Day 1 ECONOMIC WAY OF THINKING

Transcription

1 Unit 1: Economic Concepts and Supply and Demand

2 Day 1 ECONOMIC WAY OF THINKING

3 Economics Economics is the study of SCARCITY Based on individual choices made by individuals with limited resources Eg: you walk into a Target of the thousands, maybe millions of items, which do you buy? Even if you could afford them all, you only have so much room in your car, room, house, etc. How did all of those items get to Target? The economy is the system that coordinated the production of all of those goods. The US happens to have a MARKET Economy in which private firms produce goods and services.

4 Micro vs. Macro Microeconomics focus on choices made by individuals, households, or firms smaller parts that make up the economy as a whole Macroeconomics bigger picture the overall ups and downs of the economy, how all of those individual decisions in microeconomics work together Uses aggregates summarize data across many different markets Positive vs. Normative Positive economics - seeks to answer how the world works Normative economics tries to explain how the world should work (with varying opinions)

5 Scarcity People have unlimited wants with limited resources to meet those wants People must make choices!

6 What makes things scarce? All resources are scarce and can be categorized into 4 categories: Land (includes not just land but lumber, timber, water, minerals, and any other resource that comes directly from nature) Labor (effort of workers) Capital (machinery, buildings, tools, and any other manufactured good that goes into production. Also human capital) Entrepreneurship (the risk taking, innovation, and organization of resources that are used for production) Each of these resources are scarce in various situations even clean air or water in some circumstances

7 Opportunity Cost The value of what you give up in order to make the choice you do is your opportunity cost. Example: Looking at Learning Prep #1 Example 2: LeBron James and College Should LeBron mow his own yard?

8 Betty Biker Betty Biker is considering going to the Econville motorcycle rally for the weekend. She expects to spend $ on airfare, $ on motorcycle rental, $ on a motel, and $ on admission charges to events and buying memorabilia. By going to the rally, Betty will not be able to work and earn her normal consultant fees of $1, per weekend. Betty eats at restaurants exclusively. Her food expenses are normally $ per weekend and she estimates that her food expenses for the rally will be the same. Calculate the cost of going to the motorcycle rally for Betty. Be sure to list all of the component parts of your answer. Answer: $3,425

9 Illustrating Scarcity, Choices, and Opportunity Cost Production Possibilities Curve (or sometimes Frontier, more on that later) illustrates the concepts above. Trade-offs when you give something up to get something else. Opportunity Cost the top trade off, in other words, what you would have done/chosen had you not selected your option This model is oversimplified: illustrates only two goods Over simplicity is true of almost, if not all, economic models Castaway:

10 PPC for Tom, a castaway Efficiency: Productive no missed opportunities Allocative quantities society needs/desires

11 Law of Increasing Opportunity Costs/Constant Opportunity Costs Constant, aka linear, has a 1 for 1 type of cost Law of Increasing Opportunity Cost: as you increase production of one good, the opportunity cost to produced the additional good will increase So as you continue to produce good A, the opportunity cost of good B will escalate

12 Increasing Opportunity Cost aka non-linear

13 Shapes of the PPC Yes guns vs. butter.blame it on WWII propaganda.

14 Shifters of the PPC 1.Resource quantity 2.Technology 3.Benefits of Trade -(more on trade tomorrow) 5/drought-leaves-california-farmers-choosingwhich-crops-get-water-and-which/

15 PPC Growth

16 PPC: Review with a partner

17 PPC Practice Pages 2-6 of activity packet

18 Day 2 BENEFITS OF TRADE

19 Why should people trade Imagine a subsistence lifestyle where your family had to produce everything they used. Build a house, hunt/gather/grow food, sew clothing, etc. Little, if any, resources are left over to do anything else. Now, imagine your family joins with a few others and begins to trade. Each family can SPECIALIZE in a given product. Gains from Trade: by dividing tasks and trading, the families (or in our class the world population of 7 billion people) can each get more of what they want than they could get by being self sufficient. First identified in Adam Smith s The Wealth of Nations, 1776.

20 Comparative and Absolute Advantage (LP 2) What could happen if these two individuals traded? Who should catch fish? Who should gather coconuts?

21 Determining Absolute and Comparative Advantage Coconuts Fish Tom s OC Hank s OC For an OUTPUT problem (which this is) remember Opposite goes OVER Coconuts Fish Tom s OC 30 (40/30 = 4/3 fish) 40 (30/40 = ¾ coconut) Hank s OC 20 (10/20 = ½ fish) 10 (20/10 = 2 coconuts) Who has the COMPARATIVE ADVANTAGE and therefore specialize in each product?

22 Gains from Trade

23 Terms of Trade Terms of Trade indicate the rate at which one good can be exchanged for another. Countries should only trade if it is mutually beneficial. So they should trade if the gain from trade MORE than their opportunity cost to produce the item themselves. In looking at the Castaways Coconuts Fish Tom s OC 30 (40/30 = 4/3 fish) 40 (30/40 = ¾ coconut) Hank s OC 20 (10/20 = ½ fish) 10 (20/10 = 2 coconuts) Should they trade 1 coconut for 1 fish? Should they trade 1 coconut for 2 fish? Any price per coconut between the opportunity cost of the coconut producer and the opportunity cost of the coconut buyer will make both sides better off than in the absence of trade.

24 COMPARATIVE ADVANTAGE IN THE REAL WORLD NBC NIGHTLY NEWS 1/6/15

25 Input vs. Output Methods Time Required to Produce One Radio Ted 20min 5 min Nancy 30 min 15 min Time Required to Produce One Bushel of Wheat Radios Produced Per Hour Ted 3 12 Nancy 2 4 Wheat Produced Per Hour

26 Solving Comparative Advantage Questions INPUT method To solve input questions put Other goes UNDER Ted Nancy Time Required to Produce One Radio 20 min (20/5 = 4 bushels) 30 min (30/15 = 2 bushels) Time Required to Produce One Bushel of Wheat 5 min (5/20 = ¼ of a radio) 15 min (15/30 = ½ of a radio) Who should produce Radios? Who should produce Wheat?

27 Solving Comparative Advantage Questions OUTPUT Method To solve output questions.other goes OVER Radios Produced Per Hour Wheat Produced Per Hour Ted 3 (12/3 = 4 wheat) 12 (3/12 = ¼ of a radio) Nancy 2 (4/2 = 2 wheat) 4 (2/4 = ½ of a radio) Who should produce wheat? Who should produce radios?

28 Practice pages 7-9 activity packet

29 Day 3 Crazy busy day SUPPLY, DEMAND, AND EQUILIBRIUM

30 3 basic economic questions 1. What to produce 2. How much to produce 3. For whom to produce

31 What is Demand? How much people are willing and able to pay for a good/service at various quantities

32 Law of Demand and Demand Schedule Demand Schedule Law of Demand: as the price of goods falls, the quantity demanded will increase Price Quantity Demanded

33 Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: 1.The Substitution effect 2.The Income effect 3.The Law of Diminishing Marginal Utility

34 Why does the Law of Demand occur? 1. The Substitution Effect If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa) 2. The Income Effect If the price goes down for a product, the purchasing power increases for consumers - allowing them to purchase more.

35 Why does the Law of Demand occur? 3. Law of Diminishing Marginal Utility Utility = Satisfaction We buy goods because we get utility from them The law of diminishing marginal utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit. Discussion Questions: 1. What does this have to do with the Law of Demand? 2. How does this effect the pricing of businesses?

36 GRAPHING DEMAND

37 The Demand Curve A demand curve is a graphical representation of a demand schedule. The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) Let s draw a new demand curve for cereal

38 GRAPHING DEMAND Demand Schedule Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 Price of Cereal $ Draw this large in your notes $1 80 o Quantity of Cereal Q 38

39 GRAPHING DEMAND Demand Schedule Price of Cereal $5 Price Quantity Demanded 4 $ $4 20 $ $ Demand $1 80 o Quantity of Cereal Q 39

40 Shifts in Demand CHANGES IN DEMAND Changes in price Ceteris paribus- all other things held constant. When the ceteris paribus assumption is dropped, movement no longer DON T shift occurs along the demand curve. Rather, the entire demand curve shifts. A shift means that at the same prices, more people are willing and able to purchase that good. the curve! This is a change in demand, not a change in quantity demanded

41 Change in Demand Demand Schedule Price of Cereal $5 Quantity Price Demanded $5 10 $4 20 $ What if cereal 3 makes you smarter? 2 $2 50 $ o Quantity of Cereal Demand Q

42 Change in Demand Demand Schedule Price of Cereal $5 Price Quantity Demanded 4 $5 10 $4 20 $3 30 $2 50 $ o Quantity of Cereal Demand Q

43 Change in Demand Demand Schedule Price of Cereal $5 Price Quantity Demanded 4 $5 10 $4 20 $3 30 $2 50 $ o Quantity of Cereal Demand Q

44 Change in Demand Demand Schedule Price of Cereal $5 Price Quantity Demanded 4 $ $ $ $ $ o Quantity of Cereal Demand Q

45 Change in Demand Demand Schedule Price Quantity Demanded $ $ $ Price of Cereal $ Increase in Demand Prices didn t change but people want MORE cereal D 1 $ $ o Quantity of Cereal Demand Q

46 Change in Demand Demand Schedule Price of Cereal $5 Quantity Price Demanded $5 10 $4 20 $ What if cereal 3 causes baldness? 2 $2 50 $ o Quantity of Cereal Demand Q

47 Change in Demand Demand Schedule Price of Cereal $5 Price Quantity Demanded 4 $5 10 $4 20 $3 30 $ Demand $1 80 o Quantity of Cereal Q

48 Change in Demand Demand Schedule Price of Cereal $5 Price Quantity Demanded 4 $5 10 $4 20 $3 30 $ Demand $1 80 o Quantity of Cereal Q 49

49 Change in Demand Demand Schedule Price of Cereal $5 Price Quantity Demanded 4 $ $ $ $ Demand $ o Quantity of Cereal Q

50 Change in Demand Demand Schedule Price Quantity Demanded $ $ $ Price of Cereal $ Decrease in Demand Prices didn t change but people want LESS cereal $ D 2 Demand $ o Quantity of Cereal Q 51

51 Change in Demand Demand Schedule Price of Cereal $5 Quantity Price Demanded $5 10 $4 20 $ What if the price 3 of MILK goes up? 2 $2 50 $ o Quantity of Cereal Demand Q 52

52 5 Shifters (Determinates) of Demand 1.Tastes and Preferences 2.Number of Consumers 3.Price of Related Goods 4.Income 5.Future Expectations Changes in PRICE don t shift the curve. It only causes movement along the curve.

53 Change in Qd vs. Change in Demand Price of Cereal P $3 $2 There are two ways to increase quantity from 10 to 20 A C B 1. A to B is a change in quantity demand (due to a change in price) 2. A to C is a change in demand (shift in the curve) D 2 o Quantity of Cereal D 1 Q Cereal

54 Demand practice page 15 of activity packet also (see 14 and 16 for reference know and understand)

55 Supply Defined What is supply? Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. What is the Law of Supply? There is a DIRECT (or positive) relationship between price and quantity supplied. As price increases, the quantity producers make increases As price falls, the quantity producers make falls. Why? Because, at higher prices profit seeking firms have an incentive to produce more. EXAMPLE: Mowing Lawns

56 Example of Supply You own an lawn mower and you are willing to mow lawns. How many lawns will you mow at these prices? Supply Price per lawn mowed Schedule $1 $5 $20 $50 $100 $1000 Quantity Supplied

57 GRAPHING SUPPLY Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 Price of Cereal $ Draw this large in your notes $1 10 o Quantity of Cereal Q

58 GRAPHING SUPPLY Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied 4 $ $4 40 $ $ $1 10 o Quantity of Cereal Q

59 GRAPHING SUPPLY Supply Schedule Price of Cereal $5 Supply Quantity Price Supplied $5 50 What 4 if new companies 3 start making $4 40 $ cereal? $ $1 10 o Quantity of Cereal Q

60 Change in Supply Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied 4 $ $4 40 $ $ $1 10 o Quantity of Cereal Q

61 Change in Supply Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied 4 $ $4 40 $ $ $1 10 o Quantity of Cereal Q

62 Change in Supply Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied 4 $ $ $ $ $ o Quantity of Cereal Q

63 Change in Supply Supply Schedule Price of Cereal $5 Supply S 2 Price Quantity Supplied 4 $ $ $ $ Increase in Supply Prices didn t change but there is MORE cereal produced $ o Quantity of Cereal Q

64 Change in Supply Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied $5 50 What 4 if a drought destroys 3 corn and wheat $4 40 $ crops? $ $1 10 o Quantity of Cereal Q

65 Change in Supply Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied 4 $ $4 40 $ $ $1 10 o Quantity of Cereal Q 66

66 Change in Supply Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied 4 $ $4 40 $ $ $1 10 o Quantity of Cereal Q 67

67 Change in Supply Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied 4 $ $ $ $ $ o Quantity of Cereal Q 68

68 Change in Supply Supply Schedule Price of Cereal $5 S 2 Supply Price Quantity Supplied 4 $ $ $ $ Decrease in Supply Prices didn t change but there is LESS cereal produced $ o Quantity of Cereal Q 69

69 Change in Supply Supply Schedule Price of Cereal $5 Supply Price Quantity Supplied $5 50 $4 40 $ What if cereal companies 3 find a quicker way to make 2 cereal? $ $1 10 o Quantity of Cereal Q

70 6 Shifters (Determinants) of Supply 1. Prices/Availability of inputs (resources) 2. Number of Sellers 3. Technology 4. Government Action: Taxes & Subsidies 5. Opportunity Cost of Alternative Production 6. Expectations of Future Profit Subsidies A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase. Changes in PRICE don t shift the curve. It only causes movement along the curve.

71 Practice: demand, right (out) or in (left) Pg. 17 in class activity packet.

72 Quick review of supply and demand Do you get it? On pages 11 and B 2. C 3. C 4. A 5. D

73 Equilibrium aka Market Clearing Price Price where intentions of buyers and sellers match price where quantity demanded = quantity supplied. Shows you your equilibrium Price and equilibrium Quantity See Activity packet pg. 18 and 19

74 Equilibrium practice Page 18 and 19 will be used as a formative assessment today be ready to be called upon to share an answer Do we need more? Page 20 and 21 Do YOU need more? Extra practice (or study) option on pages 22 and 23

75 Price Controls Government may conclude that they need to step in and regulate prices WHY?

76 Ceilings A maximum legal price a seller may charge for a product or service Causes a Shortage Eg: on gasoline, rent control in major cities Potential problem: Black markets

77 Floors A minimum price fixed by the government Causes Surplus Eg: crops to support farmers

78 Dead Weight Loss aka Efficiency Losses Consumer Surplus: difference between the maximum price that a buyer is willing to pay and the lower price they actually paid Producer Surplus: difference between the minimum price that a producer is willing to accept and the higher price actually received THESE SHOW INNEFICIENCY! Could be on either side of equilibrium If you are ever asked to calculate Dead Weight Loss: area of a triangle = ½*b*h See practice on page 13

79 Formative assessment and optional extra practice Formative Assessment Work on matching terms on pages 2 and 10 Optional practice on pages 22-23

80 Day 4 MACROECONOMIC ISSUES/GRAPHS

81 Business Cycle

82 In theory and in reality

83 Double dip recession

84 Goal of many economic policies Three important goals for the macroeconomy: 1. Full employment (we will talk more about what that looks like next week) 2. Price stability (not too much inflation or deflation too rapidly) 3. Economic growth (are we getting better/stronger/more productive over time)

85 Unemployment More on unemployment next chapter, however, there are some things you will want to understand in order to understand the business cycle. Natural Rate of Unemployment = 4-6% Seasonal, Structural, Frictional Discouraged workers = a person who has yet to find a job after long-term unemployment, or a person who is not looking for a job (but should)

86 Inflation Defined: a rise in the general level of price in an economy 1-2% per year is generally considered to be accecptable The question (we will address later) involves the idea of sticky wages. Can wages be as flexible as inflation? Can workers wages keep up with inflation? Inflation is not growth

87 Looking at the DBQs JTFJ Just the Facts Jack/Jane don t write a thesis, intro, or 5 paragraph essay. This is economics and it requires a concise answer. ADQ Multiple parts Answer the D--- Question! Much like above, don t go into a deep analysis if it is not asked for. Don t answer other questions in the same question. Don t use this as an opportunity to show off what you know. If you don t know the answer or how to get to the answer don t spend time explaining the concepts around the answer. They just want an answer don t B--- S--- your way on the question. Questions are in multiple parts and points are awarded for each part independently. You should attempt to answer ALL parts. Even if a later answer depends on a previous answer you might still get credit even if the previous answer was wrong. If you follow the logic they might give you points. Use the same outline or letters from the question as written. It helps the faculty scorer IMMENSELY! Show means to diagram or graph a macroeconomic effect. It is possible to get partial points, so always take a shot at these and be sure to label them fastidiously. SICE Identify usually means just that: Identify the result of something happening. A short, direct response is expected (and desired). Example: 'Unemployment will rise.' If the question does not explicitly ask for explanation, don't bother writing one. Calculate usually will mean to apply a formula that you (hopefully) have mastered with practice. Keep a running page in your notebook of the formulas we use there will be A LOT of them. Explain should leap off the page when you see it in an FRQ. That means you are expected to both indicate what will happen and offer an explanation as to why or how it happens. Master the graphs / models You should always be thinking of the models when answering the questions in both the MC and FRQ sections. Know how to label ALL of the parts and show your logic clearly on the graph. Sometimes an answer on the FRQ will not require any words! A well constructed and labeled graph will do the trick.

88 See DBQs on page 26-29

89 PPC FRQ Answer as many as possible individually, then work in tables to check for understanding AP Test Language: Explain: requires 2 parts WHAT will happen, and WHY it will happen Illustrate: requires a graph/model Identify: short, maybe a word, number, phrase etc. Define: give your best definition for that concept

90 FRQ Practice #2

91 FRQ Practice #3

92 Friday To Do: 1) Complete Multiple Choice in Learning Preps packet (would you like me to take these for a grade? You could complete them with your group but it would give you a bit of a cushion before the test) They would be due at the end of class. 2) Complete other 2 practice DBQs in Activity Packet Tuesday Test: Study ideas Format MC (maybe 20 or so) To study: complete matching vocab in activity packet Check off all learning targets/check for understanding on key concepts page Make sure your entire activity packet is complete Really understand concepts of economic thinking See videos/slides for anything you don t understand (check website) 2-3 FRQs Revisit your activity packet do you understand/remember how you did everything? me with any questions