Topic 2: Day 1

Basic Economic Concepts

• Definition of EconomicsDefinition of Economics– A social science (like history, A social science (like history,

geography, political science)geography, political science)

– Studies, analyzes, predicts and explains Studies, analyzes, predicts and explains economic activityeconomic activity

Study of ScarcityStudy of Scarcity

1. People choose2. Choice involves cost3. People respond to incentives – which

can be predicted4. People create economic systems that

influence choices and incentives5. People gain when they voluntarily

trade6. Choices have consequences

Handy Dandy Guide to Economics

What goes into the production of something?

Ex. Make a sandwich

Ex. Baking a cake

The Fundamental Problem All Economies Face:

• Scarcity: When peoples’ needs/wants exceed available resources

These are known as: FOPs (Factors of Production) OR

Productive Resources

Capital: Human (intelligence/skills); Financial (Money); Physical (tools, equipment, buildings/factories)

Entrepreneurs: “Risk Takers” – people who risk savings in order to gain a profit; increase competition by bringing new g/s to the market; lower prices

Land: Consists of any natural resources (raw materials; land for people to build homes/offices; trees, oil)

Labor: Fluctuates (growth/decline; life expectancy; work skills) and can impact an economy’s productivity

What to Produce? Usually based on available FOPs in an economy.

How to Produce? Usually based on available technology and decided based on EFFICIENCY.

For Whom Are we producing?

Go for the “target audience” – where the demand is.

Traditional:

• BEQs dictated by tradition, ritual, habit

• Everyone knows their role

• Little change, no risk, no new ideas, stable

Are individuals Free to make Economic Decisions?

Command:

• BEQs decided by central authority – set the needs and goals of a country (often use quotas)

• ADV: Economies can change quickly (no debate)

• DISAD: doesn’t meet n/w of people; lacks incentives; lack consumer goods; little to no innovation

Are individuals Free to make Economic Decisions?

Market:

• BEQs decided by supply and demand (consumers; producers)

• NO gov’t involvement

• ADV: lots of g/s; Laissez-Faire; satisfies n/w; incentives; innovation; private ownership

• DISAD: mkt failures (monopolies); rewards only productive resources

Are individuals Free to make Economic Decisions?

Mixed-Market:

• Most BEQs are determined by demand

• SOME gov’t interference

• ADV: protects consumers; preserves competition; private AND public ownership; incentives

• DISAD: More gov’t regulation and involvement

Are individuals Free to make Economic Decisions?

Free Enterprise Consumers & business owners

decide what to produce, not the gov’t

Needs Wants

Basic g/s necessary for survival

Ex: food, water, shelter, clothes

Expressions of needs (not essential to survive)

Ex. Transportation, technology, luxurious g/s

Capital Good/Serv.

Consumer Good/Serv.

Durable Goods

Non-Durable Goods

Free Products

Manufactured good used to produce another g/s (tires for car, truck used for delivery)

Good purchased for final use by consumer (car, haircut)

Goods that last 3 or more years (car, appliances)

Goods that least less than 3 years (most foods, clothing)

Provided by nature that produce g/s (solar energy, wind power)

Products

Free Products

Sunshine, air, wind

Economic Products

Goods ServicesPerformed

by other people:

nurses, food serving, etc

Consumer CapitalUsed by the Consumer

Used to make other

goods

There Is No Such Thing As A Free Lunch

Even when a g/s appears to be “free”, there is always a cost involved (labor and wages, RM used to make the g/s, someone else paid along the way)

Ex: “Buy One Get One Free” – you are paying for the first one, but the price had been increased so that profit is still being made on the second; AND somebody somewhere got paid to make that second good…so it’s not “free”

Diamonds VS. Water Theory

Diamonds are rare, limited, and a WANT…..expensive

Water is abundant and a NEED….more affordable

Thus, when something is SCARCE, it creates value (regardless of need or want)

When something is not scarce, it’s cheap.

Economies are DEPENDENT on each other:•Actions in one part of the world or country have an impact on other parts of the world or country.•For example – a candy bar purchased at Stewart’s may have been manufactured in New York, but the sugar, cocoa and corn syrup came from all over the world

Adam Smith: The Wealth of Nations, (1776):

“Economies/Workers are MOST EFFICIENT when they produce what they are best at” (The Invisible Hand)

• Assembly Line – specialize in one task instead of many

• Trade – produce and trade your most efficient FOPS

Topic 2: Day 2

The PPFThe Production Possibilities Frontier

Review: Thinking at the Margin

When you decide how much more or less to do, you are thinking at the margin.

Options

1st hour of extra study time

2nd hour of extra study time

3rd hour of extra study time

Benefit

Grade of C on test

Grade of B on test

Grade of B+ on test

Opportunity Cost

1 hour of sleep

2 hours ofsleep

3 hours of sleep

The Production Possibilities Frontier

Axes: categories of goods & services or specific goods or services on 1 axis and 1 on another

Using the factors of production to make one product means that fewer resources are left to make something else

The production possibilities frontier is the line that shows the maximum possible output for that economy.

Production Possibilities Frontier

Watermelons (millions of tons)

Shoes(millions of pairs)

Sh

oe

s (m

illi

on

s o

f p

air

s)

25

20

15

10

5

0252015105

Production Possibilities Graph

Watermelons (millions of tons)

0

a (0,15)8b (8,14)

A productionpossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

0 15

8 14

14 12

18 9

20 5

21 0

Production Possibilities Frontier

What does the PPF show?

The various combinations of TWO g/s produced using all FOPS efficiently

A

B

CD

E

ButterButter

Gu

ns

Gu

ns

What does each point represent?

A=

B=

C=

D=

E=

Production Possibilities Frontier

A

B

CD

E

ButterButter

Gu

ns

Gu

ns

Wartime

Attainable; depression

Unattainable;

Without growth

Peacetime

Normal Production

Point A: normal production 50/50 Point B: wartime (80/20) Point C: post war (30/70) Point D: underutilization

(unemployment) Point E: can’t produce enough unless

more factors of production (population growth & borrow money) increase shift right more FOPs = more production

What does this all mean?

Sh

oe

s (

mil

lio

ns

of

pa

irs

)

25

20

15

10

5

0 252015105

Watermelons (millions of tons)

Production Possibilities Graph

g (5,8)

A point of underutilization

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S

Efficiency Efficiency means

using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.

When the PPF shifts to the right, it means that there was an increase in FOPS (more capital, labor, etc)

What would it mean if the PPF shifted to the left?

Law of Increasing Costs As production switches from 1

item to another, more and more resources are necessary to increase production of the 2nd item

Therefore, the opportunity cost increases

Concept Review:Trade-Off: Trade-offs are all the alternatives that we give up whenever we choose one course of action over another.

Opportunity Cost: The most desirable alternative given up as a result of a decision

In the words of the Rolling Stones: You Can’t Always Get What You Want

The Decision Making Grid:

I am giving you $100 for fun. How are you going to use this money?Alternati

vesCost

($100 or less)

Durable Parents Approve

Future Expenses

Can Use Anytime

What is the best alternative?

What are the tradeoffs?

What is the opportunity cost?

Why is this grid effective?

Topic 2: Day 4Topic 2 Test:Multiple ChoiceArticle Response