Understanding Economics: A Guide to Economic Choices and Concepts

1. Unit 1: Basic Economic Concepts1.1 1

2. What is Economics? • Economics is the science of scarcity. • Scarcity- we have unlimited wants but limited resources. • Since we are unable to have everything we desire, we must make choices on how we will use our resources. Economics is the study of ______ . choices In economics we will study the choices of individuals, firms, and governments. 2

3. Examples: You must choose between buying jeans or buying shoes. Businesses must choose how many people to hire. Governments must choose how much to spend on welfare. Textbook Definition Economics- Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants. (Study of how individuals and societies deal with ________). scarcity 3

4. What does this quote have to do with the idea of scarcity?

5. Many key terms in an economics classroom are used differently outside the classroom. Examples include the words utility, marginal, capital, demand, and investment. It is important to distinguish between the way a word may be used outside of economic context and the way it is used in class. You should think and SPEAK like an economist in order to avoid this confusion. 5

6. Microeconomics vs. MacroeconomicsOn the following slides, think about if you believe it is a Macroeconomic or Microeconomic topic.

7. Macro or Micro?

8. Macro or Micro?

9. Macro or Micro?

10. Micro vs. Macro MICROeconomics- Study of small economic units such as individuals, firms, and markets. Examples- Supply and demand in specific industries, production costs, labor markets MACROeconomics- Study of the large economy as a whole or economic aggregates. Examples- economic growth, government spending, inflation, unemployment, international trade 10

11. How is Economics used? Positive vs. Normative • Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics. • These theories are then applied to fix problems or meet economic goals. This is called policy economics. Positive Statements- Based on facts. Avoids value judgements (what is). Normative Statements- Includes value judgements (what ought to be). 11

12. Positive or Normative? 1. The rising price of crude oil on world markets will lead to an increase in gas prices. 2. A rise in average temperatures will likely increase the demand for sunscreen products. 3. Pollution is the most serious economic problem. 4. The government should ban smoking in public places. 5. Unemployment is more harmful than inflation. Positive Positive Normative Normative Normative 12

13. The reason you are here is to understand economics well enough to differentiate between normative and positive statements The Onion, although not real, shows concepts in a memorable way.

14. 5 Key Economic Assumptions • Society has unlimited wants and limited resources (scarcity). • Due to scarcity, choices must be made. Every choice has a cost (a trade-off). • Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.” • Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice. • Real-life situations can be explained and analyzed through simplified models and graphs. 14

15. Thinking at the Margin Would you see the movie three times? Notice that the total benefit is more than the total cost, but you would NOT watch the movie the 3rd time. 15

16. Students are often tempted to compare total benefit vs. total cost or even to calculate the average benefit vs. the average cost. Reminder: when you are deciding whether to buy the 3rd unit that you’ve already bought (or decided to buy) the first two. Therefore the costs and benefits to the first two units are irrelevant to the decision at hand. “Is the additional benefit I’ll receive from this unit greater than the additional cost I’ll incur?”

17. Marginal Analysis In economics, the term marginal = additional Marginal analysis (aka: thinking on the margin) making decisions based on increments. Example: • When you decide to go to the mall, you consider the additional benefit and the additional cost (your opportunity cost). • Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends. • Since your marginal benefits and costs can quickly change, you’re analyzing them every second. • What if your ex-girlfriend shows up? The Point: You will continue to do something as long as the marginal benefit is greater than the marginal cost. 17

18. Analyzing Choices 18

19. Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant)… 1. You want to visit your friend for a week. You will return Sunday night. 2. You work every weekday earning $100 per day. 3. You have three flights to choose from: Thursday Night Flight = $275 Friday Early Morning Flight = $300 Friday Night Flight = $325 Think About: Which flight should you choose? Why? 19

20. Trade-offs vs. Opportunity Cost Trade-offs- ALL the alternatives that we give up when we make a choice. (Examples: going to the movies) ALL decisions involve trade-offs. Opportunity cost- most desirable alternative given up when you make a choice. What are trade-offs of deciding to go to college? What is the opportunity cost of going to college? 20

21. What decisions did you make yesterday? To snooze or not to snooze? Breakfast at home or fast food or none at all? Buy or bring a lunch? Who to sit with at lunch? Study or hang out with friends after school? Go to bed on time or watch Netflix? Why do you have to choose to do some things and not others? All of your choices involve a cost of some kind, even if it is not money...what are the costs?

22. Economics of College In college, you can “typically” accomplish two of the three well, but it is usually at the cost of the third. 22

24. Economic Terminology Utility = Satisfaction! Marginal = Additional! Allocate = Distribute! 24

25. Price vs. Cost What’s the price? vs. How much does that cost? Price= Amount buyer (or consumer) pays. Cost= Amount seller pays to produce a good. Investment Investment= The money spent by BUSINESSES to improve their production. Ex: $1 Million new factory • Consumer Goods- created for direct consumption. (example: pizza) • Capital Goods- created for indirect consumption. (oven, blenders, knives, etc.) • Goods used to make consumer goods. 25

26. The 4 Factors of Production

27. Want to Start a Cookie Business? • What materials will you need? Make a list. • What skills do your workers they need? Make a list. • What does the owner need to do? Make a list. THESE ARE YOUR FACTORS OF PRODUCTION!!!

28. The Four Factors of Production ALL resources can be classified as one of the following four factors of production: 1. Land -All natural resources that are used to produce goods and services. (Ex: water, sun, plants, animals) 2. Labor-Any effort a person devotes to a task for which that person is paid. (Ex: manual laborers, lawyers, doctors, teachers, waiters, etc.) 3. Capital - Physical Capital- Any human-made resource that is used to create other goods and services. ( Ex: tools, tractors, machinery, buildings, factories, etc.) Human Capital- Any skills or knowledge gained by a worker through education and experience. 28

29. The Four Factors of Production 4. Entrepreneurship - Ambitious leaders that combine the other factors of production to create goods and services. • Examples-Henry Ford, Bill Gates, Inventors, Store Owners, etc. Entrepreneurs: • Take The Initiative • Innovate • Act as the Risk Bearers So they can obtain _________. PROFIT Profit =Revenue - Costs 29

30. Are you PRODUCTIVE? • What does a “productive school day” look like? • What increases your productivity? • What decreases your productivity? • In most cases, what is the relationship between your productivity and your income? Why?

31. Productivity Productivity= A measure of efficiency that shows the number of outputs per unit of input. Ex: Bob can make 10 pizzas in 1 hour. Stan can make 5 pizzas in 1 hour. Bob is more productive. Why do businesses and countries want to improve their productivity? Since all resources are scarce, improving productivity allows us to produce more stuff with fewer resources.