What is Economics? Chapter 1

1. What is Economics? Chapter 1 • Economics: is the commonsense science of how and why people, businesses, and governments make the choices they do. • Economics is Scientific: a. Observation: Economists observe how and why choices are made. b. Economists use these observations as a basis to predict cause-and-effect relationships. c. Economists attempt to control future events through altering important variable.

2. Why do we make choices? • Insatiability: refers to the fact that everyone has unlimited “wants” (Prov. 27:20) (Ecc. 5:10) page 4 textbook • What does God through the Bible say about our choices? (Matt. 6:24), (Matt. 6:33) (Col.3:2) page 3 textbook • What should we desire to choose (or not to)? (Prov. 8:11)- wisdom (Prov. 23:4) labor not to be rich (1 Tim. 6:6-11) page 4 read • Scarcity: Everything is “finite”, or limited in quantity (time, labor, money, and natural resources are scarce or limited in quantity) • Because of the conflict between insatiability and scarcity, choices become necessary!!!

3. Contentment and Stewardship • Contentment: Internal (psychological) Satisfaction with what you have or own and who you are, regardless of the circumstances. (Heb. 13:5) pg 5 • Stewardship: Using wisely and well what God has given you. (Luke 12:48) God will hold you accountable for what He has given you. • Oikonomos: Greek word for Steward and Economics. (1 Cor. 4:1-2)

4. The Cost of Choice • Economic cost: the value people place on a good or service • Goods: is any tangible thing that has a measurable life span (Ex/ shoes, clothing, car, glasses, etc.) • Services: intangible items (Ex/ labor of an accountant, singer or teacher) • Economic goods and services: goods and services that bear a positive economic cost (a price tag higher than zero) • Nuisance goods: goods that consumers pay to have removed and have a negative economic cost (Ex/ trash, sewage, toxic waste, etc.) • Recycling: the service of turning nuisance goods into economic goods (recycling is an application of the stewardship principle). • Free goods and services: goods and services with a price tag of “zero” (Ex/ wind for a windmill, geothermal steam, air and water).

5. Intrinsic vs. Subjective ValueOpportunity Benefit vs. Opportunity Cost • Diamond-Water Paradox: What has more value a handful of diamonds or a single glass of water? • Intrinsic Value: This principle holds that a thing is valuable because of the nature of the product, such as its scarcity or the amount of labor and natural resources that goes into its production. • Subjective Value: states that it is an object’s usefulness to the buyer that determines its worth. (Carl Menger proposed this as the solution the diamond-water paradox) • Utility: usefulness. The amount of satisfaction the good or service provides the buyer. • Opportunity benefit: the satisfaction you receive form the choice that you make • Opportunity cost: the satisfaction that you “give up” or the regret you experience for not choosing differently. • The Broken Window story: pg 10 read and list what is the one economic lesson that Hazlitt proposes and what you believe he is saying? • Util: is an economic term for an imaginary unit of satisfaction. Fig. 1.1 pg 11.

6. The Scope and Purpose of Choice • Microeconomics: deals with the choices made by “individual” units: individual people, households, or business firms. • Macroeconomics: examines large-scale economic choices and issues (government) • Positive Economics: observing economic choices and predicting economic events. (Ex/ An economist predicts that the stock market will rise again this year) • Normative Economics: refers to making value judgments about existing or proposed economic policies (Ex/ “Everyone “should” save 10% of their income”, “It is “unpatriotic” to buy foreign made clothing”, “Illegal immigrants are taking all our jobs” • Carl Menger: Founder and “Father” of the Austrian School of Economics. He advocated personal financial freedom, and that a person makes his decisions more efficiently than the government because the individual’s decisions are based on personal utility. Menger explained that it is “utility” that gives value to anything. • Chapter 1 Review pg 15

7. Personal Finance: Budgeting • Budget: is a tabulation of income and planned expenditures • Impulse buying: purchasing things that we think that we need at the moment or that merely strike a fancy • Fixed expenses: expenses that do not rise or fall as the family’s income increases in the short term (Ex/ rent or mortgage payments, food expenses, utilities and property taxes). • Variable expenses: those costs that rise and fall as the family’s income changes (Ex/ vacations, gifts, entertainment, new clothes and allowances). • Engel’s Law: observes that as a family’s income increases: the % of income spent on food decreases, the % spent on clothing, rent, fuel, and electricity stays about the same, and the % spent on education and recreation increases. • Budget Categories: pg 18-21 • Escrow Account: an account set up by the mortgage holding company for the home buyer to pay property taxes and property insurance. • Contingency: is an uncertain event (Ex/ loss of a job)

8. Economic Models: Chapter 2Circular Flow Model • Tabular model or schedule: explains simple relationships between pairs of variables (Figure 2-1) pg 25. The info is limited to a few observations • Line Graph: provides significantly more data and can tell economists approximately how much of a product will be sold at any given price on the graph (Figure 2-2) pg 25 • Production Possibilities Curve (PPC): enables the economist to see the “maximum” feasible amounts of two commodities that a business can produce when those items are competing for that business’s limited resources (Figure 2-3) pg 26 • Circular Flow Model: a visual explanation of how a complete national economic system functions. (Figure 2-5 pg 28) • Consumption Expenditures: the total amount of money that households spend on goods and services

9. Factors of Production • Factors of Production: The resources that businesses need/use to produce their goods and services. • 4 factors of production: Land, Labor, Capital and Entrepreneurship. • Land: all of the natural resources that go into the production of goods (animal, vegetable or mineral resource). • Labor: all of the human “effort” (physical and mental) that goes into the creation of goods or services. • Capital: refers to the goods used to produce other goods. Two categories of Capital: Financial and Real. • Financial capital: is all the money the household sector loans to the business firms • Real Capital: Business firms use the financial capital to purchase real capital: the tools they use to produce their goods and services. • Entrepreneurship: the activity of creatively combining natural resources, human labor, and capital in unique ways to produce new goods and services. Entrepreneurship is the most important factor of production because it directs, organizes and plans the production process.

10. Factor Costs • 4 Factor Costs: Rent, Wages, Interest and Profit and are the payments business firms make in exchange for the four factors of production. • Rent: includes all payments for the use of an owner’s property (buildings, land, royalties to an author, etc.) • Wages: all payments for labor used to produce goods or services (salaries, hourly wages, bonuses, etc.). Wages make up the largest portion of all the factor costs. • Interest: the payment business firms make on borrowed money (Ex/ corporate bonds) • Profit: the difference between the revenue received from the sale of a product and the cost of the land, labor, and capital that went into its production.

11. Government as an economic entity • Transfer payments: payments of money or goods to persons for which the government expects no specific economic repayment (Ex/ welfare benefits, food stamps, social security, and unemployment compensation) • Budget deficit: when government spending exceeds the amount it receives in taxes • Budget surplus: the government receives more in taxes than it spends • Taxes: government imposes taxes to pay for its spending. Households pay sales, income and property taxes (etc.). Businesses pay corporate, social security, unemployment, and many other taxes. • Government in the Circular Flow: Figure 2-8 pg 33

12. The Financial Market: The Heart of the Economy • Financial Market: the 4th player in the circular flow model and is the collection of a nation’s financial institutions that receive deposits of excess funds from households and lend those funds to business firms. (Ex/ commercial banks, insurance companies, finance companies, and stock brokerage firms) See Figure 2-9 pg 35. • Principal function: to circulate money from households to business firms. • Dissaving: any time households withdraw money form an account or borrow it. • Crowding Out: Our Government borrows money by selling bonds (with very attractive interest rates), treasury bills and treasury notes. Crowding out occurs because every dollar borrowed by the government means one less dollar is available to business firms to borrow • Ludwig Von Mises: Advocate of Free Markets. Author of “Human Action” the most complete and persuasive exposition and defense of the free market (pg 34).

13. Principles of Purchasing • Caveat Emptor: “let the Buyer Beware” • Bait and Switch: Ex/ any product used to entice you to come to the store to purchase but when you arrive… • Eight principles of purchasing: pg 38-40 textbook.

14. Consumerism • Era of Consumerism: the drive for the enforcement of consumer rights • Redress: the right to be heard in court and receive reasonable compensation (Ex/ consumer buys a defective product or service). • Cease and desist order: prohibits firms from continuing a deceptive practice • Counter-advertising: advertising that a firm must produce at its own expense to correct any false claims that its earlier advertising promoted • Ralph Nader: America’s first and most vocal consumer advocate pg 42 • Federal Agencies that enforce consumer rights: FDA (Food and Drug Administration), FTC (Federal Trade Commission), CPSC (Consumer Product Safety Commission) pg 41 textbook

15. Value and Demand Chapter 3 • Principle of Diminishing Marginal Utility: states that people tend to receive less and less additional satisfaction from any good or service as they obtain more and more of it during a specific period of time. • William Stanley Jevons: developer of the Law of Diminishing Marginal Utility

16. The Function of Prices • Marginal Utility Schedule • Marginal Utility Table • Scripture and DMU: pg 48 textbook. Eccles. 5:10-11 and the rich fool (Luke 12:16-21) • How Demand Works: Cartoon pg 49 textbook

17. Demand • The Law of Demand: everything else being held constant, the lower the price charged for a good or service, the greater the quantity of it people will demand, and the higher the price, the lower the quantity they will demand. • Fig 3.3 Subjective Value pg 51 • Fig 3.4 Demand Schedule and Fig. 3.5 Demand Curve pg 51 • Change in Demand: when a demand curve shifts. A Rightward shift indicates an increase in demand . A Leftward shift indicates a decrease in demand. See Fig. 3-6, 3-7 and 3-8 for examples.

18. Change in Income • One of the most important causes of shift in demand is a change in people’s incomes. • Normal goods: goods that experience an increase in demand because of an increase in consumers’ income. • Inferior goods: goods that experience a decrease in demand due to an increase in consumers’ income (Ex/ powdered milk, recapped tires, used cars, secondhand clothing). • Substitute goods: goods that households use in place of others. As the price of one of the goods rises, consumers tend to buy more of the substitute (Ex/ chicken for beef, hot dogs instead of hamburgers, etc) pg 55 Fig. 3-9. Category: Change in the price of related goods. • Complementary goods: goods that are usually purchased or used together (Ex/ cameras and memory cards, French fries and ketchup, gas and cars, peanut butter and jelly). Fig. 3-10. Category: Change in tastes and preferences. • Change in expectations: a shift in the demand curve due to a change in people’s expectations of future prices. If people expect the price of a good to increase they will buy more of it ASAP (Ex/ food, gas, . If people expect the price to decrease in the future they postpone their purchase until the price has gone down (Ex/ housing market, computer, etc.).

19. Personal Finance: Insurance • Homeowner’s insurance: liability and comprehensive. • Liability insurance: pays for property damage and bodily injury incurred by any visitor on the insured person’s property. • Comprehensive insurance: protects the homeowner from heavy loss due to misfortunes such as fire, theft, windstorms, hail and lightning damage. • Automobile insurance: Collision insurance, deductible. • Collision insurance (full coverage): will pay to replace or repair the policyholder’s car (medical payments, uninsured motorist, no-fault insurance, . • Deductible: the amount the policyholder must pay before the insurance company will cover the remainder.

20. Insurance: Life and Health • Life insurance: (Cor. 12:14 pg 59) insurance to cover the responsibilities (family, burial, etc.) due to the death of a person. • Types of Life insurance: Term, Whole, Universal • Term life insurance: provides only death protection for a specified period of time. • Beneficiary: the person(s) who receive the proceeds of the insurance • Premium: a monthly payment given in exchange for a fixed death benefit • Whole life insurance: provides a savings component along with a death benefit. Premiums are level over the lifetime and the savings value of a whole life policy are called its “Cash Value”. • Universal life insurance: hybrid form that provides policyholders with a term life insurance but includes a flexible savings plan. Premiums are called “contributions” • Health Insurance: disability income insurance, major medical insurance, hospitalization, group health insurance

21. Supply and Prices Chapter 4 • Proverbs 11:24-26 and Philippians 4:19 • Supply: is the amount of goods and services business firms are willing and able to provide at different prices. • Law of Supply: holds that the higher the price buyers are willing to pay, other things being held constant, the greater the quantity of a product a firm will produce and that the lower the price consumers are willing to pay, the smaller the quantity the supplier will produce. • Supply schedule: Figure 4-1 • Supply Curve: Figure 4-2 are positively sloped, meaning that if prices rise producers will increase supply, and vice-versa: prices decrease: supply will decrease. • Change in quantity supplied: Whenever a change in the price consumers are willing to pay causes a change in the number of goods produced and sold.

22. Changes in Supply • Changes in supply: Figure 4-3 • Decrease in supply: a leftward shift in the supply curve, a situation in which suppliers produce less of their product at any given price. Figure 4-4 • Increase in supply: a rightward shift of the supply curve, demonstrates the willingness of business firms to produce more of their product at any given price. Figure 4-5 • Why a Change in Supply? Economists have pinpointed three reasons: • 1. Changes in Technology: advances in the tools used to produce goods and services (Ex/ computer, automation) Ex/ calculator: pg 68 Fig. 4-6 • 2. Changes in Production costs: Companies must pay for the natural resources, labor, and capital that goes into their products. If a firm’s costs rise, it must decrease the quantity of what it provides at the same price. Fig. 4-7 • 3. Changes in the price of related goods: as the price people are willing to pay for a substitute rises, business firms naturally become willing to sell more of that good or service and (normally) decrease their supply of the original good. Fig 4-8

23. Determining Prices Chapter 4b • Market Equilibrium Point: it represents the price at which consumers are willing to take from the market the exact quantity of a product that suppliers are willing to put into the market. Figure 4-9 pg 71 • Market Equilibrium Price: The price at which supply meets demand. • Alfred Marshall: Architect of the Demand and Supply Model pg 70 • Surplus: If a supplier raises the price of his product above the market equilibrium price, the law of supply will motivate him to increase the quantity of the product he puts into the market. At the same time, however, the law of demand will compel consumers to buy less of his product. The combined effect of the two opposite laws will result in a surplus. Figure 4-10 pg 72. Figure 4-11 and 4-12 pg 73 • Price Floor: a barrier intended to prevent the prices of those items from falling below the market price. • Demand solution to a surplus: decrease price increase demand • Supply solution to a surplus: decrease supply • Simplest solution: allow the market to work: supplier will lower price until supply meets demand and surplus is gone. Figure 4-13

24. Shortage • Shortage: whenever various factors hold the price of a good lower than its market equilibrium price. Figure 4-14. • Price Ceiling: usually a mandate by government that prevent prices from rising to the market equilibrium price. Imposing a price ceiling will always cause shortages when the market price is higher. If the market price is lower then that business will “die” because they will not be able to sell their products. • “3” Solutions to a shortage: decrease demand Figure 4-15, increase supply Figure 4-16, or allow price to rise to the market equilibrium point Figure 4-17. • Seven Good Years Followed by Seven Lean Years: Genesis 41:46-57 and 47:13-20. Biblical example of surplus and shortage.

25. Personal Finance: The Christian and Debt • Christian Debt Philosophies: Deut: 15:6, Romans 13:8, Lev. 25:35-36, Matt. 5:42 and Luke 19:23 pg 80 • Scripture associates debt with bondage, and may limit a Christian’s mobility, debt presumes upon an uncertain future or seeing the Lord’s provision or protection, or giving to charity or the Lord, • Default: fail to pay a loan on time • Garnish: when a lender gets permission to take a part of a borrower’s wages