Why isn’t everyone in this room wearing at least one diamond?

1. Why isn’t everyone in this room wearing at least one diamond?

2. Economics • Study of how society manages its SCARCE RESOURCES

3. Resources • Land • Labor • Capital • Entreprenuers

4. Resources • Create a product you would like to market to society. • Describe all the factors of production that would go into making your product, putting them each into one of the four categories of resources we discussed yesterday! • Be prepared to share!

5. Three Basic Question • What do we produce? • How are we going to produce these goods/services? • For whom are we producing these goods?

6. Economic Principles • Buckle up…there are 10 of these! • Trade-offs

7. Trade offs • In order to get one thing, we must often give up something else • Date night? Or Friend night? • Guns and Butter • Efficiency vs. Equity

8. trade offs So how do we know what decision is the right one!?!?!

9. Economic Principles • Buckle up…there are 10 of these! • Trade-offs • Costs and Opportunity Costs

10. Opportunity cost • The cost of something is what you give up to get it • This includes any resources (money) • Also includes the missed opportunities from making that decision • Date night example: • Costs = cost of actual date + opportunity cost • Opportunity cost = hanging out with friends

11. Opportunity cost

12. Opportunity cost Opportunity cost of guns = Change in butter production Change in gun production Opportunity cost of butter = Change in gun production Change in butter production

13. Opportunity cost That means when we make an extra gun we are giving up 1.67 pounds of butter. We must take this loss of butter into account when we figure out our costs

14. Opportunity cost On the flip side, when we make an extra pound of butter we miss out on making 3/5 of a gun. This forgone trigger must be taken into account when figuring out the cost of choosing to make the butter.

15. Your turn • Complete the practice problem on opportunity cost. You may write your answer on the worksheet • You may work with a partner. • When you are finished, please bring your completed assignment to the front.

16. Practice Problem

17. Practice Problem • Current plan = 10 hours for economics and 10 hours for chemistry • If he alters his plan and studies 15 hours for economics, what is his opportunity cost? • He gives up 5 hours of studying chemistry and his grade goes down two points.

18. Practice Problem

19. Practice Problem • Current plan = 10 hours for economics and 10 hours for chemistry • If he alters his plan and studies 15 hours for chemistry, what is his opportunity cost? • He gives up 5 hours of studying economics and his grade goes down ten points.

20. Practice Problem

21. Practice Problem • Current plan = 10 hours for economics and 10 hours for chemistry • If he alters his plan and studies 20 hours for economics, what is his opportunity cost? • He gives up studying chemistry and his grade goes down five points.

22. Practice Problem

23. Economic Principles • Buckle up…there are 10 of these! • Trade-offs • Costs and Opportunity Costs • ? • ?

24. Let’s see how you do • Read the selected pages in your textbook • Principle 3 = 6-7 • Principle 4 = 7-8 • Pick the one single fact that you feel is most important • Could be a definition • Could be an explanation • Could be an example • Write that fact on a half sheet with you and your partners name and turn it into Mrs. Krieger

25. Economic Principles • Buckle up…there are 10 of these! • Trade-offs • Costs and Opportunity Costs • Margins

26. Margins • People are rational = do the best you can with what you have • Margin = ONE BITE MORE thinking

27. Economic Principles • Buckle up…there are 10 of these! • Trade-offs • Costs and Opportunity Costs • Margins • Incentives

28. INCENTIVES • Govern most things you do… • Gives you reason to do something!

29. Economic Principles • Buckle up…there are 10 of these! • Trade-offs • Costs and Opportunity Costs • Margins • Incentives • Trade Can Make You Better

30. Trade Can Make You Better • How many of you are farmers? • How many of you are tailors? • How many of you are teachers?

31. Trade Can Make You Better • How many of you eat food? • How many of you wear clothes? • How many of you are in class?

32. Trade Can make you better • How long would it take you to learn how to farm? • How long would it take you to learn how to sew? • How long would it take you to learn how to teach? (Careful with your answer)

33. Trade Can make you better • Trade with those that know how to perform services/make goods • Allows us to specialize

34. Economic Principles • Buckle up…there are 10 of these! • Trade-offs • Costs and Opportunity Costs • Margins • Incentives • Trade Can Make You Better • Markets = Good Way To Organize Economic Activity

35. Market Economy • Decisions are made by firms and households… A LOT OF THEM • Adam Smith, “Wealth of Nations” • Invisible hand theory: leads to desirable outcomes

36. Economic Principles • Buckle up…there are 10 of these! 7. Governments Sometimes Help Markets

37. Governments • Enforce rules that allow the “invisible hand” to do its job • Work to promote equity and efficiency • Help with externalities (pollution)

38. Economic Principles • Buckle up…there are 10 of these! • Governments Sometimes Help Markets • Standard of Living is Tied to Production

39. Standard of Living • Average Incomes for 2010: • Luxembourg = $36,399 • United States = $29,056 • United Kingdom = $23,182 • Portugal = $13,092 • Turkey = $6,772 • Mexico = $4,456

40. Standard of living • Depends on your ability to produce goods and services • Analyzed looking at each worker and what they can do with an hour

41. Principle Nine Why can’t the government just print more money so we can all have plenty of it?

42. inflation • Prices rise when the government prints money due to inflation • Growth in the money supply = rise in the overall level of prices • BASIC IDEA: If there is more money out there, people will ask for more for their goods/services

43. Economic Principles • Buckle up…there are 10 of these! • Governments Sometimes Help Markets • Standard of Living is Tied to Production • Prices Rise When There’s Too Much Money • Trade-off between inflation and unemployment

44. Inflation vs. unemployment Typically have to deal with one or the other

45. Inflation vs. unemployment • Let’s say we print more money (knowing this will cause inflation) • An increase in the amount of money = an increase in the amount of spending • More spending and higher demand for product = an increase in production • An increase in production = a need for more workers • Hiring more workers = decrease in the unemployment

46. Methodology • Scientific Method • Deduction: Theory to Facts • Assumptions • Ceteris Paribus “All other things equal” • Models • Graphical Expression

47. MODELS Production Possibilities Frontier (PPF) Also called the Production Possibilities Curve (PPC) - Shows us what combinations of two goods we can produce with a given set of resources

48. Production Possibilities Frontier Assumptions • Full employment (using all available resources)

49. Production Possibilities Frontier Assumptions 2. Full Production: a. Productive efficiency: production at the least cost b. Allocative efficiency: combination of goods/services most wanted by society

50. Production Possibilities Frontier Assumptions 3. Fixed Technology: state of technology does not change