Economics: Unit One

1. Economics: Unit One The social science for the socially awkward.

2. Unit One: Basic Economic Concepts • Everybody faces tradeoffs • The cost of something is what you give up to get it (opportunity cost) • People respond to incentives • Trade makes everyone better off • Rational people think at the margin. • Government intervention can make markets more efficient and more equitable. • Markets are a good place to organize economic activity. • When the government pumps too much money into the economy, the overall level of prices increases. • There is a short-term tradeoff between inflation and unemployment.

3. Unit One: Basic Economic Concepts I. Economics – The social science that deals with the problem of how to allocate a society’s scarce resources between the competing and unlimited wants and needs of its people. II. Scarcity A. Limited + Desired B. Diamonds, clean water, trees C. Not solar power, small pox, or polluted water

4. Unit One: Basic Economic Concepts III. The Basic Economic Problem – Wants and needs of humankind are unlimited but the resources to satisfy human want and need are scarce. A. Scarcity forces individuals and society’s to face choices and sacrifices. B. Society has to figure out how to best allocate scarce resources to meet the wants and needs of humanity.

5. Unit One: Basic Economic Concepts IV. Scarce resources are the factors of production needed to meet the needs and wants of society. A. Land (natural resources) B. Labor (the workforce) C. Capital – physical and human (tools, technologies, and ideas used to produce goods and services)

6. Unit One: Basic Economic Concepts V. Microeconomics and Macroeconomics A. Microeconomics 1. Interaction between households and firms 2. Supply and demand in a particular market B. Macroeconomics 1. Aggregate (total) demand and aggregate supply. 2. interactions of all nation’s households, firms, government, and foreigners in determining overall level of output, employment, and price level of a given country. 3. Informs government policy

7. Unit One: Basic Economic Concepts VI. Three goals of economic policy on a governmental level A. Full employment of nation’s labor force B. Stability in the level of prices for goods and services (low inflation) C. The continual increase in the output of goods and services (economic growth)

8. Unit One: Basic Economic Concepts VIII. Choice and Opportunity Cost A. All economic decisions involve trade-offs B. There is always a cost (“there is no such thing as a free lunch”) C. Opportunity cost is the opportunity lost 1. What is given up 2. What else you may have bought, time, rest, fun, etc. 3. All economic transactions involve opportunity costs

9. Unit One: Basic Economic Concepts • Economic Models • Diagrams, formulas, graphs used by economists to explain economic phenomena. • Ceteris Paribus – “other things being equal” • When using a model, economists hold all other variables constant. • Ceteris paribus is used to examine how one variable effects another variable.

10. Unit One: Basic Economic Concepts X. The Production Possibilities Curve or Frontier A. Illustrates trade-off between two competing production possibilities B. The PPC models scarcity, efficiency, inefficiency, and opportunity costs

11. Production Possibilities Frontier (PPF)Points along the curve are efficient

12. Unit One: Basic Economic ConceptsIndividual Production Possibilities Curve

13. Unit One: Basic Economic Concepts National Production Possibilities Curve – Constant Opportunity Cost - One to one opportunity cost - Straight line National Production Possibilities Curve – Increasing Opportunity Cost • Increasing cost • Line bows outward

14. PPC – Constant Opportunity Cost

15. PPC – Increasing Opportunity Cost

16. Unit One: Basic Economic Concepts The Law on Increasing Opportunity Cost • When you have two products that require different resources, the opportunity cost of producing item A will increase as you produce more and more of that item. • This law explains why the frontier is bowed outward – as output of a particular product increases , the opportunity cost of producing additional units rises. • This results from the fact that some labor, land, and capital resources are better suited at making certain goods than others.

17. Unit One: Basic Economic Concepts • How would we plot inefficiency on a PPC? • How is the line affected if the economy gets better? Worse? • Create a production possibilities curve between two goods. Plot the frontier, a point of underutilization, and a point of impossibility.

18. Unit One: Basic Economic Concepts VI. Productivity A. The output generated per unit of input. B. An example would be an hour of work for an employee. C. Investments in training and education will increase the productive capabilities of the population (human capital) D. Investments in technologies will increase the productive capabilities of the economy (physical capital)

19. VII. Economic Systems A. The system within a nation which allocates resources between the competing needs and wants of the government, firms, and households. B. The system answers the WHAT, HOW, FOR WHOM questions on economics. C. Two Primary Systems 1. Command System 2. Market System

20. Unit One: Basic Economic Concepts D. COMMAND 1. The government controls all resources – the state answer all three questions. 2. Resources allocated according to government’s priorities. a. If equality is the goal, the government will distribute resources equally among the nation’s population. b. If military might is the goal, the government will allocate more resources toward building and maintaining defense. (North Korea)

21. Unit One: Basic Economic Concepts 3. No Private ownership or property rights a. The state owns all factors of production (including the land on which you live) b. Incentives are problematic c. Most economies in the world have transition to mixed and market economies because the lack of private ownership and fixed class systems have de- incentivized citizens. (China)

22. Unit One: Basic Economic Concepts E. Market Economies 1. Based on principles of a. Private ownership b. Property rights c. Pursuit of self interest (profit motive) 2. Adam Smith – Scottish social philosopher a. Laissez-faire economic theory b. The invisible hand of self interest regulates the economy

23. Unit One: Basic Economic Concepts 3. There are three characteristics to market economies a. Property Rights – private ownership of our resources b. Incentives – maximize utility (happiness) c. Prices – reflect the relationship between supply and demand 4. The circular flow of the market economy a. Voluntary and beneficial exchanges (Trade makes everyone better off) b. Two markets – product and resource c. Does nor account for the role of government or foreign consumers.

25. VIII. Marginal Analysis A. Economic decisions take place on the margin 1. “additional” 2. marginal cost and marginal benefit a. One more hour b. One more dollar c. One more snooze 3. Firms consider marginal costs of adding extra units against marginal benefits (or revenue) 4. Consumers weigh the marginal utility of a good versus the price of a good. 5. Macroeconomics a. governments have to think on the margin when determining increases in taxes for different income levels. b. Think about household’s propensity to marginally consume or marginally save across the nation.