Topic 2: Day 1

1. Topic 2: Day 1 Basic Economic Concepts

2. What is Economics? • Definition of Economics • A social science (like history, geography, political science) • Studies, analyzes, predicts and explains economic activity • Study of Scarcity

3. Handy Dandy Guide to Economics • People choose • Choice involves cost • People respond to incentives – which can be predicted • People create economic systems that influence choices and incentives • People gain when they voluntarily trade • Choices have consequences

4. What goes into the production of something? • Ex. Make a sandwich • Ex. Baking a cake

5. The Fundamental Problem All Economies Face: • Scarcity: When peoples’ needs/wants exceed available resources Scarcity of What? Labor Capital Entrepreneurship Land These are known as: FOPs (Factors of Production) OR Productive Resources

6. The FOPs: C 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 E L Land: Consists of any natural resources (raw materials; land for people to build homes/offices; trees, oil) L Labor: Fluctuates (growth/decline; life expectancy; work skills) and can impact an economy’s productivity

7. 3 BEQs (Basic Economic Questions) 1. What to Produce? Usually based on available FOPs in an economy. How to Produce? Usually based on available technology and decided based on EFFICIENCY. 2. For Whom Are we producing? Go for the “target audience” – where the demand is. 3.

8. Economic Systems • 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? • 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?

9. Economic Systems • 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?

10. Free Enterprise • Consumers & business owners decide what to produce, not the gov’t

11. Basic Concepts Expressions of needs (not essential to survive) Ex. Transportation, technology, luxurious g/s Basic g/s necessary for survival Ex: food, water, shelter, clothes

12. Basic Concepts Goods and Services: 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)

13. Confused? Illustrate this in your notes: Products Economic Products Free Products Sunshine, air, wind Goods Services Performed by other people: nurses, food serving, etc Consumer Capital Used by the Consumer Used to make other goods

14. Basic Concepts... TINSTAAFL There Is No Such Thing As AFree 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” Paradox of Value 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.

15. Basic Concepts... Economic Interdependence • 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 Specialization: Division of Labor • 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

16. Topic 2: Day 2The PPF The Production Possibilities Frontier

17. 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 Review: Thinking at the Margin • When you decide how much more or less to do, you are thinking at the margin.

18. 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.

19. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 a (0,15) 8 b (8,14) Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Production Possibilities Frontier 0 15 8 14 14 12 18 9 20 5 21 0

20. The PPF Production Possibilities Frontier What does the PPF show? The various combinations of TWO g/s produced using all FOPS efficiently What does each point represent? A= B= C= D= E= B E Guns A D C Butter

21. Production Possibilities Frontier Unattainable; Without growth Wartime B E Normal Production Guns A D C Peacetime Butter Attainable; depression

22. What does this all mean? • 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

23. Production Possibilities Graph 25 20 15 10 5 S Shoes (millions of pairs) a (0,15) b (8,14) c (14,12) g (5,8) d (18,9) A point of underutilization e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) 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.

24. 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?

25. 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

26. 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

27. Trade Offs & Opportunity Costs 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? What is the best alternative? What are the tradeoffs? What is the opportunity cost? Why is this grid effective?

28. Famous Fads The Real World

29. Topic 2: Day 4 Topic 2 Test: Multiple Choice Article Response