Basic Economic Concepts

1. Basic Economic Concepts Scarcity, Opportunity Cost & PPC Capitalism Characteristics Supply and Demand

2. SCARCITY • Economics is the study of limited resources and unlimited needs and wants • Scarcity leads to making choices • Opportunity Cost is what is sacrificed when one choice is made over the “next best alternative” • Every decision has an opportunity cost

3. Opportunity Cost to every decision!

4. SCARCITY • Marginal decision making = the result of an additional change • Marginal benefits vs. marginal costs is the basis for making the decision • Examples: 1 more hour of sleep vs. eating breakfast Part time job vs. goofing off College vs. full time job

5. Production Possibilities Curve • Illustrates scarcity, choices & opportunities costs • Points on the curve show production amounts possible for 2 goods Capital goods Point A Consumer Goods

6. Capital Goods Y = Point Not Possible Point A X = Point possible, but inefficient Consumer Goods

7. CAPITALISM – MARKET ECONOMY • Ownership of all resources is in the hands of individuals • Decision making is by individuals in the market • Voluntary exchange of goods and services • Self interest influences all decisions – to the benefit of society • Competition is the regulating mechanism

8. CAPITALISM – MARKET ECONOMY • Markets and Prices coordinate the millions of decisions • System is facilitated by: • Specialization • Use of money • Technology • Active, but limited government involvement

9. CAPITALISM – MARKET ECONOMY • Basic Questions every society must ask: • What goods & services to produce? • How to produce? • How much to produce? • For whom to produce? • How will changes be implemented?

11. CAPITALISM – MARKET ECONOMY • Lesson on property rights – Power point

12. Supply and Demand • Go to Power Point on S & D

13. Problem Areas in AP Economics • Investment – term defined as business spending for capital equipment, machinery, factories, inventories, etc. • Personal investment is NOT used in Macro • Investment decisions are MB vs MC • MB = rate of return business will receive (profit motive = revenue – cost = profit) • MC = interest rate that must be paid to borrow funds for Ig (gross private investment)

14. Problem Areas in AP Economics • Real Interest rate – cost of borrowing the money to buy the capital goods (machinery) • If rate of return is greater than the cost of the interest, the investment will be profitable • Ex: 10% rate of return is greater than 7% interest = profitable decision • Even if capital is financed by savings, it gives up interest earned on $$$savings • REAL interest is used – inflation adjusted $$ (nominal rate – inflation rate = real interest rate)

15. Problem Areas in AP Economics • Investment Demand Curve shows amount of Ig at each real interest rate amount • Ig Demand Curve shifts (left or right) when other factors change: • Costs of production • Business taxes • Technology changes • Excessive inventories (no need for new production) • Expectations for future business conditions

16. Problem Areas in AP Economics • Key Graphs to know and teach: • Circular Flow • PPC • Supply and Demand • Foreign Exchange Rates (S & D) • Investment Demand • Business Cycles • AD/AS (Short Run and Long Run)

17. Problem Areas in AP Economics • Key Graphs to know and teach: • Loanable Funds (S & D) + AD/AS (Fiscal Policy) • Money Market + Ig Demand + AD/AS (Monetary Policy) • Phillips Curve (Long Run and Short Run) • Laffer Curve • Cost Curves (Micro)