UNIT 1 - Fundamental Concepts

1. UNIT 1 - Fundamental Concepts • Economics is the study of how we can best increase a country’s wealth with the resources that we have available to us.

2. UNIT 1 - Fundamental Concepts • Marginal Benefit is the additional satisfaction or value one obtains from an activity or product. • Marginal Cost is the additional cost or sacrifice one makes of participating in an activity or purchasing a product.

3. UNIT 1 - Fundamental Concepts • Economic Decision-Making You decide to participate in an activity (going to college, buying something, etc.) as long as your marginal benefit exceeds your marginal cost.

4. UNIT 1 - Fundamental Concepts • Macroeconomics and Microeconomics The nation's unemployment rate, inflation, interest rate trends, government budgets, government fiscal policies, economic growth, and monetary policy, are topics discussed in _____ (fill in the blank). • For inflation and unemployment rates, visit http://www.bls.gov/

5. UNIT 1 - Fundamental Concepts • Macroeconomics and Microeconomics Price elasticity (sensitivity) of demand for goods and services, firms’ production behavior, cost functions, income inequality, and protectionism, are topics discussed in _____ (fill in the blank). • For college tuition changes, visit www.bloomberg.com and search for “tuition”.

6. UNIT 1 - Fundamental Concepts • The Production Possibilities Curve A production possibilities curve represents outcome or production combinations that can be produced with a given amount of resources.

7. UNIT 1 - Fundamental Concepts • The Production Possibilities Curve GUNS E 600 C F 500 B 400 G A 300 D ROSES 350 500 580 700

8. UNIT 1 - Fundamental Concepts • Economic Growth If an economy is operating at a point on the production possibilities curve, all resources are used, and they are utilized as efficiently as possible. GUNS E 600 C F 500 B 400 G A 300 D ROSES 350 500 580 700

9. UNIT 1 - Fundamental Concepts • Economic Growth Is Caused by: Increases in Resources Advances in Technology

10. UNIT 1 - Fundamental Concepts • Your Own Personal PPC If two possible outcomes in your own personal life are job earnings and educational credits, then your PPC looks as follows: Job earnings E 30000 C F 23000 B 16000 G A 12000 D College credits 23 10 30 18

11. UNIT 1 - Fundamental ConceptsThree Economic Systems are: • Capitalism • Communism • Socialism

12. UNIT 1 - Fundamental Concepts • Capitalism Characteristics • The role of the government is limited to the most essential functions. • All prices are determined in the free market (supply and demand).

13. UNIT 1 - Fundamental Concepts • Communism Characteristics • Government makes all decisions regarding production, prices, wages, interest rates, and income distribution.

14. UNIT 1 - Fundamental Concepts • Socialism (Mixed Economy) Characteristics • Most economic decisions are made by the private sector, but the role of the government is significant. Government spending and taxes are relatively high.

15. Survey question. On a scale of 1through 5 (1 = most capitalist, and 5 = most communist), which economic system do you prefer? • 1 • 2 • 3 • 4 • 5 0 of 30

16. UNIT 1 - Fundamental Concepts • Grading Systems • Capitalist: every student gets the grade (s)he works for. • Communist: all scores are added up, then divided by the number of students in the class. Everyone receives the same grade. • Socialist: some points are taken from the higher scoring students and given to the lower scoring students.

17. 0 / 30 For the grading system in our course, which do you prefer (1 = pure capitalist; 5 = pure communist)? • The current system (no redistribution) • A small amount of grade redistribution (i.e. 6%) • A fair amount of grade redistribution (i.e. 12%) • A considerable amount of grade redistribution (20%) • Pure equality Cross-Tab Label 0 of 5

18. UNIT 1 - Fundamental Concepts • Economic Growth and Economic Systems • Countries with the highest overall economic standard of living have the freest markets (more elements of capitalism). • Examples: Hong Kong, the United States, Japan, Taiwan, Great Britain, Canada, Sweden, South Korea, and Singapore.

19. UNIT 1 - Fundamental Concepts • 2010 Purchasing Power Parity (unless otherwise noted) Gross Domestic Product estimated in billions of dollars, and Per Capita (person) GDP Country/AreaGDPPer Cap. GDP World $ 74,540 $ 11,200 United States $ 14,660 $ 47,200China $ 10,090 $ 7,600Hong Kong $ 326 $ 45,900Korea - North $ 40 $1,800Korea - South $ 1,459 $ 30,000 Luxembourg $ 41 $ 82,600 Qatar $ 151 $ 179,000 For GDP information of other countries around the world, see our CD, Unit 3, Section 2

20. UNIT 1 - Fundamental Concepts • Economies around the World Most industrialized countries are mixed economies, but they also have many capitalist elements. Characteristics include • Substantial activity in the private sector (businesses and households). Prices are determined by demand and supply. • A significant role by federal and local governments.

21. UNIT 1 - Fundamental Concepts • The Role of Government The role of most governments around the world includes: • Spending on defense, roads, legal system, public services and education • Redistributing incomes through taxes and subsidies • Passing laws and imposingregulations • Implementing price controls • Conducting monetary policyto affect inflation,interest rates, and employment

22. UNIT 1 - Fundamental Concepts • Important Concepts and Definitions We will discuss the following concepts: • The simple circular flow • The circular flow with government and foreign markets • Nominal and real prices and incomes • Positive and normative economic statement • The fallacy of composition • The fallacy of cause and effect

23. The Simple Circular Flow Supply of Products ProductsMarket Purchases of (Demand for) Products Households Businesses Supply of Labor and Resources Resource(Inputs) Market Purchases of (Demand for) Labor and Resources

24. UNIT 1 - Fundamental Concepts • The circular flow with government and foreign markets (see next slide). This is a more complex (more realistic) model.

25. Foreign Markets Supply of Products ProductsMarket Purchases of Products Products Services Services Government Households Businesses Taxes Taxes Resource(Inputs) Market Supply of Labor and Resources Purchases of (Demand for) Labor and Resources

26. UNIT 1 - Fundamental Concepts • Nominal and Real Prices • Nominal prices are expressed in current dollars. • Real prices are adjusted for inflation. Enough money to purchase 3 gallons of gasoline a few years ago. Not enough to purchase 2 gallonstoday.

27. UNIT 1 - Fundamental Concepts • Positive and Normative Economic Statements • Apositive statement can be proven or dis-proven. • Anormative statement is an opinion or value judgment.

28. UNIT 1 - Fundamental Concepts • Which is the Normative and Which is the Positive Economic Statement? • Statement I: The minimum wage should increase to $8.50. • Statement II: If the minimum wage increases, then firms’ cost of production rises.

29. UNIT 1 - Fundamental Concepts • The Fallacy of Composition • Fallacy: what is good for one person (or one group) is good for all persons (or all groups).

30. UNIT 1 - Fundamental Concepts • The Fallacy of Cause and Effect • Because A happens before B, A must be automatically the cause of B.

31. UNIT 1 - Fundamental Concepts • Cause and Effect Fallacy Example A: The car industry in country X has not done well. B: The economy of country X has not done well. Did A cause B?

32. UNIT 1 - Fundamental Concepts • Critical Thinking Guidelines • Question the source. • Question the assumptions. • Question how the variables are defined. • Question the validity ofthe statement. • Question the statistics. • Think like an economist.