Introduction to Economics: Making Choices with Limited Resources

Intro to Business & Marketing Unit 2: The US and Global Economy Section 1: What is Economics? --------------------------------------------------------------------------------------------------------------------------------------------------------------

Economics Defined • Economics is: • “A social science that • focuses on choices among scarce resources • to achieve maximum satisfaction of unlimited needs and wants” • Thus, economics is really about the scientific study of households, businesses, and governments and how they attempt to maximize their needs & wants given that there are limited resources! • An Economist is a social scientist who studies the economy and then makes recommendations as to how to improve it.

Why Study Economics?Answer: Improved Citizenship & Global Awareness The Study Of Economics: Makes you a knowledgeable citizen that can influence society through voting and influencing the vote of your family and friends! Here are three examples where understanding economics could help you decide which political candidate to support. • Should the U.S. government give money to large US businesses that are losing money so they will not fail? • Should Americans buy American-made products to help financially protect American businesses and US jobs? • What should the U.S. government do about rising gasoline prices? Gasoline is $3.00 per gallon now. What should the government do if the price starts rising fast towards $4.00?

Economic Review Questions • Provide, in your own words, a definition of economics. • Are economic principles accepted by scientists? Which scientists? • Would most economists say the U.S. would have a stronger economy if U.S. households always “bought American” • T or F: The Government should not let gasoline prices get too high as people need to drive. • Would most economists say the Government should help U.S. airlines that are losing money and about to fail (go out of business)?

Revisiting the Definition of Economics • Economics is a social science that focuses on choices among scarce resources to achieve maximum satisfaction of unlimited needs & wants” • Needs vs. Wants • Needs: For Survival (food, clothing, shelter, medical coverage, transportation, basic safety, etc.) • Wants: Nice to Have (fine clothing, nice car, large home, dining out, nice vacations, iPhone 10, XBox) • Some items are in between (cell phone, computer, etc.) • Needs and Wants are assumed to be unlimited by a society. A society (and most people) want more, more, more! But, there are not enough resources to make enough goods & services to satisfy everyone! 

Economics is a social science that focuses on choices among scarce resources to achieve maximum satisfaction of unlimited needs & wants” • Resources or the Factors of Production (“Inputs”) • Natural Resources (land, minerals, air, water…) • Human Resources (people) • Capital (buildings & equipment to produce) • Entrepreneurial Ability (“innovators”) • Factors of Production are “inputs”, necessary for producing “output”. “Output” is goods and services! • Factors of Production are also known as: “Land, Labor, & Capital” (where Land is 1 above and Labor is 2+4 above)

Scarcity and Opportunity Cost • So, people have unlimited needs and wants, but resources that make the products are limited or scarce, so we must “economize” and make choices as to how to use the resources • There are a limited number of workers (human resources) in an economy to make goods & services  • There are limited natural resources and entrepreneurs that are necessary to make the goods & services  • There is limited capital (production equipment) to make the goods & services.  • Since resources are scarce, a great economy must know how to allocate the scarce resources to try and best satisfy the society’s unlimited wants! • Producing more of one product means choosing less of another. What you don’t produce is the opportunity cost)

Opportunity Cost: A closer Look Economics involves making choices as to how scarce resources should be used in making goods & services. Since resources are scarce, producing more of one product means producing less of another. A society (economy) can’t have everything! What we don’t produce when an economy produces a product is called the “opportunity cost”. Concept of “Opportunity Costs” i. The cost to society of production is the best alternative foregone on what you could have produced with the resources ii. examples: >the “opportunity cost” of producing more corn is less wheat since farmland & farmers are limited >the opportunity cost of more national defense is less consumer products since the resources are assigned to defense and resources are limited.

The Production Possibilities Model (Shows Limited Resources and Opportunity Cost) • Production Possibilities Table (One Nation): • ProductProduction Alternatives AB CD E • Pizza 0 2 4 7 9 • Robots 14 12 9 5 0 • Key Points of Table: • More production of one product means less of another product (there is an “opportunity cost” of producing more of one product) since resources are fully employed

Production Possibilities Curve: Points A-E Represent Potential Production with Current Resources Employed A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Area to right of curve as not attainable now since resources are limited. Points A-E are the best the nation can do right now as all resources are fully employed. C’ Industrial Robots U D’ Inside curve area is Unemployed Resources. Not at potential E’ 0 1 2 3 4 5 6 7 8 9 Pizzas 1-10

Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Economic Growth: Curve Shifts right or “more of everything” B’ A B C’ C Industrial Robots D’ D E’ E 0 1 2 3 4 5 6 7 8 9 Pizzas 1-11

The Production Possibilities Curve & Economic Growth Economic Growth: • The ability to produce more output of both products! Shown by shift right in the PPC (more goods & services) • Increasing “productivity” to have more of all products (increases standard of living or incomes) • 4 Factors Driving Economic Growth (Shift PPC) • Increase in natural resource quantity • Increase in human resource quantity (birth rates + immigration) & quality (education & training) • Increase in quantity (more) and quality (better technology) of capitalresources • International trade (Global Specialization)

Practice: Slides 1-12 • Exercise 1: Needs vs. Wants • Think of your own family. List 4 Needs and 4 Wants. Needs Wants

Practice: Slides 1-12 • The Factors of Production • Identify which type of factor each is: • ________ A factory building • ________ A computer programmer • ________ The owner of a local Chipotle • ________ Aluminum • ________ Tools used in the production of cars • ________ Farmland • ________ A computer used by an Accountant

Practice: Slides 1-12 • Opportunity Cost (the best alternative foregone) • What is the opportunity cost of studying 2 hours? • What is the opportunity cost of building more libraries across the County? • What is the opportunity cost of increasing our spending for national defense?

Practice: Slides 1-12 • ProductProduction Alternatives AB CD E • Pizza 0 2 4 7 9 • Robots 14 12 9 5 0 • This nation is currently producing at full employment at Option C. What is the opportunity cost of this nation deciding to produce 3 more pizzas? • Tor F: This nation is currently capable of producing at least 4 robots and 6 pizzas. • T or F: This nation is currently capable of producing 13 robots and 2 pizzas. • Assuming the nation is at production level D, what will the nation’s opportunity cost be of producing 4 more robots? • What would need to happen for this nation to produce 10 pizzas and 10 robots? • What is Economic Growth? What causes economic growth?

Intro to Business & Marketing Unit 2: The US and Global Economy Section 2: Capitalism & Free Markets --------------------------------------------------------------------------------------------------------------------------------------------------------------

Economic Systems: Goal Is To Address The Scarcity Issue? • Types of Economic Systems • Free Market System (“Pure Capitalism”) • People and businesses pursue their own interests voluntarily and do business in “markets” • Minimal government involvement (national defense, rule of law, court system, roads, etc.) • Key Characteristics • private property ownership, competition, reliance on entrepreneurs to fuel growth • No 100% Free Market systems in the world today!

Economic Systems: Goal Is To Address The Scarcity Issue? • Types of Economic Systems (Cont.) • Command Economies (Communism) • Government owns most property resources • Most economic decisions made by government through central planning board • What to produce • How to produce it • Who gets the goods • Cuba and North Korea are best examples today, but there is no pure command economy today!

Economic Systems: Goal Is To Address The Scarcity Issue? Types of Economic Systems (Cont.) • Mixed Economics System (Mix of: free market system & command system) (Also known as “Capitalism” or a “Mixed System”) • The U.S. and all other nations have a mixed economy! • Governments actively participates in economy to regulate success in a “mixed” economy

Market System’s Basic Elements • Private Property • Freedom of Enterprise and Choice • Self-Interest • Competition • Markets and Prices • Active But Limited Government • Reliance on Technology & Capital Goods • Specialization • Use of Money

Market System’s Basic Elements • Private Property • Defined: The right to legally own resources (capital and natural) & output (products), and the associated money income earned. • Gives “capitalism” its name (“capital”) • Govt. may still own some property in capitalism • Prisons, courtrooms, fighter jets, computers • Incents people to protect scarce resources • Encourages hard work and causes economic growth!

Market System’s Basic Elements • Freedom of Enterprise & Choice • Freedom of enterprise • Businesses free to form in area of choosing • No government “blockage” of entry • Businesses subject to only necessary regulation • Freedom of choice • Owners can handle their property or money as they see fit (within broad legal framework) • Workers are free to enter any line of work they are qualified for (as long as legal) • Consumers can spend their money as they choose

Global Perspective Key:██Free (80–100)██MostlyFree(70.0–79.9)██ModeratelyFree(60.0–69.9)██MostlyUnfree(50.0–59.9)██Repressed(0–49.9) LO2

Market System’s Basic Elements • Self-Interest • the motivating or driving force of the market system • Each person or business does what’s financially best for him/her • Entrepreneurs try to maximize profit • Workers try to obtain the highest wages • Consumers try to get best products at the lowest prices

Market System’s Basic Elements • Competition • the control force of our market system • Producers that charge too much, lose customers • Employers that pay too low a wage, lose employees • Competition Requires: • Many buyers and sellers • One or a few sellers is a monopoly (1) or oligopoly (several) • freedom of buyers and sellers to enter or leave market

Market System’s Basic Elements • Markets and Prices • Markets: the coordinating mechanism of the market system • Markets “bring together” suppliers of product and demanders of products • A market could be a store, on Internet, or other places • Prices: • “The Rationing Function of Prices” • Prices ration scarce resources • “The Guiding Function of Prices” • Prices guide or motivate entrepreneurs, businesses, and households towards action or inaction

Market System’s Basic Elements • Active, But Limited Government • Imposes and enforces broad legal limits • Protection of private property • Keeping the peace (rule of law) • Owns certain private property • National defense • Common goods (parks, prisons, highways)

Market System’s Basic Elements • Extensive use of technology and capital goods • Encouraged through “self-interest” via the pursuits of profit (Revenue less costs) • Technology lowers cost of production and, thus, increases profits • Even sought by command economies

Market System’s Basic Elements • Specialization (or the “division of labor”) • “the way” in modern economies • Consumers consume little of what they produce • Consumers produce little of what they consume • How does specialization of labor increase output? • Makes use of ability differences • Improves productivity through repetition • Saves time since no “shifting time” required

Market System’s Basic Elements • Use of Money • Virtually all economies use money • Key function: “medium of exchange” • Eliminates the “coincidence of wants” problem that barter has • Use of money enables specialization (key point!) • Money defined: a social convention to facilitate the exchange of goods and services • To be “Money”: Must be acceptable in exchange for goods and services (Money is not backed by gold or other metals…it is money because we agree it is!)

The Market System: How Does It Work? • The Market System must answer 5 Fundamental questions to be effective: • The 5 Fundamental Questions Of Any Economy: • What goods and services will be produced? • How will the goods and services be produced? • Who will get the goods and services or output? • How will the system accommodate change? • How will the system promote progress?

The 5 Fundamental Questions • Question 1: What is to be produced? • Answer: Produce only those goods that produce a profit • Profit = Revenue – Costs • Revenue = price x quantity sold (money from customers) • Costs = price of resource x quantity used • Producers Produce only when: Revenue > Cost

The 5 Fundamental QuestionsWhat is to be produced? Question 1: Continued • Profits and expanding industries • If an industry has a very high profit: • Will attract other suppliers to the industry • Increase in supply decreases price as owners compete • Decrease in price eventually eliminates the high profit • Industry reaches “equilibrium” or moves back to an average profit

The 5 Fundamental QuestionsWhat is to be produced? Question 1: Continued • Losses and declining industries • If an industry is not making an average profit • Suppliers will drop out of industry • Decrease in suppliers reduces supply and increases price as there is less competition • Increase in price of product will eventually eliminate the losses and move the industry back to equilibrium size and an average profit

The 5 Fundamental QuestionsWhat is to be produced? Question 1: Continued • Consumer Sovereignty and “Dollar Votes” • Consumers have ultimate authority over what is produced, not businesses! (Consumer Sovereignty) • Consumers “vote” or “demand” with their dollars • If dollar votes produce profits, producers will produce • If not enough votes, producers shift to produce something more profitable • Resource providers (labor, for example) are a “derived demand” (labor follows dollar votes). In other words, your future career is largely determined by “demand”.

Economics Quiz • Profit is the difference between ______ and _____? • What will happen in those industries that are realizing a very high profit? • What will happen in those industries that are losing money or not making profits? • What is “consumer sovereignty”? • Who ultimately decides “what will be produced”? • What do we mean when we talk about “dollar votes”?

Question 2: How Will The Goods and Services Be Produced? • Review: What should be produced (Question 1)? • Answer: steered by dollar votes as long as the attainment of normal profits by businesses! • How Will The Goods and Services Be Produced? (Question 2)? • Answer: At the most efficient production methods! • Lowest cost will enable those firms to lower price, gain customers, and be the biggest and most profitable producers! • Firms shift their mix of capital and labor to produce at the lowest unit cost possible.

How Will the Goods Be Produced? LO3

Question 3: Who Will Receive The Output? • Who is to receive the output (Question 3)? • Answer: consumers who are “willing & able” to pay the market price for the scarce products • The price “rations” the goods to those who are willing & able to pay (the “rationing function” of prices) • New Perspective: Those individuals that provide more valuable resources to the production process (labor, entrepreneurship, natural resources) receive more goods in exchange (via higher incomes). In effect, the amount of output purchased is directly related to one’s resource contribution.

Question 4: Can The System Adapt to Change? • The economic system must be adaptable to change because: • Consumer preferences are constantly changing • Supply capabilities are constantly changing • Market System adjusts to change remarkably well • Example: change in demand for bicycles and cigarettes • For Bicycles: Demand Up, Price Up • Profits of bicycle industry rises • More suppliers enter and supply increases lowering prices • Lower prices eliminate very high profit to average profit and the equilibrium size • For Cigarettes: Demand Down, Prices Down • Profits of cigarette makers fall • Suppliers leave market and those left can raise prices due to less supply

Question 5: How will the Market System Promote Progress? • Market System promotes technological progress and capital formation • New output products (phones, tablets, TVs, Aps, medicine, etc.) to increase profits • “Creative Destruction”: New products replace old, outdated products “destroying” products, industries, and jobs, but growing employment in new industries. • Discuss: Blockbuster, Spotify, Amazon, etc. • New production technology to increase profits • Entrepreneurs seek lowest production costs possible to increase profits and price below competition.

Adam Smith and “The Invisible Hand” • Adam Smith (the “Father Of Economics”) • Wrote: The Wealth of Nations (1776) • Concept of economic self-interest (incentive for households to seek higher wages & lower prices, and for businesses to seek higher profits) drives the “social good” • Concept of voluntary exchange (we exchange voluntarily as we pursue our self-interest) • Economy is seemingly directed by an invisible hand • People with freedom to follow their “economic self-interest, will be incented to voluntarily exchange with others to produce products that meet the “social good” in order to maximize wages and profits. And scarce resources will be allocated efficiently!

Economics Quiz • Who is known as the “father of economics”? • Describe Adam Smith’s “invisible hand” concept. • How are our scarce resources allocated across the multitude of industries that produce things? • What products should be produced? • How should these products be produced? • Which businesses will produce these goods? • Who is to receive the output produced in the economy and on what basis? • How would our economy adapt to a sudden desire for people to buy “Pink Flamingos” for their front yard?

The Circular Flow Model • RESOURCE • MARKET • Households sell • Businesses buy Costs Wages, Profits Labor, Entrepreneurs Labor, Entrepreneurs • BUSINESSES • buy resources • sell products • HOUSEHOLDS • sell resources • buy products Goods and Services Goods and Services • PRODUCT • MARKET • Businesses sell • Households buy Consumption Expenditures Revenues LO5

The Circular Flow Model: The Exchanges of Goods and Resources In An Economy • Circular Flow Model • Key Points • Two primary groups of decision makers in an economy • Households • Businesses (sole proprietorship, partnership, corporations) • Two Primary Markets • Resource Markets • Product Markets

The Circular Flow Model: The Exchanges of Goods and Resources In An Economy • Key Points of Circular Flow Model (continued) • “Circular flow” depicts interrelatedness of the two groups (Households & Businesses) • Counterclockwise Flow: “real flow” (resources and products) • Clockwise Flow: “money flow” (income and consumption expenditures) • Simplified Model: No Government

Questions for Discussion: Slides 17-20 • What type of economic system does the United States have? What about Russia, China, and France? • When we say that all economies have a “mixed economic system, what do we mean? • Why do command economies almost always have more poverty than a mixed system? • What could be an advantage of a command economy? • Which two economies are closest to a command economy?

Questions for Discussion: Slides 21-31Market Systems Basic Elements • Match the Market System Key Element to the Correct Phrase on Right • Private Property ____ Little participation with markets • Freedom of Enterprise & Choice ____ Go for highest wages and make money • Self-Interest ____ Couldn’t specialize without it! • Competition ____ Must have to lower production costs • Markets & Prices ____ Guides people towards action • Limited Govt. ____ Incents people to work hard and own stuff • Reliance on Technology/Capital ____ Improves productivity through skills • Specialization ____ Lowers prices and improves quality • Use of Money ____ Do what you do best to make us great!

Questions for Discussion: Slides 21-31Market Systems Basic Elements Questions for Discussion • What do you think are the 3 most important elements of the 9? Why? • Why would Ovechkin’s Stanley Cup jersey worn in the final game fetch thousands of dollars? Which element of the 9 does this relate to? • What would happen to the economy if we did not have the freedom to pursue our selected career as the Government told us what to do? • What is a monopoly? An Oligopoly” Give an example of each. Why does the Government allow monopolies but then regulates them as to what they can charge their customers? • What causes US money to be worth something? Is money backed by gold or some other precious metal? • Why do all businesses pursue technology and capital equipment? • What is Creative Destruction? Give an example. • Describe what Adam Smith’s “Invisible Hand” is all about?

Introduction to Economics: Making Choices with Limited Resources