WHY SOCIETIES HAVE ECONOMIES

1. WHY SOCIETIES HAVE ECONOMIES • Wants • The basics: food, clothing, shelter • We usually want more

2. WHY SOCIETIES HAVE ECONOMIES • RESOURCES • Factors of production: resources people have for producing goods/services to satisfy wants • labor – workers • land – natural resources (soil, minerals, wildlife, energy) • capital – anything that is used to produce other goods/services. • Includes tools, machines, or buildings used to produce goods/services.

3. WHY SOCIETIES HAVE ECONOMIES • Production, Distribution, and Consumption • produce (make a good) • distribute it to people • consumption – act of buying & using goods/services • Want-Satisfaction Chain (page 290)

4. Want-Satisfaction Chain

5. WHY SOCIETIES HAVE ECONOMIES • Making Choices • Benefits & Costs • opportunity cost – the benefit given up when scarce resources are used for one purpose instead of the next best purpose. • Example: when you choose to spend your money on clothes instead of future savings what are you giving up?

6. WHY SOCIETIES HAVE ECONOMIES • Scarcity • Resources are limited • People always have more wants and needs then available resources

7. The Production Possibilities Curve (PPC) Using Economic Models… Step 1: Explain concept in words Step 2: Use numbers as examples Step 3: Generate graphs from numbers Step 4: Make generalizations using graph 7

8. What is the Production Possibilities Curve? • A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources • This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 4 Key Assumptions • Only two goods can be produced • Full employment of resources • Fixed Resources (Ceteris Paribus) • Fixed Technology 8

9. a b c d e f Production “Possibilities” Table 14 12 9 5 0 0 0 2 4 6 8 10 Bikes Computers Each point represents a specific combination of goods that can be produced given full employment of resources. NOW GRAPH IT: Put bikes on y-axis and computers on x-axis 9

10. Production Possibilities How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 8 6 4 2 0 Impossible/Unattainable (given current resources) A B G C Bikes Efficient D Inefficient/ Unemployment E 0 2 4 6 8 10 Computers 10

11. Opportunity Cost Example: 1. The opportunity cost of moving from a to b is… 2 Bikes 2.The opportunity cost of moving from b to d is… 7 Bikes 3.The opportunity cost of moving from d to b is… 4 Computer 4.The opportunity cost of moving from f to c is… 0 Computers 5.What can you say about point G? Unattainable 11

12. The Production Possibilities Curve (or Frontier) 12

13. Production Possibilities A B C D E CALZONES 4 3 2 1 0 PIZZA 0 1 2 3 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Constant Opportunity Cost- Resources are easily adaptable for producing either good. • Result is a straight line PPC (not common) 13

14. Production Possibilities A B C D E PIZZA 20 19 16 10 0 ROBOTS 0 1 2 3 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Law of Increasing Opportunity Cost- • As you produce more of any good, the opportunity cost (forgone production of another good) will increase. • Why? Resources are NOT easily adaptable to producing both goods. • Result is a bowed out (Concave) PPC

15. Constant vs. Increasing Opportunity Cost Identify which product would have a straight line PPC and which would be bowed out? Corn Cactus Wheat Pineapples

16. Trade & Comparative Advantage • Comparative Advantage: The ability to produce something at a lower opportunity cost than other producers. • Law of Comparative Advantage : An individual, firm, region or country with the lowest opportunity cost of producing a good should specialize in that good. • Absolute Advantage: The ability to produce something using fewer resources than other producers.

17. Specialization, Exchange and Comparative Advantage • According to the theory of competitive advantage, specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers.

18. Absolute Versus Comparative Advantage • Country A has an absolute advantage because it can produce more food and more clothing in one day than country B. • Country A has a comparative advantage in the production of food because a worker in country A can produce 6 times as many units of food as a worker in country B, but only 1.5 as many units of clothing.

19. Absolute Versus Comparative Advantage • The opportunity costs can be summarized as follows: • For food: • 1 unit of food costs country A ½ unit of clothing. • 1 unit of food costs country B 2 units of clothing. • For clothing: • 1 unit of clothing costs country A 2 units of food. • 1 unit of clothing costs country B ½ unit of food.

20. Absolute Versus Comparative Advantage • Conclusion: • Country A will specialize in producing food, and country B will specialize in the production of clothing. • Specialization also works to develop skills and raise productivity.

21. ECONOMICS BASIC ECONOMIC DECISIONS

22. BASIC ECONOMIC DECISIONS • What and How Much to Produce? • What resources are available? • What are the peoples’ wants? • How much does society need?

23. BASIC ECONOMIC DECISIONS • How to Produce Goods and Services (Resources) • Technology – can produce goods cheaper and faster

24. BASIC ECONOMIC DECISIONS • Who Will Get What Is Produced? Questions to ask: • Should goods/services be divided equally? • Should you receive goods/services on the basis of what you want? • Should a small group of people decide who receives what? • Should people who own more resources and produce more goods/services get more or own and produce less?

25. ECONOMICS THREE TYPES OF ECONOMIES

26. THREE TYPES OF ECONOMIES • A Traditional Economy • Traditional economy – basic economic decisions are made by long-established ways of behaving that are unlikely to change. • Few exist today

27. THREE TYPES OF ECONOMIES • Command Economy – government owns or controls factors of production (land, labor, capital) and makes the basic economic decisions. • Karl Marx and “The Communist Manifesto” • What to produce? • How much to produce? • Who will get what is produced? • Communist nations – Cuba, North Korea, former USSR • Cuba – entrepreneurs • Real estate

28. THREE TYPES OF ECONOMIES • Market Economy – system in which private individuals own factors of production are free to make economic decisions about production, distribution, and consumption. • Market – place where buyers/sellers agree to exchange goods/services • No one person runs economy. • Decision Making by Individuals • We can choose what we want to do (work) If we make more money we acquire more resources = The ”Who will get what?” decision

29. THREE TYPES OF ECONOMIES • Competition & Profit Seeking • Producers compete to satisfy wants of consumers • Profit – difference between what it costs to produce a good/service and the price the buyer pays for it • Invest – use your money to help a business grow; with the hope that you can get a piece of the profit. • Free Enterprise- individuals in a market economy are free to undertake economic activities with little or no governmental control • Capitalism – system in which people make their own decisions about how utilize capital, land, and labor to produce goods and services. • Adam Smith and “The Wealth of Nations”

31. THREE TYPES OF ECONOMIES • Modern – Day Economies • mixed economies – mixture of three basic systems • China – Communist government • Command to mixed (now more of a market economy) • What has happened? • United States • Usually considered a market economy • Has elements of command economy • Map

32. Koppel on Discovery: ChinaChinese Ghost TownsNorth Korea