Unit I Basic Econonomic Concepts.ppt

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ECONOMICS MICRO AND MACRO

• _{Economics- a social science concerned with the}

ways individuals and nations choose to use their scarce resources (use limited resources to fulfill their unlimited wants.)

• Microeconomics- study of the economics of individuals and firms

• Macroeconomics- study of the economy as a

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SHOPPING SPREE

• Make a list of the items you would like

to buy and indicate the approximate

price of each item.

• You only have $100.00 to spend.

• Add up the prices of each item, if the

total exceeds $100.00, remove items

that exceed your budget.

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CHOICE

• _{Spending decisions involve choices}

• _{Each available choice competes with other}

available choices

• _{Businesses, individuals and governments must}

make decisions daily about what to produce, when to produce it, and when to stop

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OIL DISCOVERED IN TEXAS

• _{In 1901, people discovered oil in Texas- but they}

were actually looking for water! Disappointed, they offered to trade the oil for water at the ratio of 1:1

• What is the more primary need, oil or water?

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CREATE A LIST

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WANTS V. NEEDS

• _{Wants- anything}

other than what is

needed for basic

survival

• _{Needs- things that}

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WANTS V. NEEDS

• _{How can you determine whether or not}

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YOUR SITUATION

• _{What are some of the things competing for your}

income?

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SCARCITY

• _{Scarcity- the condition people face because they}

do not have and cannot have enough income, time and other resources to satisfy their every want

• _{Scarcity- things must be limited and desirable}

• Desirable- Things are wanted.

• True or False- Because it is limited, polio is scarce.

• _{Do not confuse scarcity with shortages} • _{Scarcity exists always}

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THINK ABOUT IT

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WON’T HAPPEN!

• _{Scarcity forces people to make choices about how}

they will use their resources

• _{Trade-Offs- Exchanging one thing for the use of}

another.

• _{Individuals, families, businesses, and societies are}

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OPPORTUNITY COST

• _{Opportunity Cost- the value of the next best}

alternative that had to be given up to do the action that was chosen.

• _{Considering the opportunity cost can help people}

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LIST YOUR FREE TIME CHOICES

• _{Create a list of 4-5 activities you will do with your}

hour of free time.

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DECISIONS, DECISIONS

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WHY WERE THE

COLUMNS NAMED

CHOICE AND COST?

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ARE ALL TRADE-OFFS

OPPORTUNITY COSTS?

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REVIEW QUESTIONS

• _{1. Why is economics a social science?}

2. Why must people make economic choices?

3. Determine whether the following is a

macroeconomics topic or a microeconomics topic. • How much the US government taxes and spends • Demand for cars

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REVIEW QUESTIONS CONTINUED

• _{4. Determine if the following is a need or a want.}

• House • Money

• Computer • Education

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BELL RINGER

TRADE-OFFS V. OPPORTUNITY COST

• _{Any time you pay money to purchase a good or}

service, you lose the opportunity to purchase the next best alternative. Every spending choice has an opportunity cost.

• _{How do trade-offs and opportunity costs differ?}

• _{Think of the activity yesterday where you listed}

the 4-5 things you could do with your free time.

• Why did put a star next to the thing you did and circled the thing you would do next?

• What was everything on the list?

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ECONOMY AND ECONOMIC MODELS

• _{Economy- all the activity in a nation that together}

affects the production, distribution, and use of goods and services

• _{Economic Models- simplified representations of}

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PRODUCTION POSSIBILITIES CURVE

• _{Production Possibilities Curve- graph showing the}

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PRODUCTION POSSIBILITIES

FRONTIERS

AND OPPORTUNITY COSTS

Learning Objective 2.1

Graphing the Production Possibilities Frontier

FIGURE 2-1

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OPPORTUNITY COST- ALWAYS IN TERMS OF THE

OTHER GOOD.

POSSIBLE

–

ACTUAL = OPP COST

Opportunity Cost

1. 8 billion military

2. 10 billion civilian

3. C to B

4. C to D

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PPF REVIEW

Opportunity Cost

1. 15 grain

2. 15 wine

3. 9 grain

4. 12 wine

5. Can the following be produced?

• _{18 grain, 5 wine}

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PPF Review

Opportunity Cost

1. 12 grain

2. 9 wine

3. 9 grain

4. 8 wine

5.Can the following be produced?

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Changing Opportunity Cost

Increasing _Decreasing _Constant

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WHAT TYPE OF CURVE

ILLUSTRATES THE LABEL BELOW?

Zero

opportunit

y cost

per unit of

good B

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PRODUCTION POSSIBILITIES

FRONTIERS

AND OPPORTUNITY COSTS

Increasing Marginal Opportunity Costs

FIGURE 2-2

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PRODUCTION POSSIBILITIES

FRONTIERS

AND OPPORTUNITY COSTS

Economic Growth FIGURE 2-3

Economic Growth

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Moving from point B to point A, could

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BUILD YOUR OWN CURVE

• _{Build your own production possibilities curve with}

“Hours Spent Watching TV” on the horizontal axis and “Hours Spent Studying Economics” on the

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WHY DOES THIS MATTER?

• _{Suppose you have two firms in Kiln, MS that}

produce wine and grain. They can either

continue to both produce both wine and grain or have one produce wine and the other produce grain.

• What will help us to make the best economic decision?

• Should we look at who produces more of an good or service?

• Should we look at who can produce it at a lower cost?

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Absolute advantage

The ability of

an individual, a firm, or a country to

produce more of a good or service

than competitors, using the same

amount of resources

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Comparative advantage

The ability of an individual, a firm,

or a country to produce a good or service at a lower

opportunity cost than competitors

.

Absolute Advantage versus Comparative Advantage Comparative Advantage and Trade

Example: Why does Bill Gates not cut his own grass? He can make more money

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The basis for trade is comparative advantage, not absolute advantage.

Individuals, firms, and countries are better off if they specialize in producing goods and services for which they have a

comparative advantage and obtain the other goods and services they need by trading.

Comparative Advantage and the Gains from Trade

Don’t Let This Happen to YOU!

Don’t Confuse Absolute Advantage and Comparative Advantage

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Solved Problem 2-2

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THE MARKET

SYSTEM

Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Product markets Markets for goods—such as

computers—and services—such as medical treatment.

Factor markets Markets for the factors of production, such as labor, capital, natural resources, and

entrepreneurial ability.

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PRODUCT OR FACTOR MARKET??

• _{Workers paid in California to make Levi’s Jeans} • _{Levi’s Jeans bought at a mall store}

• _{Payment made for Levi’s Jeans} • _{Rent paid for the use of land}

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THE MARKET

SYSTEM

• _Labor

_{- all types of work}

• Capital

refers to physical capital, such as

computers and machine tools, that is used to

produce other goods.

• Land- natural resources

• Entrepreneur- someone who brings together

the factors of production

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Circular-flow diagram A model that illustrates how participants in markets are linked.

THE MARKET SYSTEM

The Circular Flow of Income

• A household consists of all the individuals in a home.

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FIGURE 2-6

The Circular-Flow Diagram

THE MARKET SYSTEM

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THE MARKET

SYSTEM

The Market Mechanism

Free Market- few government restrictions

Adam Smith

•_{Individuals act in self-interested, rational ways}

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Property rights

The rights individuals or firms

have to the exclusive use of their property,

including the right to buy or sell it.

The Legal Basis of a Successful Market System

THE MARKET

SYSTEM

Protection of Private Property

Enforcement of Contracts and Property Rights

If property rights are not well enforced, fewer goods and

services will be produced. This reduces economic efficiency, leaving the economy inside its production possibilities

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POSITIVE ECONOMICS

• Branch of economics concerned with the description and explanation of economic phenomena

• Focuses on cause-and-effect relationships

• Includes developing and testing economic theories

• I.E.- might describe how money supply affects inflation, but it does not provide any instruction on what policy ought to be followed

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NORMATIVE ECONOMICS

• _{The part of economics that expresses value}

judgments about economic fairness or what the economy ought to be like.

• _{“What Ought To Be”}

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ECONOMIC DECISIONS

• _{Two Types of Decisions}

• Should I do something?

• How much of something should I do?

• _{Should I do something?… We use Net Benefit}

• Benefit – Cost = Net Benefit. (To make the decision, the net benefit should be a positive number

• _{How much of something should I do? … We use}

Marginal Analysis

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MARGINAL ANALYSIS

• _{Marginal Benefit- the additional benefit of taking}

the next step or doing something one more time

• _{Marginal Cost- the additional cost of taking the}

next step and doing something one more time.

• _MC_{˃ MB…. Stop}

• _{MB ˃ MC…. Continue}

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OPTIMAL ALLOCATION OF RESOURCES

15

10

5

0 ₁ ₂ ₃

a

b

c

d e

MB = MC

MC

MB

Quantity of Pizza

M ar g in al B en ef it & M ar g in al C o st 1-50 Should this firm make…

1st Pizza 2nd_Pizza 3rd_Pizza