Length: 2 Weeks Chapters: 1 and 2 Assignments: Unit 1 Workbook Problem Sets Vocab NC

Length: 2 Weeks Chapters: 1 and 2 Assignments: Unit 1 Workbook Problem Sets Vocab NC

What is Economics in General? Economics is the science of scarcity. Scarcity is the condition in which our wants are greater than our limited (scarce) resources. Since we are unable to have everything we desire, we must make choices on how we will use our resources. In economics we will study the choices of individuals, firms, and governments. Economics is the study of. choices

Examples: You must choose between buying jeans or buying shoes. Businesses must choose how many people to hire Governments must choose how much to spend on welfare. Economics Defined Economics-Social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants. (Study of how individuals and societies deal with scarcity)

"It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest -Adam Smith

Micro vs. Macro MICROeconomics- Study of small economic units such as individuals, firms, and industries (competitive markets, labor markets, personal decision making, etc.) Unit 2 MACROeconomics- Study of the large economy as a whole or in its basic subdivisions (National Economic Growth, Government Spending, Inflation, Unemployment, etc.) Unit 3-6

How is Economics used? Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics. These theories are then applied to fix problems or meet economic goals. This is called policy economics. Positive vs. Normative Positive Statements- Based on facts. Avoids value judgments (what is). A fall in incomes will lead to a rise in demand for own-label supermarket foods Normative Statements- Includes value judgments (what ought to be). Pollution is the most serious economic problem

What Does Short-Run Mean? EVERYTHING in this class is always in the short-run this time period varies, just always think of it as short like me. The only time this will change for you on a FRQ is if the FRQ specifically states longrun. Same is true for a MCQ You will see the short-run when we cover issues such as aggregates, the short-run prevents our models from reaching market equilibrium.

Thinking at the Margin # Times Watching Movie Benefit Cost 1st $30 $10 2nd $15 $10 3rd $5 $10 Total $50 $30 Would you see the movie three times? Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3 rd time.

Marginal Analysis In economics the term marginal = additional Thinking on/at the margin, or MARGINAL ANALYSIS involves making decisions based on the additional benefit vs. the additional cost. For Example: You have been shopping at the mall for a half hour, the additional benefit of shopping for an additional half-hour might outweigh the additional cost (the opportunity cost). After three hours, the additional benefit from staying an additional half-hour would likely be less than the additional cost.

Marginal Analysis Notice that the decision making process wasn t should I go to the mall for 3 hours or should I stay home In reality the decision making process started with should I go to the mall at all. Once you are there you thought should I stay for an additional half hour or should I go. The MARGINAL ANALYSIS approach to decision making is more comely used than the all or nothing approach.

Marginal Analysis Notice that the decision making process wasn t should I go to the mall for 3 hours or should I stay home You will continue to do something until the In reality the decision making process was should I go to the marginal mall at all. cost outweighs the marginal Once you are there you benefit. thought should I stay for an additional half hour or should I go. The MARGINAL ANALYSIS approach to decision making is more comely used than the all or nothing approach.

5 Key Economic Assumptions 1. Society s wants are unlimited, but ALL resources are limited (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off). 3. Everyone s goal is to make choices that maximize their satisfaction. Everyone acts in their own selfinterest. 4. Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice 5. Real-life situations can be explained and analyzed through simplified models and graphs.

Analyzing Choices

Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant) 1. You want to visit your friend for a week 2. You work every weekday earning $100 per day 3. You have three flights to choose from: Thursday Night Flight = $275 Friday Early Morning Flight = $300 Friday Night Flight = $325 Which flight should you choose? Why?

Trade-offs and Opportunity Cost ALL decisions involve trade-offs. Trade-offs are all the alternatives that we give up whenever we choose one course of action over others. (Examples: going to the movies) The most desirable alternative given up as a result of a decision is known as opportunity cost. What are trade-offs of deciding to go to college? What is the opportunity cost of going to college? GEICO assumes you understand opportunity cost. Why?

Comparative and Absolute Advantage

Opportunity Cost and the Relation to Absolute/Comparative Advantage Opportunity Cost is when what you are giving up to perform a task. How does this relate to Absolute/Comparative Advantage? As a class we will read Introduction to Comparative/Absolute Advantage 17

Introduction to Comparative/Absolute Advantage Work with your partner to complete the Problem Set. What you do not get done is homework. We will review this tomorrow. Problem Set

Concept review with your partner 1. Define scarcity 2. Define Economics 3. Identify the relationship between scarcity and choices 4. Explain how Macroeconomics is different than Micro 5. Explain the difference between positive and normative economics 6. Identify the 5 main assumptions of Economics 7. Give an example of marginal analysis 8. Name 10 Disney movies

Economic Terminology Utility = Satisfaction! Marginal = Additional! Allocate = Distribute! 20

Scarcity versus Shortage Scarcity is forever, shortage is just a temporary condition Example: There is a shortage of Ferrari 488 s at the moment BUT a 1967 275 NART Spyder is scarce due to the fact it is no longer being built. Which one is worth more? Why? Lets find out! 21

1967 NART Spider 22

Price vs. Cost What s the price? vs. How much does that cost? Price= Amount buyer (or consumer) pays Cost= Amount seller pays to produce a good Investment Investment= the money spent by BUSINESSES to improve their production Ex: $1,000 new computer, $1 Million new factory 23

Goods vs. Services Give examples Goods= physical objects that satisfy needs and wants Consumer Goods- created for direct consumption (example: pizza) Capital Goods- created for indirect consumption (oven, blenders, knives, etc.) Goods used to make consumer goods Services= actions or activities that one person performs for another (teaching, cleaning, cooking) 24

The 4 Factors of Production 25

The Factors of Productions and PPF s

The Four Factors of Production Producing goods and services requires the use of resources- DUH!. ALL resources can be classified as one of the following four factors of production: Land Labor Capital Entrepreneurship 27

The Four Factors of Production Land = All natural resources that are used to produce goods and services. Anything that comes from mother nature. (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.) Labor = Any effort a person devotes to a task for which that person is paid. (manual laborers, lawyers, doctors, teachers, waiters, etc.) 28

The Four Factors of Production Two Types of Capital: 1. Physical Capital- Any human-made resource that is used to create other goods and services (tools, tractors, machinery, buildings, factories, etc.) 2. Human Capital- Any skills or knowledge gained by a worker through education and experience (college degrees, vocational training, etc.) 29

The Four Factors of Production Entrepreneurship= ambitious leaders that combine the other factors of production to create goods and services. Examples-Henry Ford, Bill Gates, Inventors, Store Owners, etc. Entrepreneurs: 1. Take The Initiative 2. Innovate 3. Act as the Risk Bearers So they can obtain. PROFIT Profit = Revenue - Costs 30

The Four Factors of Production Classify the Four Factors of Production in the following scenario: You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

The Four Factors of Production Classify the Factors of Production in the following scenario: You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Accountants vs. Economists Accountants look at only EXPLICIT COSTS. Explicit costs are the traditional out-of pocket costs of decision making. Ex: Going to Disneyland Economists look at the EXPLICIT COSTS and the IMPLICIT COSTS. Implicit costs are the opportunity costs such as forgone time and forgone income. Ex: Payton Manning leaves the NFL to open a taco shop. 33

Concept review with partner... 1. Explain relationship between scarcity and choices 2. Differentiate between positive & normative 3. Differentiate between price and cost 4. Explain the Invisible Hand of Capitalism 5. Differentiate between consumer and capital goods 6. Give examples of each of the 4 Factors of Production 7. Define tradeoffs 8. Define opportunity cost 9. Differentiate between accounting costs and economic costs 10.Name 10 different teachers at THS. 34

Introduction to Production Possibility Curves Problem Set Work with your partner to complete the Problem Set. What you do not get done is homework. We will review this tomorrow.

WE HAVE A PROBLEM!! The Economizing Problem Scarcity Society has unlimited wants but limited resources 36

The Production Possibilities Curve (PPC) Using Economic Models Step 1: Explain concept in words Step 2: Use numbers as examples Step 3: Generate graphs from numbers Step 4: Make generalizations using graph 37

What is the Production Possibilities Curve? A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 4 Key Assumptions Only two goods can be produced Full employment of resources Fixed Resources (Ceteris Paribus) Fixed Technology 38

Production Possibilities Table A B C D E Bikes (Y) 14 12 9 5 0 Computers (X) 0 2 4 6 8 Each point represents a specific combination of goods that can be produced given full employment of resources. NOW GRAPH IT: Put bikes on y-axis and computers on x-axis 39

Bikes Production Possibilities How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 A B Impossible/Unattainable (given current resources) C G 8 6 4 2 0 Inefficient/ Unemployment D 0 2 4 6 8 10 E Computers Efficient 40

Opportunity Cost Example: 1. The opportunity cost of moving from a to b is 2 Bikes 2.The opportunity cost of moving from b to d is 7 Bikes 3.The opportunity cost of moving from d to b is 4 Computer 4.The opportunity cost of moving from f to c is 0 Computers 5.What can you say about point G? Unattainable 41

The Production Possibilities Curve (or Frontier) 42

Production Possibilities A B C D E CALZONES 4 3 2 1 0 PIZZA 0 1 2 3 4 List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Constant Opportunity Cost- Resources are easily adaptable for producing either good. Result is a straight line PPC (not common) 43

Production Possibilities A B C D E PIZZA 20 19 16 10 0 ROBOTS 0 1 2 3 4 List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Law of Increasing Opportunity Cost- As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Why? Resources are NOT easily adaptable to producing both goods. Result is a bowed out (Concave) PPC

Corn Constant vs. Increasing Opportunity Cost Identify which product would have a straight line PPC and which would be bowed out? Cactus Wheat Pineapples

PER UNIT Opportunity Cost How much each marginal unit costs = Opportunity Cost Units Gained Example: 1. The PER UNIT opportunity cost of moving from a to b is 1 Bike 2.The PER UNIT opportunity cost of moving from b to c is 1.5 (3/2) Bikes 3.The PER UNIT opportunity cost of moving from c to d is 2 Bikes 4.The PER UNIT opportunity cost of moving from d to e is 2.5 (5/2) Bikes NOTICE: Increasing Opportunity Costs 46

The Production Possibilities Curve and Efficiency 47

Two Types of Efficiency Productive Efficiency- Products are being produced in the least costly way. This is any point ON the Production Possibilities Curve Allocative Efficiency- The products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society. 48

Bikes Productive and Allocative Efficiency Which points are productively efficient? Which are allocatively efficient? 14 12 10 8 6 4 2 0 A B E G C D 0 2 4 6 8 10 F Productively Efficient combinations are A through D Computers Allocative Efficient combinations depend on the wants of society (What if this represents a country with no electricity?) 49

Why two types of efficiency? Is combination A efficient? Yes and No. It is productively efficient but it is not the combination society wants Size 20 running shoes A Size 10 running shoes

Shifting the Production Possibilities Curve 51

Production Possibilities 4 Key Assumptions Revisited Only two goods can be produced Full employment of resources Fixed Resources (4 Factors: LLCE) Fixed Technology What if there is a change? 3 Shifters of the PPC 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade 52

Robots Production Possibilities What happens if there is an increase in population? Pizzas 53

Robots Production Possibilities What happens if there is an increase in population? Pizzas 54

Robots Production Possibilities What if there is a technology improvement in pizza ovens Pizzas 55

Robots Production Possibilities What if there is a technology improvement in pizza ovens Pizzas 56

Capital Goods Capital Goods Capital Goods and Future Growth Countries that produce more capital goods will have more growth in the future. Panama Favors Consumer Goods Mexico Favors Capital Goods Current PPC Future PPC Future PPC Current PPC Consumer goods Consumer goods Panama Mexico 57

PPC Practice Draw a PPC showing changes for each of the following: Pizza and Robots (3) 1. New robot making technology 2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows Consumer goods and Capital Goods (4) 4. BP Oil Spill in the Gulf 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education 58

Robots Question #1 New robot making technology Q A shift only for Robots Pizzas Q 59

Robots Decrease in the demand for pizza Q Question #2 The curve doesn t shift! A change in demand doesn t shift the curve Pizzas Q 60

Robots Question #3 Mad cow disease kills 85% of cows Q A shift inward only for Pizza Pizzas Q 61

Capital Goods (Guns) Question #4 Q BP Oil Spill in the Gulf Decrease in resources decrease production possibilities for both Consumer Goods (Butter) Q 62

Capital Goods (Guns) Q Question #5 Faster computer hardware Quality of a resource improves shifting the curve outward Consumer Goods (Butter) Q 63

Capital Goods (Guns) Q Question #6 Many workers unemployed The curve doesn t shift! Unemployment is just a point inside the curve Consumer Goods (Butter) Q 64

Capital Goods (Guns) Significant increases in education Q Question #7 The quality of labor is improved. Curve shifts outward. Consumer Goods (Butter) Q 65

Partner Review: Scarcity Bus Ride Scenario: A group of 40 college students get on a bus to go to a dance 30 miles away. Shortly after leaving, the bus finds that it is too heavy to go over a large hill 10 students need to get off the bus You and your partner need to find 5 different ways to decide who should get off the bus. 1. Are any of the solutions fair? 2. How are resources allocated in communism? 3. How are resources allocated in capitalism? 4. What role do prices play in capitalism? 66

Scarcity Means There Is Not Enough For Everyone Government must step in to help allocate (distribute) resources 67

The Four Basic Economic Systems Traditional Based on tradition, custom/culture limited to no growth Command Economy (Centrally Planned) All factors of production are controlled by the Government limited to no growth Free Market Economy (Capitalism) Factors of Production are owned by individuals who make economic choices, NO GOVERNMENT INVOLVEMENT possible high growth, but dangerous Mixed Economy (Free Enterprise) Combo of command/free market growth w/reduced risk 68

Every society must answer three questions: The Three Economic Questions 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services? The way these questions are answered determines the economic system An economic system is the method used by a society to produce and distribute goods and services. 69

Centrally-Planned Economies (aka Communism) 70

Centrally Planned Economies In a centrally planned economy (communism) the government 1. owns all the resources. 2. decides what to produce, how much to produce, and who will receive it. Examples: Cuba, North Korea, former Soviet Union, and China? Why do centrally planned economies face problems of poor-quality goods, shortages, and unhappy citizens? NO PROFIT MEANS NO INCENTIVE TO W!! 71

Irrational Soviet Production Soviet companies were not guided by prices or profit. Gov t officials determined output quotas based on quantitative measurements. Businesses were paid based on meeting these quotas. 1. Why did a business make desk lamps that were filled with lead that were almost too heavy to carry? Production quota based on weight 2. Why did light bulb producers only make tiny night light size bulbs? Production quota based number of bulbs produced 3. Why did oil companies drill many shallow holes when they knew that oil deposits are usually found in deep holes that require slower drilling? Production quota based number of feet drilled 4. Why did a construction superintendent order his workers to remove bathtubs from the first floor and install them in the third floor while he slowly lead inspectors through apartment building. Quota on # of apartments complete at inspection 5. Why did black market vendors sell burned out light bulbs? Business got resources before the public so workers would steal good 72 light bulbs from work and replace them with burnt out bulbs

Advantages and Disadvantages What is GOOD about Communism? 1. Low unemploymenteveryone has a job 2. Great Job Securitythe government doesn t go out of business 3. Equal incomes means no extremely poor people 4. Free Health Care What is BAD about Communism? 1. No incentive to work harder 2. No incentive to innovate or come up with good ideas 3. No Competition keeps quality of goods poor. 4. Corrupt leaders 5. Few individual freedoms 73

Free Market System (aka Capitalism) 74

Characteristics of Free Market 1. Little government involvement in the economy. (Laissez Faire = Let it be) 2. Individuals OWN resources and answer the three economic questions. 3. The opportunity to make PROFIT gives people INCENTIVE to produce quality items efficiently. 4. Wide variety of goods available to consumers. 5. Competition and Self-Interest work together to regulate the economy (keep prices down and quality up). 75

Example of Free Market Example of how the free market regulates itself: If consumers want computers and only one company is making them Other businesses have the INCENTIVE to start making computers to earn PROFIT. This leads to more COMPETITION. Which means lower prices, better quality, and more product variety. We produce the goods and services that society wants because resources follow profits. The End Result: Most efficient production of the goods that consumers want, produced at the lowest prices and the highest quality. 76

Example of Communism Example of why communism failed: If consumers want computers and only one company is making them Other businesses CANNOT start making computers. There is NO COMPETITION. Which means higher prices, lower quality, and less product variety. More computers will not be made until the government decides to create a new factory. The End Result: There is a shortage of goods that consumers want, produced at the highest prices and the lowest quality. 77

The Invisible Hand The concept that society s goals will be met as individuals seek their own self-interest. Example: Society wants fuel efficient cars Profit seeking producers will make more. Competition between firms results in low prices, high quality, and greater efficiency. The government doesn t need to get involved since the needs of society are automatically met. Competition and self-interest act as an invisible hand that regulates the free market. 78

The Invisible Hand!!! 79

Attacks Against Capitalism 1. Companies are greedy and do anything to screw over consumers! Companies have an incentive to satisfy the needs of consumers. If they don t they will go out of business. 2. Capitalism causes companies to outsource US jobs overseas. America suffers because companies want more profit! How many of you lost your job to outsourcing? How many of you benefit in the form of lower prices? 3. Capitalism only helps the rich. US companies enslave and exploit third-world workers in sweatshops! Sweatshop workers are not forced labor. They make the decision to work there voluntarily. Why? Although the working conditions are far below US standards, working in a sweatshop is better that the alternative Sweatshop wages in Vietnam, Honduras, and Nicaragua are more than double the country s average wage. 80

Sweatshops Then Sweatshops Now Sweatshops "My concern is not that there are too many sweatshops, but that there are too few." -Jeffrey Sachs, Harvard University Question: Who is to blame for these people being so poor? Answer: Low productivity. If a country doesn t produce very much, it can afford to pay it s workers very much. Why do these countries have such low productivity? Corrupt governments, inadequate physical capital and infrastructure, and underdeveloped human capital. What does foreign investment bring to poor countries? 81

Capital Goods Capital Goods Connection to the PPC Communism in the Long Run Free Markets in the Long Run CURRENT CURVE FUTURE CURVE FUTURE CURVE CURRENT CURVE Consumer goods Cuba Consumer goods Puerto Rico 82

The Difference Between Capitalism and Communism North Korea and South Korea at Night North Korea's GDP is $40 Billion South Korea's GDP is $1.3 Trillion (32 times greater).

The Circular Flow Model The Product Market- The place where goods and services produced by businesses are sold to households. The Resource (Factor) Market- The place where resources (land, labor, capital, and rent.) are sold to businesses. 84

DEMAND Resource Market SUPPLY Businesses Individuals SUPPLY Product Market 85 DEMAND

Introduction to Circular-Flow Work with your partner to complete the Problem Set. Model Problem Set What you do not get done is homework. We will review this tomorrow.

AP Microeconomics Exam 2003, #3 Complete the FRQ in your notes 87

Use the OOO Method! Tractors Cars Atlantis 10 (1T = 30/10C) 30 (1C =10/30T) Xanadu 40 (1T = 20/40C) 20 (1C = 40/20T) A.Xanadu B.Atlantis C.Xanadu 88

89