Unit 1: Fundamentals of Economics

1. Unit 1: Fundamentals of Economics

2. Unit 1 Standards: • SSEF1, SSEF2, SSEF4, SSEF5, SSEF6, SSMI1

3. Unit 1: EQs • What is scarcity? • What are the factors of production? • How are limited resources allocated? • What trade-offs appear on a production possibilities frontier? • How are rational decisions made? • What are the similarities and differences of a command, market, and mixed economic system? • How does each economic system answer the three basic economic questions of what to produce, how to produce, and for whom to produce? • How does each economic system meet a society’s broad economic and social goals? • What is the role of government in a market economy? • How do goods and services flow in a market economy? • What is the role of money in a market economy?

4. Unit 1: Key Terms • Scarcity • Choice • Opportunity cost • Trade-offs • Factors of production • Marginal thinking • Production • Possibilities curve (frontier) • Economic systems • 3 basic economic questions • Market economy • Public goods and services • Property rights • Market failures • Government regulations • Deregulation • Circular flow diagram • Product market • Factor market • Households • Firms

5. SSEF1 • SSEF1 The student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments. • a. Define scarcity as a basic condition that exists when unlimited wants exceed limited productive resources. • b. Define and give examples of productive resources (factors of production) (e.g., land (natural), labor (human), capital (capital goods), entrepreneurship). • c. List a variety of strategies for allocating scarce resources. • d. Define opportunity cost as the next best alternative given up when individuals, businesses, and governments confront scarcity by making choices.

6. Scarcity • Scarcity is the fundamental economic problem of having seemingly unlimited human needs and wants, in a world of limited resources. • not all of society's goals can be pursued at the same time • trade-offs are made of one good against others.

7. Factors of Production • A.K.A. productive resources • Anything used in the production of a good or service • They are classified into one of the following areas: • Land • Labor • Capital • Physical capital • Human capital • Entrepreneurship

8. Flash Presentation: Opportunity Cost

9. Land • Private property • Natural resources used in production • i.e. trees, coal, and wheat

10. Labor • People who provide skills that assist in the production of a good or service

11. Capital • Physical – technology, equipment, buildings, and tools that assist in the production of a good or service • Human – the knowledge and skills that assist in the production of a good or service • Example: taxi cab driver’s knowledge of city streets

12. Entrepreneurship • The risk-taking and managerial skills needed to start any business

13. What Productive Resource do they represent??

14. What type of productive resource is pictured???

15. What Factor of Production is in this lady’s brain????

16. I started a business making computers and other electronic devices. I am an __________.

17. What Factor of Production do these represent?

18. Flash Presentation: Productive Resources

19. Opportunity Cost • the benefit that is lost in making a choice between two competing uses of scarce resources. • It is always the next best alternative.

21. Opportunity Cost EXAMPLE: an individual has $25 to either purchase groceries or new clothes.  The individual weighs the choices against each other and decides that it’s more important to eat for the week and forgo the new pair of jeans.  The opportunity cost of the groceries is……

22. Activity • Choose a product • Divide paper up into four sections + label • In each section, draw the factors of production involved in the production of that particular good/service • Include AT LEAST 8 things

23. Example

24. GPS • SSEF2 The student will give examples of how rational decision making entails comparing the marginal benefits and the marginal costs of an action. • a. Illustrate by means of a production possibilities curve the trade offs between two options. • b. Explain that rational decisions occur when the marginal benefits of an action equal or exceed the marginal costs.

25. What is a decision making grid? • Sometimes, making a decision can be complex or unclear • Putting this kind of information “on paper” can make the opportunity cost clear, and make the decision easier

26. Format for a simple decision making grid.

27. Example

28. Thinking at the margin • Not all choices are all or nothing • Sometimes you can decide “how much” of one choice you can do and “how much” of the other • This is called “Thinking at the Margin”

29. Decision making at the Margin

30. Production Possibilities Curve • Graph used to various ways an economy can choose to utilize their resources • Two axes can show categories of goods (military vs consumer) or specific goods (guns v. butter)

31. Production Possibilities Curve • The frontier on a P.P.C. represents the maximum combination of goods that can be produced with current resources

32. Production Possibilities Curve • Point Y represents production beyond available resources • Can reach point Y with an increase in resources or better technology that allows more efficient production

33. Production Possibilities Curve • Point X represents underutilization • The economy is not using its resources efficiently to produce the maximum amount of goods

34. Opportunity Cost and PPC • In order to produce more of one good, you have to produce less of another • The amount of one item lost when increasing production of another is the opportunity cost

35. Economic Growth and PPC • A change in Factors of Production or technology will cause the PPC to “shift” • Increase = Shift right • Decrease = Shift left • Example: More land on a farm would increase the production possibilities for wheat and corn (shift right)

36. Activity • Create a table showing the production possibilities between two alternatives • Graph the points & create a Production Possibilities curve • Include 2 things that could cause Production Possibilities to increase • Sketch an additional curve showing growth • Include 2 things that could cause Production Possibilities to decrease • Sketch an additional curve showing reduction

37. 3 Economic Systems Unit 1 Notes 3

38. GPS • SSEF4 The student will compare and contrast different economic systems and explain how they answer the three basic economic questions of what to produce, how to produce, and for whom to produce. • a. Compare command, market, and mixed economic systems with regard to private ownership, profit motive, consumer sovereignty, competition, and government regulation. • b. Evaluate how well each type of system answers the three economic questions and meets the broad social and economic goals of freedom, security, equity, growth, efficiency, and stability.

39. 3 Key Economic Questions • Because resources are limited, all societies must answer the following: • What goods and services to produce? • How to produce? • For whom to produce?

40. Different Economic Systems

41. Traditional • Relies on habit/custom to answer economic questions • Usually small/close communities • Slow to adapt to change

42. Market • Economic questions answered by individuals • Buyers and sellers consider self-interest • Competition regulates the market

43. Market Advantages Disadvantages • Freedom • Efficiency • Encourages growth • Consumers have a great deal of control • Less stability • Inequality

44. Command • Governments answer economic questions • Terms associated: • Socialism • Democratic means should be used to distribute wealth evenly though society • democracy • Communism • All economic and political power lies with the government • authoritarian

45. Command Advantages Disadvantages • Guarantee jobs and income • Can jumpstart industry • Can not always meet consumer demands • No reward for innovation • Little individual freedom

46. Mixed • In reality, no one economic system can answer all economic questions • Most economies use aspects of both free market and centrally planned economics to accomplish their goals

47. GPS • SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. • a. Illustrate by means of a circular flow diagram, the Product market; the Resource (factor) market; the real flow of goods and services between and among businesses, households, and government; and the flow of money. • b. Explain the role of money as a medium of exchange and how it facilitates exchange.

48. Money in the Free Market • Players • Households • Own the factors of production and consume goods + services • Firms • Uses factors of production to produce a product

49. Money in the Free Market • Factors of production and products are exchanged in 2 markets • FACTOR MARKET (A.k.a. Resource Market) • Households supply Factors of Production to firms in exchange for money • PRODUCT MARKET • Firms supply households with goods and services in exchange for money

50. Multiple ways of showing this: