WHAT IS ECONOMICS? Understanding Economics Chapter 1

Transcription

1 WHAT IS ECONOMICS? Understanding Economics Chapter 1

2 Chapter 1, Lesson 1 Scarcity and the Science of Economics

3 Needs vs. Wants! Need a basic requirement for survival, such as food, clothing and shelter.! Our needs are limited.! Want something we would like to have which is not necessary for survival.! Our wants are unlimited.

4 Economic Products! Good an object that satisfies a need or want! Durable good lasts three years or more when used regularly (tools, appliances, automobiles)! Nondurable good lasts less than three years when used regularly (notebook paper, clothing)! Consumer good intended for use by individuals (shoes, shirt, car)! Capital good used by businesses to produce other products (machinery and equipment)! Service an action that satisfies a need or want (haircut, home repair, legal advice)! Goods and services have value worth that can be expressed in dollars and cents.

5 Basic Economic Problem - Scarcity! Scarcity the basic economic problem that results from a combination of scarce (limited) resources and unlimited wants.! People don t have enough resources to buy everything they want.! Societies don t have enough resources to produce all the things people would like to have.! What resources of ours are limited?! Income! Time! Scarcity does not mean shortage.! Shortages are temporary, scarcity always exists.! Scarcity means we have to make decisions about how to use our limited resources.

6 Defining Economics! Economics the study of how individuals, households, businesses and societies use their limited (scarce) resources to satisfy unlimited wants.! Microeconomics the branch of economic theory that deals with the behavior and decision making of small units such as individuals, households and businesses.! Macroeconomics the branch of economic theory that deals with the economy as a whole and decision making by large units such as governments or societies.

7 Adam Smith, Economist ( )! Adam Smith was the first economist (Scotland).! Founder of classical economics.! He wrote The Wealth of Nations in 1776.! He believed in the invisible hand. This means that when societies allow individuals to make their own economic decisions, without government intervention, this creates the ideal economic system.! This means that government should not interfere in the marketplace.

8 Adam Smith, Economist ( )! Adam Smith also explains the paradox of value (why some very important things like water have low monetary value while unimportant things like diamonds have high monetary value.)! Scarcity is necessary for something to have monetary value.! Utility is necessary for something to have monetary value. " Utility the capacity to provide satisfaction. (Utility may vary from person to person.)! Adam Smith argued that for an item to have monetary value it must be scarce and have utility.! Diamonds are scarce and have utility high monetary value.! Water has utility but is not scarce low monetary value.

9 Wealth! Wealth the accumulation of goods that are scarce, have utility and are transferrable from person to person.! Services are not counted as wealth because they are not tangible. However, this does not mean they are not useful.! The abilities and skills of a nation s people are, in part, the source of its wealth.! Adam Smith If you take away all material possessions from a nation, the skills and abilities of a nation s people could work to restore them.! A nation s wealth includes all natural resources, factories, stores, houses, furniture, clothing, etc. that can be exchanged.

10 TINSTAAFL! There Is No Such Thing As A Free Lunch! Because resources are limited, and scarcity always exists, everything has a cost.! There is no such thing as getting something for free.

11 The THREE Economic Questions! Because societies have scarce resources, they have to make choices about how they use these resources. 1. WHAT to produce? " Guns versus butter? " Low, middle or upper income housing? " A society cannot produce everything people want. " Who decides this? Government? Or is it made the spending decisions of consumers? 2. HOW to produce? 3. FOR WHOM to produce?

12 The THREE Economic Questions! Because societies have scarce resources, they have to make choices about how they use these resources. 1. WHAT to produce? 2. HOW to produce? " Use automated robots or actual workers? How does this decision affect unemployment? How does it affect production costs? " Japan Most workers are over 45 (manual labor is difficult) so they use more automation which can make production less expensive. " Mexico The population is younger so they use more workers instead of automation. 3. FOR WHOM to produce?

13 The THREE Economic Questions! Because societies have scarce resources, they have to make choices about how they use these resources. 1. WHAT to produce? 2. HOW to produce? 3. FOR WHOM to produce? " Who receives the things that are produced? " Who makes the decisions? " If society cannot make enough housing for all citizens, who gets the housing? " Charter schools?

14 Elements of the Study of Economics! Description describing economic behavior (economic fact)! Gross Domestic Product (GDP) the monetary value of all final goods and services produced in a nation.! GDP describes a nation s economic health.! Economics also describes jobs, prices, trade, taxes and government spending.! Analysis analyzing the economics it describes! Why are some prices higher?! Why do people s incomes vary?! How do taxes affect people s desire to work and save?! There are various opinions based on which facts you look at.! Explanation! Prediction

15 Elements of the Study of Economics! Description describing economic behavior (economic fact)! Analysis analyzing the economics it describes! Explanation! This is understanding how our economy works after analyzing it.! Being able to explain the economy allows a person to address problems in the economy.! Prediction! What will happen in the future? Will incomes rise or fall? Will the economy slow or grow?! We can predict how various actions will affect the economy. What affect will a new law have?

16 Goal of Studying Economics! We want citizens to be informed about economics.! Informed citizens make better and more informed decisions in the voting booths.! This is the responsibility of all citizens in a free and democratic society.

17 Chapter 1, Lesson 2 Our Economic Choices

18 Factors of Production! Factors of Production resources needed to produce goods.! Land natural resources or gifts of nature not produced by people (fields, mineral deposits, livestock)! Capital tools, equipment, machinery and factory buildings used to produce goods and services. (includes computers too) " Capital increases productivity.! Labor the efforts, abilities and skills of people (labor is impacted by birthrates, immigration, war and disease)! Entrepreneurs risk-taking individuals who introduce new products or services in search of profits. (They often start new businesses.) " Notable entrepreneurs Henry Ford, Steve Jobs

19 Production Possibilities Curve! Production possibilities curve graph representing the maximum possible combinations of goods and/or services an economy can produce when all resources are fully employed.

20 Production Possibilities Curve! a, b and c possible combinations of cars and clothing production that are possible.! d not possible with the available resources! e possible but does not fully utilize the resources.

21 Opportunity Cost! Opportunity cost cost of the next best alternative given up when a choice is made.! The opportunity cost of moving from point a to point b and making an additional 100 units of clothing is 30 cars given up.

22 Trade-Offs! Trade-offs alternative that must be given up when one choice is made rather than another.! Difficult decisions can be made easier by the use of tools such as decision-making grids.! Opportunity cost the cost of the next best alternative use of resources when one decision is made over another.! Opportunity costs apply not only to producers but also consumers as well.

23 Decision Making Grid Example

24 Consumer Rights! Consumers are important to the economy as our buying decisions drive what is produced in an economy.! President Kennedy introduced rights protecting consumers into law in 1962! The right to safety protection against goods that are dangerous to us! The right to be informed we receive information about products that helps us make better buying decisions.! The right to choose the government will promote competition so we always have choices.! The right to be heard consumer interests will be heard when laws are being made.! The right to redress the right to receive compensation from producers if they are harmed by their products.

25 Consumerism! Consumerism a social movement that was aimed at promoting the interests of consumers (this started in the 1960s)! Consumer Responsibilities primary responsibility is to behave ethically! Save receipts, guarantees and contract to support your case! Report the problem immediately trying to fix it may void the warranty! Keep copies of all correspondence! Be nice the customer service representative didn t cause the problem! Keep records of who you talked to and on what dates

26 Chapter 1, Lesson 3 Using Economic Models

27 Economic Growth! Economic Growth an increase in a nation s total output of goods and services over time! Economic growth is a good thing because " We want more goods and services than we have now " The population is growing so more goods and services will be needed.! Creating growth requires risk and sacrifice! We give up consuming now to invest resources in capital and labor that we can use later to make even more goods. Is this a good gamble?

28 Economic Growth! Economic Growth allows a country to produce more output (a shift OUT for the PPC).! Technology may improve! Population may increase! Labor (human capital) becomes more skilled! Productivity may increase (Productivity measure of the amount of output produced in a given time period with a given amount of resources. Productivity goes up if more can be produced with the same amount of resources.)! New capital items may now exist

29 Economic Growth! A major reason for an increase in productivity is investment in human capital improving people s skills, abilities, health, knowledge and motivation.! Examples: Company-provided training or tuition reimbursement for college classes or company wide program for weight loss or smoking cessation.! People have to sacrifice earning an income now to spend time obtaining an education.

30 Economic Growth! Division of Labor dividing work into separate tasks to be performed by different workers! Specialization assignment of tasks to the workers, factories, regions, or nations that can perform them most efficiently! Ex: Henry Ford s invention of the assembly line in 1913 reduced the time to build a car from 1½ days to 2½ hours! Economic interdependence mutual dependence of the economic activities of one person, company, region or nation on those of another person, company, region or nation.! The U.S. and Japan have a great deal of economic cooperation and thus strong political relations.

31 Circular Flow of Economic Activity! Market meeting place or mechanism through which buyers and sellers of an economic product come together! Factor markets markets in which productive resources are bought and sold! Product markets market in which goods and service are bought and sold

32 Circular Flow of Economic Activity! Individuals and businesses are connected by markets.! The flow has no starting or ending point.

33 Thinking Like an Economist! Economic Model simplified version of a complex concept or behavior expressed in the form of a graph, figure, equation or diagram.! Economists reduce complex situations to their most basic elements.! Models are based on assumptions things we think are true.! Cost-benefit analysis comparison of the cost of an action to its benefits.! Can be used to analyze a single course of action or to make a decision between two alternatives! Incrementalism taking small, careful steps toward the final goal.

34 The Road Ahead Why Study Economics?! Free-enterprise economy economy in which consumers and privately owned businesses, rather than the government, make the decisions of WHAT, HOW and FOR WHOM.! This describes the American economy.! Standard of living quality of life based on ownership of necessities and luxuries that make life easier! Studying economics helps us understand the factors that impact our standard of living.! Citizenship - understanding our economy helps us to make better decisions in elections.! The world is a complex place. We want to understand how we impact the world and how the world impacts us.

35 The World Economy! Less developed countries focus on agriculture, manufacturing and mining (needs)! As economies develop, basic needs are satisfied and people demand more services such as health care, education, entertainment and banking.