produce; how to b. what to produce; how to produce it; who to consumes produce it; who to consumes it.it.c. what to produce; why c. what to produce; why produce; how to produce.produce; how to produce.d. when to produce; how to d. when to produce; how to produce; what to produce.produce; what to produce.
132. Scarcity is correctly described by 132. Scarcity is correctly described by
which of the following statements?which of the following statements?
I. Scarcity exists if there are more uses for resources than can be satisfied at one time.
II. Scarcity exists if decisions must be made about alternative uses for resources.
III. Scarcity would not exist in a society in which people wanted to help others instead of themselves.
(a) I only(b) II only(c) III only(d) I and II only(e) I, II, and I
133.133. The expression, "There's no such thing The expression, "There's no such thing as a free lunch," implies thatas a free lunch," implies that
a. everyone has to pay for his own lunch.b. the person consuming a good must
always pay for it.c. opportunity costs are incurred when
resources are used to produce goods and services.
d. no one has time for a good lunch anymore.
134. Which of the following scenarios best describes the concepts of 134. Which of the following scenarios best describes the concepts of
scarcity and opportunity cost?scarcity and opportunity cost?
a. As a birthday present, your cousin sends you a $20 bill.
b. Your state government, in order to increase support for higher education, must increase the sales tax to keep the budget balanced.
c. Your state government, in order to increase support for higher education, must cut spending for environmental protection to keep the budget balanced.
d. The local fire department conducts a raffle to raise funds for new equipment.
e. Smoke from a forest fire impairs air quality in a small mountain town.
135. Incentives matter135. Incentives matter
a. only when people are greedy and selfish.b. only in a free market system.c. only in the private sector.d. to all human beings regardless of
environment.
Handy Dandy Guide to EconomicsHandy Dandy Guide to Economics
• 1. People economize. – People choose the alternative which seems best to them
because it involves the least cost and greatest benefit.• 2. All choices involve cost.
– Cost is the second best choice people give up when they make their best choice.
• 3. People respond to incentives. – Incentives are actions or rewards that encourage people to
act. When incentives change, people's behavior changes in predictable ways.
Economic SystemsEconomic Systems
• 4. Economics systems influence individual choices and incentives. – How people cooperate is governed by written and unwritten rules. As rules
change, incentives change and behavior changes.
• 5. Voluntary trade creates wealth. – People can produce more in less time by concentrating on what they do
best. The surplus goods or services they produce can be traded to obtain other valuable goods or services.
• 6. The consequences of choices lie in the future. – The important costs and benefits in economic decision making are
those which will appear in the future. Economics stresses making decisions about the future because it is only the future that we can influence. We cannot influence things that have happened in the past.
Direct versus InverseDirect versus InverseRelationshipsRelationships
Y variableY variable
X VariableX Variable
Direct Relationship Direct Relationship (positive) upward sloping(positive) upward slopingto the right.to the right.
Inverse RelationshipInverse Relationship(negative) downward(negative) downwardsloping to the right.sloping to the right.
Direct RelationshipsDirect RelationshipsGraph this data!Graph this data!
Data PointData Point CommunityCommunity Yearly Yearly RainfallRainfall
Umbrella Umbrella SalesSales
AA Center CityCenter City 30 inches30 inches 100 units100 units
BB Moose Moose HavenHaven 40 inches40 inches 200 units200 units
CC BlountvilleBlountville 50 inches50 inches 300 units300 units
DD HoucktonHouckton 60 inches60 inches 400 units400 units
EE Echo RidgeEcho Ridge 70 inches70 inches 500 units500 units
Positive SlopePositive Slope
100100
200200
300300
400400
500500
1010 2020 3030 4040 5050 6060 7070 8080
1010
100100
Slope = 100/10 = 10Slope = 100/10 = 10
UmbrellaUmbrella SalesSales
Yearly Yearly RainfallRainfall
AA
BB
CC
DD
EE
Inverse RelationshipsInverse RelationshipsGraph this data!Graph this data!
Data Data PointPoint CityCity Coat SalesCoat Sales
Average Average JanuaryJanuary
TemperaturesTemperatures
FF Tropical CityTropical City 100 units100 units 50 50 degreesdegrees
GG North TownNorth Town 200 units200 units 40 40 degreesdegrees
HH SnowboundSnowbound 300 units300 units 30 30 degreesdegrees
II Cold CityCold City 400 units400 units 20 20 degreesdegrees
JJ ArcticaArctica 500 units500 units 10 10 degreesdegrees
Negative SlopeNegative Slope
100100
200200
300300
400400
500500
1010 2020 3030 4040 5050 6060 7070 8080
Slope = -100/10 = -10Slope = -100/10 = -10
-100-100
1010
JJ
II
HH
GG
FF
Sales of Sales of woolen woolen coatscoats
January January temperaturestemperatures
Information at the MarginInformation at the Margin
Incremental Incremental SpendingSpending
HoursHours
50
75
100
01 2 3
-25
1
The slope shown equalsThe slope shown equals––25, which means that 25, which means that the additional spending the additional spending by restaurant customersby restaurant customersdecreases by $25 withdecreases by $25 witheach passing hour.each passing hour.
The slope shown equalsThe slope shown equals––25, which means that 25, which means that the additional spending the additional spending by restaurant customersby restaurant customersdecreases by $25 withdecreases by $25 witheach passing hour.each passing hour.
Nonlinear RelationshipsNonlinear Relationships
(a) Decreasingly positive slope(a) Decreasingly positive slope ((b) Decreasingly positive slopeb) Decreasingly positive slope
((c) Decreasingly negative slopec) Decreasingly negative slope (d) Increasingly negative slope(d) Increasingly negative slope
A Shift in the CurveA Shift in the Curve
100
200
300
400
500
10 20 30 40 50 60 70 80
UmbrellaUmbrella SalesSales
Yearly Yearly RainfallRainfall
AA
BB
CC
DD
EE
When a curve changesWhen a curve changesposition, we say there position, we say there has been a shift in thehas been a shift in thecurve. A shift representscurve. A shift representsa new relationshipa new relationshipbetween the variables. between the variables.
When a curve changesWhen a curve changesposition, we say there position, we say there has been a shift in thehas been a shift in thecurve. A shift representscurve. A shift representsa new relationshipa new relationshipbetween the variables. between the variables.
An Intersection PointAn Intersection Point
YY
XX
Curve 1Curve 1
Curve 1Curve 1
AA
At the intersection point At the intersection point of two curves, their values of two curves, their values are identical.are identical.
At the intersection point At the intersection point of two curves, their values of two curves, their values are identical.are identical.
Practice Graphing with 2 Practice Graphing with 2 curvescurves
• Graph the following data for– A. wheat– B. sweatshirts– C. slices of pizza
• Attach the graphs to your notes.
