Understanding Basic Economic Principles

1. Understanding Basic Economic Principles

2. Common Core/Next Generation Standards Addressed! RST.6‐8.2 - Determine the central ideas or conclusions of a text; provide an accurate summary of the text distinct from prior knowledge or opinions. (MS‐LS1‐6) RI.8.8 - Trace and evaluate the argument and specific claims in a text, assessing whether the reasoning is sound and the evidence is relevant and sufficient to support the claims. (MS‐LS2‐4) WHST.6‐8.2 - Write informative/explanatory texts to examine a topic and convey ideas, concepts, and information through the selection, organization, and analysis of relevant content. (MS‐LS1‐6)

3. Career Cluster Standards – Agriculture, Food and Natural Resources. • Pathway Content Standard: The student will demonstrate competence in the application of principles and techniques for the development and management of agribusiness systems. • ABS.01. Performance Element: Utilize economic principles to establish and manage an AFNR enterprise. • ABS.01.01. Performance Indicator: Apply principles of capitalism in the business environment. ABS.01.01.01.a. Recognize principles of capitalism as related to AFNR businesses.

4. Bell Work • How much money do you spend in a week? • How do you decide what purchases to make? • How can you save more?

5. STUDENT LEARNING OBJECTIVES • Understand the resources needed for agricultural businesses. • Understand the Law of Supply. • Understand the Law of Demand. • Understand the relationship between supply and demand. • Understand the Law of Diminishing Returns • Understand the Principle Equimarginal Returns. • Understand the relationship between enterprises.

6. Terms • Capital • Competitive enterprises • Complementary enterprises • Equilibrium • Law of diminishing returns

7. Terms Continued • Labor • Land • Law of Demand • Law of Supply • Management

8. Terms Continued • Marginal cost • Marginal return • Principle of Equimarginal Returns • Resource • Supplementary enterprises

9. Resource is an item used to produce a product or service. • Land • Capital • Labor • Management

10. Land includes everything in nature used in production. • Soil • Minerals • Wildlife

11. Capital includes things used in production that are man-made. • Cash • Equipment • Buildings • Supplies

12. Labor is the physical energy supplied by humans.

13. Management is the decision making function of the business.

14. Law of Supply • The Law of Supply states that when the price of a product is lowered, with no change in other factors, less of the product will be supplied.

15. Factors Affecting the Supply • Technology affects supply. • Generally, technology decreases the cost of production, making it cheaper to produce the product. • The rate that technology advances is not constant.

16. Factors Affecting the Supply • Costs of production affects supply. • When prices of inputs change, the level of production often changes. • Generally, producers try to sell products for at least as much as the total cost of all the inputs.

17. Factors Affecting the Supply • Price of other products affects supply. • If a firm can produce a different product that is priced higher, it may change production to capitalize on higher profits. • Sometimes it is unfeasible to shift fixed assets to produce different products, i.e. removing an orchard to take advantage of higher corn prices.

18. Factors Affecting the Supply • Seasonal and cyclical production affects supply. • Some cycles of production are uncontrollable, i.e. time required for livestock to reproduce, time needed for plants to bear fruit. • Certain fruits and vegetables are considerably cheaper when “in-season”.

19. Law of Demand • The Law of Demand states that when the price of a product is increased with no change in other factors, less product will be purchased.

20. Factors Affecting Demand • Size of population affects demand. • With higher population more product will be needed. • All other things constant, demand is increased as population increases.

21. Factors Affecting Demand • Tastes and preferences of consumers affects demand. • Tastes and preferences change with time and other factors. • Weather affects preferences, (i.e. coats in the winter, barbecue foods in the summer).

22. Factors Affecting Demand • Income and distribution of wealth affects demand. • Generally, higher income results in more products being purchased. • More luxury items are purchased as incomes increase.

23. Factors Affecting Demand • Relative prices of all goods and services affect demand. • With a limited budget, decisions to buy an item directly affects the amount of another item that can be purchased. • When the price of a substitute item decreases, consumers will purchase more of the substitute. • When the price of a complement (items used together) decreases, more of the item will be purchased.

24. Relationship between Supply and Demand • Interaction of supply and demand determines price. • Price is found at equilibrium, where the supply and demand curves intersect. • If demand curve shifts right, the price increases. • If supply curve shifts left, the price increases. • Foreign trade is a major player in price determination of agricultural commodities.

25. Principle of Diminishing Returns • Law of Diminishing Returns affects physical output and economic returns. • The law of diminishing returns states that as a variable resource is added to fixed resources, marginal output declines immediately or after an initial stage of increasing marginal returns. Total output may increase at an increasing rate for a time, but then increases at a decreasing rate until it reaches its maximum.

26. Principle of Diminishing Returns • Values need to be provided to understand the law of diminishing economic returns. • The additional cost of each unit of input is called marginal cost. • The additional return resulting from each unit of input is called marginal returns. • Net returns will be highest when marginal cost is equal to marginal return.

27. Principle of Equimarginal Returns • The Principle of Equimarginal Returns states that to allocate a resource among several alternative uses in such a way that the marginal returns are equal in all uses. • Never invest capital in an alternative that does not provide returns equal to or greater than the amount invested. • Always invest capital in the option that provides the greatest marginal returns, so long as the returns are greater than the amount invested.

28. Relationship between Enterprises • Many businesses combine several enterprises to maximize profits. • Supplementary enterprises are those where one enterprise supplements the income of another. • A sports stadium is often used for concerts. • A lawn tractor can be used to move snow.

29. Relationship between Enterprises • Complementary enterprises are those where one enterprise produces the inputs for another. • Soybeans used in rotation to leave nitrogen for corn. • Tree trimming service may sell mulch.

30. Relationship between Enterprises • Competitive enterprises are those where one enterprise interferes with another. • Enterprises competing for labor resources. • Students who work so much that they do not have enough time to study.

31. Review/Summary • What resources are needed for a agricultural businesses? • Define the Law of Supply and Demand. • What is the relationship between supply and demand? • Explain the Law of Diminishing Returns. • Explain the principle Equimarginal Returns. • Identify the relationship between enterprises.

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34. Student Learning Activities • Sample tests are available in the Lesson Plan tab.

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