Economics CIA4UChapter 1 Class 1

Mr. Redmond

Expectations

1. Show up on time2. Help each other learn3. Show Respect4. Get involved in classroom discussion5. Do your best to reach your goals!

THIS IS A GRADE 12 U LEVEL CLASS! Therefore…

Let me get to know you On a piece of paper

Write your name Why you chose to take this course? Your interests (at least 3) What your goals are for this course (at

least 2)? What action will you take to achieve your

goals? What are your plans after school (at least

2-3 sentences)?

Handout Textbooks Course outline

Economics? Who cares?What’s In It For Me? Why study economics?

Understand the world Why do governments make the decision they do? Why do businesses succeed or fail? Why do I pay so much for my cell phone?

Help you make good choices to maximize your scarce resources $$$$$$$$

Better informed for voting Understand economic policy/platform

Agenda

Go over course outline What is economics? What is an economy? What is the goal of economics? What do we want the economy to provide

us? Analytical Economics vs Normative

Economics

What is Economics? Geopolitics Money Stock market Government Trade Supply and

Demand

Article article on debt

What is Economics?

Definition: The study human activity, involved in making decisions about the use of scarce resources to satisfy human wants and needs

Origin - Greek Word oikonomia Oikos: House Nemo: Manage Wise management of one’s own

household

What is an Economy? ?

What is an Economy? A self-sustaining system in which

many independent transactions (often triggered by self-interest) create distinct flows of money and products and services

What is an Economy?

Retailer

Consumer

$$$$Goods

What is an Economy?

Retailer

Consumer

$$$$ Goods

Manufacturer

$$$$ Goods

What is an Economy?

Retailer

Consumer

$$$$ Goods

Manufacturer

$$$$ Goods

Employees

$$$$ Service

$$$Goods

What is an Economy?

Retailer

Consumer

$$$$ Goods

Manufacturer

$$$$ Goods

Employees

$$$$ Service

$$$Goods

Government

$$$

$$$

$$$$$$

What is an Economy?

Retailer

Consumer

$$$$ Goods

Manufacturer

$$$$ Goods

Employees

$$$$ Service

$$$Goods

Government

$$$

$$$

$$$$$$

Serv

ices

What is an Economy?

Retailer

Consumer

$$$$ Goods

$$$

Goods

Man

ufac

ture

r

$$$$

Goods

Empl

oyee

s

$$$$

Serv

ice

Manufacturer

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Goods

Employees

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Service

Manufacturer

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Employees

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Gov

ernm

ent

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Services

It can get a little complicated…

What is the Goal of Economics? Maximize the satisfaction of human

WANTS (goods and services) with the minimum use of resources

Effective: Use of resources that achieves what we want (the right goal)

Efficient: Use of the minimum amount of resources that achieves what we want (the right way)

What do we want? GOODS: tangible things that satisfy

human wants iPhone, Hockey Stick, Car etc…

SERVICES: items that satisfy human wants, that are intangible, lasting only for the time of its production Haircut, taxi ride, massage etc…

Analytical (positive) Economics Facts about the world Descriptive: Describes things the

way they are or were Ex Automobile sales are up 7% from

last year Conditional: Forecasts based on

analysis Ex If x occurs then y will follow Ex If the U.S attacks Saudi Arabia,

gasoline prices will increase

Normative Economics Deals with statements that contain

value judgments or opinions A.K.A. Policy Economics

Should gambling be legalized? Should the city set up shelters to

support homeless people? Should we legalize prostitution?

Marijuana?

Building an Economy

What is an Economic Event? Something that has had an impact

on the economy?

What is the economy? Businesses Consumers Households

Review What is economics? What is an economy? What is the goal of economics? Goods vs Services Vending Machine Economy Analytical vs. Normative

Economics is a Social Science How do we know what is the best

decision to maximize our scarce resources?

Understanding human behaviour (decisions) Complicated because of …

Needs and wants of different groups differ Needs and wants are based Values and Belief Societal Values and Beliefs are changing

Predicting Human Behaviour Individual Behaviour is hard to predict Group Behaviour is easier to predict

On a hot sunny day more people will: Buy ice cream Go to the pool Not come to class

Use of statistics and probabilities Key assumption

Humans are rational, social and self-interested

Scarcity Human needs and wants are unlimited

Needs: Needed to survive Wants: Non-essential items

Resources (land, labour, capital) are limited

Needs and Wants > Resources = Scarcity Dealing with scarcity dominates Economics We need to make choices

Opportunity Cost The sum or true cost of all that is lost in order to produce

or consume what we decide we want the most.

In other words, opportunity cost is the cost of spending your money, time and energy on one thing, instead of another thing.

For every decision that we make, an alternative decision is possible, and the difference in outcomes is the opportunity cost that we face

Every decision has consequences What do you gain? What do you loose?

Opportunity Cost Video games vs. Studying

Working a second job to pay down my mortgage – opportunity cost?

Think about the opportunity costs of every dollar that you spend, and what else you could have done with it instead.

Think like our good friend Warren.

Opportunity Cost Warren Buffet

World renown investor One of the richest people in the world Is frugal with his money His perspective.

For him, spending $4 on a cappuccino doesn’t merely mean $4 lost today; it also means a potential $40 or more in foregone future earnings and capital growth.

Opportunity Cost What would you do with $2000

What are your priorities? List at least three alternatives?

Spring Break Trip to Cancun Blu-Ray home theatre system Save for college or university

How would you evaluate the alternatives?

Opportunity Cost NOTE: Opportunity cost of a decision

is only the next best option not all of them

Ex If you choose to spend $2000 on a trip the opportunity cost of the $2000 is either enjoyment of the Blu-Ray system OR the savings for school (+ interest)

Does Opportunity Cost Always have to do with money?

Opportunity cost is not just restricted to monetary or financial costs but anything that has value (ex. pleasure, time, etc.)

Ex. Take the family to the carribean vs renovate your kitchen

Opportunity cost?

Opportunity cost The enjoyment of cooking in a new

kitchen

What if the scenario was vice versa? What would the opportunity cost(s) be?

Opportunity Cost Sarah decides to enroll in university?

What is her opportunity cost?

Sarah’s total cost of the school year Tuition, books, living expenses AND…. Money she would have made from

working instead of going to school

Opportunity Cost and Political Decisions Minimum wage – opportunity cost?

Discussion What are you going to do after grade 12?

College University Work Travel Work Abroad Grade 13

What is the opportunity cost for you? (Next Best)

Decision Making Criteria p91. Define the problem2. Clarify goals and priorities3. List possible alternatives4. Establish criteria to judge alternatives5. Weight each criterion based on goals and

priorities6. Evaluate each alternative7. Make a decision8. Act on the decision9. Assess effectiveness

Decision Making MatrixPriority Priority 1 Priority 2 Priority 3 Total

Weighted Value

Weight

Alternative 1

Alternative 2

Alternative 3

Decision Making MatrixPriority Getting

good marksGetting ready for post secondary

Income Fun with friends

Total Weighted Value

Weight High (3x) High (3x) Moderate (2x) Low (1x)

Spring Break Trip to Cancun

-3 -3 -2 +1 -8+1

Blu-Ray home theatre system

-3 -3 -2 +1 -8 +1

Save for college or university

+3 +3 +2 -1 +8 -1

Who Stays? You are a passenger on

the Costa Concordia (see below). Your captain has was showing off his navigating skills and ran the ship aground. The ship is sinking and all but one of the life boats is damaged. There are 25 people left on board Only 5 can get in the life boat. Who gets to go on the life boat? Who gets to tread water with the sharks (you are 20 miles off shore)?

Goals1. Survival2. See your family again3. Wealth4. Save the most needy

Criteria1. Make a contribution to the boat (x3)

1. Physically Fit 2. Age (Young is good - but no kids)

2. Contribute to you after (x1)1. Status Famous2. Rich

3. Impact on society (x2)1. Education2. Status

Decision Making MatrixPriority Make a

contribution to the boat

Contribute to you after

Impact on society

Total Weighted Value

Weight x3 x1 x2Professional Athletes. Free autograph anyone?

Save the kids!! Oh they’re sooooo cuuute!

Gramps and Grams (sorry no walkers allowed in the boat)

DoctorsFree pec implants?

Your High School Economics Teacher Can you say A++??

Opportunity Cost Production Possibility Curve Production Possibility Curve (PPC)

Illustrates the concept of opportunity cost Each point on the curve illustrates the trade off that must be

made PPC only demonstrates what happens when a society moves

from one level of production to another

The 4 Assumptions of PPC 1) there is a limited supply of resources/fully employed 2) technology is also limited 3) the economy is running efficiently 4) there exists an only “two good” world

Production Possibilities – are the amounts of goods or services a firm or society could produce, given a fixed amount of land, labour, technology and other inputs.

Constant Opportunity Cost Production Possibility Curve 1

Production Possibilities Ploughs

Loaves of Bread

Opportunity/ Relative

Cost (Bread)

A 0 15000

B 1 12000 3000

C 2 9000 3000

D 3 6000 3000

E 4 3000 3000

F 5 0 3000

Opportunity Cost Production Possibility Curve Opportunity Cost

0

2000

4000

6000

8000

10000

12000

14000

16000

0 1 2 3 4 5 6

Ploughs

Bre

ad

A

B

C

D

E

F

G

H

Production Possibility Curve PPC The Opportunity cost is expressed in

the good given up (i.e. 3000 loaves of bread) not dollars A.K.A. The relative cost

PPC shows the maximum output or frontier What happened at point G? What happened at point H?

The law of increasing relative cost When an economy focuses more of it’s

resources on a single product the relative cost increases

Why? Resources are not 100% interchangeable. Can a blacksmith bake bread? Can she do it as well as a baker?

What does this mean?

The trade offs faced by society are not fixed

If society produces a few ploughs it will use those resources – people and machines- that are best equipped for building ploughs. But as more ploughs are being produced, more resources are needed and doing so becomes difficult. It will result on those being less skilled at making ploughs.

Opportunity Cost Production Possibility Curve 2

Production Possibilities Ploughs

Loaves of Bread

Opportunity/ Relative

Cost

A 0 15000  

B 1 14000 1000

C 2 12000 2000

D 3 9000 3000

E 4 5000 4000

F 5 0 5000

Opportunity Cost Production Possibility Curve 2

Opportunity Cost

0

2000

4000

6000

8000

10000

12000

14000

16000

0 1 2 3 4 5 6

Ploughs

Bre

ad

AB

C

D

E

F

As more ploughs are produced, the most convertible resources are consumed/used first, the resources remaining are less productive in making ploughs and therefore the cost of producing ploughs increases (outputs) – Law of increasing relative costs (AKA Increasing Opportunity Cost)

The Law of Diminishing Returns

Law of Diminishing Returns deals with inputs (Resources – Labour)

Definition: Outputs will increase when ONE input is increased but only to a certain point

The Law of Diminishing Returns

Year Cultivated LandLabour force

(Workers)Total Production(Bushels of Corn)

Increase in Yield

(Extra Bushels)

1 10 1 1000  

2 10 2 2000 1000

3 10 3 2800 800

4 10 4 3400 600

5 10 5 3800 400

6 10 6 3900 100

7 10 7 3900 0

Law of Diminishing ReturnsLaw of Diminishing Returns

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0 1 2 3 4 5 6 7 8

Number of Workers

Bu

shel

s o

f C

orn

Total Production(Bushels of Corn)

Increase in Yield(extra Bushels)

The Law of Increasing Returns to Scale AKA Economies of Scale Law of Increasing Returns to scale

deals with inputs (Resources – land, labour)

Definition: The RATE of output will increase when ALL inputs in production are increased

Why? Teamwork and specialization

The Law of Increasing Returns to Scale

YearCultivated

LandLabourforce

(Workers)

Total Production (Bushels of

Corn)Increase in Yield

(extra Bushels)

1 10 1 1000  

2 20 2 2000 1000

3 30 3 3200 1200

4 40 4 4600 1400

5 50 5 6200 1600

6 60 6 8000 1800

7 70 7 10000 2000

The Law of Increasing Returns to Scale

Law of Increasing Returns to Scale

0

2000

4000

6000

8000

10000

12000

0 1 2 3 4 5 6 7 8

Number of Workers and ha of land (x10)

Bu

shel

s o

f C

orn

Total Production(Bushels of Corn)

Increase in Yield(extra Bushels)

AgendaReview laws Falicies

Review Laws Law of Increasing Relative Cost

Opportunity/Relative cost increases with specialization

Law of Diminishing Returns Outputs will increase when ONE input is

increased but only to a certain point Law of Increasing Returns to Scale

The RATE of output will increase when ALL inputs in production are increased

What is a Fallacy? A hypothesis that

has been proven false

still accepted by many people because it appears, at first glance, to be right.

The Fallacy of Composition Belief that individual benefit

automatically translates into social benefit

“If it works for me that it must work for the rest of society”

The Fallacy of Composition Death of the commons

What happens if one farmer puts one extra cow on common land? One extra fat cow

What happens if many farmers put just one extra cow on common land? Commons were ruined for everyone

The Fallacy of Composition ex. Farmer decides to produce

more corn = more money for him

BUT … if every farmer that year decided to produce more corn the price of corn would drop and farmers could not recover operating expenses

Can also work the other way - belief that what is good for society is good for individual

Wrong - free trade may benefit many - but some people have lost jobs

Fallacy of Composition Every player on the team is a superstar and a great player, so

the team is a great team.

The best action for a business during a time of recessions might

be to lay layoff staff and reduce production.

An individual business can increase profits by reduce expenses. However, one businesses expense is another businesses sale, so if all firms try to increase their profits by reducing expenses, they might all experience a reduction in profits, as sales decline.

The Post Hoc Fallacy (Cause-and-effect fallacy) Example: the alarm clock rang (a)

and then Mr. Hoey got out of bed (b) (A) did cause (B)

Example: the alarm clock rang (a) and then the sun came up (b) Even though (b) happened after (a), (a)

did not cause (b) to happen

The Post Hoc Fallacy (Cause-and-effect fallacy) "post hoc ergo propter hoc” Translation “after this therefore

because of this” people sometimes assume because

event B took place after event A, it must have been caused by event A

Post-Hoc Fallacy Samson is scratched by a cat while visiting her friend. Two days

later she comes down with a fever. Joan concludes that the cat's scratch must be the cause of her illness.

Most people who are read the last rites die shortly afterwards.Therefore: Priests are going around killing people with magic words!

The Fallacy of Single Causation Closely linked to Post Hoc Fallacy A single person/event caused a

particular event ex. The great depression was caused

by the 1929 stock market crash –WRONG - numerous things caused the Great Depression

Single Causation Fallacy The Conservatives pass a new tax reform law

that benefits wealthly Canadians. Shortly thereafter the economy takes a nose dive. The Liberals claim that the tax reform caused the economic woes and they push to get rid of it.

Review for Quiz Monday Review Key Terms on p25 Decision Making Model

Cruise ship Know laws and fallacies Be able to graph a production possibility

curve Law of Increasing Relative Cost Law of Increasing Returns to Scale Interchangeable resources

Class work Write your own fallacies

Post hoc Single causation Composition

P 24 #6

P24#6a) Single Causationb) Compositionc) Post hocd) Compositione) Single Causationf) Composition

g) TRUEh) Post hoc / Single

Causationi) Post hoc / Single

Causation

END OF CHAPTER 1