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Unit One: Basics

Unit One: Basics. Topic: Basic terminology and concepts. Learning Targets. The student will understand what is studied in economics. The student will describe how economic decisions are made and how individual decisions affect others.

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Unit One: Basics

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  1. Unit One: Basics Topic: Basic terminology and concepts

  2. Learning Targets • The student will understand what is studied in economics. • The student will describe how economic decisions are made and how individual decisions affect others. • The student will describe how money, resources and goods and services flow through the economy. • The student will differentiate between the three types of economic systems and how decisions are made in each system. • The student will use economic terminology correctly.

  3. Defining Economics • Brainstorm • Def: study of scarce resources and decision-making as it relates to the production and consumption of goods and services. • Social science • Use ceteris paribus assumption (all other things equal) • Simplified models

  4. Decision-Making • Why can’t everyone have everything? • Scarcity and resource use • How do we make decisions? • Cost-benefit analysis • Marginal analysis – “how much” concept • Opportunity cost – if I do this, I am missing out on the opportunity to gain ___. • Incentives

  5. Cost-Benefit Analysis • Marginal cost is upward-sloping (as you produce each additional unit of an item, cost increases). • Marginal benefit is downward-sloping (consuming additional units starts to lose its pleasure). Good X MC MB and MC MB 100 101 Quantity of X

  6. Interaction • Choices affect others. • Trade – specialization and division of tasks/labor • Why specialize and trade? • Gains • Comparative advantage – producing at a lower opportunity cost (giving up less of another good). • Circular Flow Model – resource markets and product markets

  7. Macro vs. Micro • Macroeconomics – study of the whole; business cycle (recessions and expansions), GDP, fiscal and monetary policies, etc. • Microeconomics – study of the individual units; consumer behavior, business decisions, effects of taxation, etc.

  8. The Four Fundamental Questions(any economic system must answer) • What to produce? • How to produce it? • Who will receive it? • How will the system accommodate change?

  9. Free Enterprise/Capitalism/Free Market Economy • People and firms act in their own interest. • Examples: United States, Canada (really mixed economies, but close examples) • How does a market economy answer the four fundamental questions?

  10. Market Economy - Characteristics • Private property (incentives) • Freedom of enterprise and choice (incentives) • Self-interest (incentives) • Competition (incentives) • Reliance on technology and capital goods • Specialization • Use of money • Active, but limited, government (laissez-faire)

  11. Market Economy - Basis • Adam Smith, The Wealth of Nations, 1776 • The “invisible hand” is competition, which guides decisions made by consumers and producers acting in their own self-interest. • Because each individual wants more, they work harder, which increases overall production. • If the market is left alone, it will function on its own because of the “invisible hand.” • Three virtues: efficiency, incentives and freedom.

  12. Other Economic Systems • Socialism – common ownership of resources; more government-funded programs • Communism – government-owned resources; government-controlled decisions

  13. Terms • Goods • Services • Consumer • Producer • Private (sector) • Public (sector) • Cost • Price • Market failure • Externality

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