introduction to macroeconomics basic economic concepts

Introduction to Macroeconomics

Basic Economic Concepts

Needs and Wants

• Biological needs

– Food– Water– Shelter

Needs and Wants• Societal Needs

Comfort/Luxury

Security

Entertainment

Love/Acceptance

The Concern of Economics

• What its about

• Our efforts to provide ourselves with our material needs and wants

• Or….how to get more stuff

Economic Resources and Income

• Property resources

– Land (Rent)– Capital (Interest)

• Human Resources

– Labor (wages, salaries and benefits)

– Entrepreneurs (profit/loss)

Scarcity

• The wants and needs for material things among people in a society are unlimited

• The economic resources to fulfill those wants and needs are limited

• This limits our options and forces us to make choices

Opportunity Cost

• The value of the next best alternative given up when a choice is made

• TINSTAAFL – “There is no such thing as a free lunch”

• Everything has a cost, but not necessarily a price

Trade-Offs

• To get one thing, you must always give up something else

• Every choice involves both costs and benefits that must be evaluated

• Marginal Cost v. Marginal Benefit

• Rational Behavior – “The Invisible Hand”

The Invisible Hand“A cappuccino is intriguing to an economist: he doesn’t

know how to make a cappuccino, and he knows that nobody else does either. Who, after all, could boast of being able to grow, pick, roast, and blend coffee, raise and milk cows, roll steel and mold plastics and assemble them into an espresso machine, and, finally, shape ceramics into a cute mug? Your cappuccino reflect the outcome of a system of staggering complexity. There isn’t a single person in the world who could produce what it takes to make a cappuccino.

The economist know that the cappuccino is the product of an incredible team effort. Not only that, there is nobody in charge of the team. Economist Paul Seabright reminds us of the pleas of the Soviet official trying to comprehend the western system: “Tell me …who is in charge of the supply of bread to the population of London?” The question is comical, but the answer – nobody – is dizzying.”

-Tim Hartford, The Undercover Economist

Economics Defined

• “The science of economics is concerned with the efficient use of limited resources to achieve maximum satisfaction of human material wants.”

• How to get the most stuff that people want at the least cost

The Three Basic Questions

• What to produce?

• How to produce?

• For whom to produce?

Economics SurvivorLast summer, you went on a fabulous

Alaskan Cruise!

There was much fun to be had…

…but unfortunately, you and two of your friends fell overboard.

You are now stranded on a previously uncharted and unknown island to the south of Kodiak Island

in the Gulf of Alaska.

You are here.

No one noticed you were missing.

You must now try to survive in the hopes that someday

someone finds you.

You cannot escape the island. Don’t even try.

There are sharks out there.

There is a sandy and rocky beach, and very rough cliffs. The interior of the island is mountainous, with thick forests of Douglas

fir and Sitka spruce trees.

• The wildlife consists of deer, rabbits, seagulls, eagles, fish and clams.

• It has a mild, temperate climate (lucky for you it is summer), but the weather is very changeable.

• There are frequent rain showers and fog can be heavy in the mornings and evenings..

Your salvaged equipment:• You have

– 1 compass– 2 rain ponchos– 1 book of matches (dry)– 2 knives– 3 life preservers– 2 paddles– 1 small axe– And the wet clothes you

are wearing.

You do not have….

• A lifeboat or raft (I have no idea why you have paddles!)

• A radio• Any of the skills

the Professor had on Gilligan’s Island. (Also, there are no coconuts.)

Your Task:

Write a survival plan and create a storyboard (1 per group). It must include the following:

1. What are your resources? List all available land, capital, labor and entrepreneurial abilities.

2. How will you answer the three basic questions?3. How will you meet all of your biological and societal

needs?

Please be detailed. Remember, escape is not an option. And, sadly, I must insist that neither murder and cannibalism nor suicide will be acceptable alternatives. Be creative!

Economics Survivor RubricYou will need to demonstrate understanding of the following basic economic concepts through the pictures/words on your storyboard:

Three Basic Questions_____ What to produce?_____ How to produce?_____ For Whom to produce?Economic Resources_____ Land_____ Capital_____ Labor_____ Entrepreneurial AbilitiesBiological/Societal Needs_____ Food_____ Water_____ Shelter_____ Comfort/Luxury_____ Security_____ EntertainmentSkills_____ Creativity_____ Participation

______ / 15 points Grade _________

The Three Basic Questions

• What to produce?

• How to produce?

• For whom to produce?

Types of Economic Systems

• For each of the following, know how they answer the three basic questions, some advantages and disadvantages, and examples.

• Traditional

• Command

• Market

All economies are mixed economies!

• Be able to give examples of traditional, command and market economic systems within our own economy.

• Technically, the United States has a modified free-enterprise economy

Production Possibilities

Frontiers

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

100

50

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

100

50

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

100

50

a

b.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

100

50

90

25

50

45

a

b.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

c

Inefficient – unemployed resources

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

.

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

.

•Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

U.S.

Developing nation

•Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

NOW

FUTURE

U.S.

Developing nation

•Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

NOW

FUTURE

U.S.

Developing nation

•Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Economic Interdependence

Production Possibilities Frontier

(PPF/PPC)

Capital Goods (Robots)

Consumer Goods (Pizza)

•Scarcity – unlimited wants, limited resources

•Opportunity costs and trade-offs

•Efficiency – two kinds

•Productive: producing at the least cost (any pt. on the PPF)

•Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF)

100

50

90

25

50

45

a

b

Cost = 40 pizzas

Benefit = 20 robots

cpolicy

Inefficient – unemployed resources

d Unattainable with current resources and technology

Economic Growth

NOW

FUTURE

U.S.

Developing nation

Investment = purchase of capital goods

•Economic Growth = SOL

Increased quality of human resources (EDUCATION) or technology (INVESTMENT)

Economic Interdependence

Circular Flow Diagram

Consumers

(Households)

Producers

(Businesses)

Consumers

(Households)

Producers

(Businesses)

A market is anything that

brings together buyers and sellers

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Spend $!

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Spend $!

Revenue$

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Pay You! $

Spend $!

Revenue$

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Pay You! $

Get Paid! $

Spend $!

Revenue$

Consumers

(Households)

Producers

(Businesses)

Product Market

(goods/services)

Resource Market

(land, labor, capital, entrepreneurs)

Get a job!

Hire you! Make

stuff!

Buy stuff!

Pay You! $

Get Paid! $

Spend $!

Revenue$

All parts of the circular flow diagram are

dependent on all other parts!

The End