Introduction to Economics Unit 1 Basic Economic Concepts

Introduction to Economics

Unit 1 – Basic Economic Concepts Chapter 1 n Objectives: - For students to understand the basic economic problem. - - For students be able to make rational economic choices. - For students to be able to explain the factors of production. - For students to understand the Circular Flow Model

Topics to be discussed What is Economics Basic Economics Question Circular Flow Inflation/Recession Opportunity Cost 3 Basic Questions 4 Factors of Production Micro and Macro Economics

What is Economics – Quiz Choose the correct answer Economics is the political science that deals with unemployment, inflation, taxes, business cycles, money, supply, and trade. Economics is the social science that studies money and banking Economics is the social science that examines the interaction of demand supply Economics is the social science concerned with the problem of scarcity

And the answer is… n Economics is the social science concerned with the problem of scarcity n What is Scarcity? n Not enough resources to meet demand n Why do you think scarcity is a problem? n What else is Economics? n Economics is common sense made confusing. n Economics is the science of decision making.

Economics? The social science concerned with how individuals and societies decide how to satisfy there unlimited wants given our limited resources. I can’t buy a car if I don’t have an income! The science of decision making How to make decisions

“The Economic Problem” Scarcity… What is it? Limited resources but unlimited wants Unlimited wants VS Limited Resources You can’t buy 10 candy bars if the store only has 5 candy bars to sell. Can’t buy 3 burgers if you only have enough money for 1. What are some things that you “want” to have? Do you have the resources to purchase them? Needs VS Wants What are some of your needs…wants.

Scarcity means… We must use things efficiently in order to maximize the number of goods and services we can produce. Don’t waste… The Economic Problem (Scarcity)– We can’t have everything we want!! Because of this… we need to make choices. What we want (need) VS what we can give up (live without)

How does scarcity impact you? Have you ever wanted something you couldn’t afford to buy? Did a store ever run out of the item that you wanted? Has anyone ever wanted you to do something that you didn’t have time to do?

Production Possibilities Curve

Production Possibilities Curve Graph showing the maximum combinations of goods and services that can be produced from a fixed amount or resources in a given period of time. Because resources are limited we are only able to use so much of them to produce certain goods.

Resources – Factors of Production Natural resources (Land)– “free gifts of nature” Land, minerals, oil, forests, air, and timber Capital Resources – “manufactured aids to production” Tools, machines, equipment, factories Things used in producing goods and services and getting them to consumers. Human Resources (Labor)– “mankind’s physical and mental talent” These are the skills people have that are used to produce goods and services. Entrepreneur – the individual who combines the factors of production in order to produce a good or service. Risk taker, policy maker, and innovator

Would it be possible to start a business without one of these factors? n If you would create any type of business you wanted what would it be and what would you need to get started?

Opportunity Cost The true cost of choosing one alternative over the other. Trade offs – giving up one thing in order to obtain another. The one that you give up when the choice is made. Give an example of a time when you had to make an economic choice. What was the opportunity cost? “Opportunity cost is the opportunity lost”

College Vs. Work What are you planning on doing after you finish high school? College or work What factors did you consider when making this decision? money now or money later Family How will this decision impact your future? What are the trade offs of this decision? Opportunity cost?

Recap n What is the basic economic problem? n As consumers what do we need to weigh when making economic choices? n What are the four factors of production? n What is economics? n How do trade offs lead to opportunity costs?

Lets keep on moving… “Economics is common sense made confusing, ” so if you are confused you are likely not alone!! If you have any questions on the material that we just covered please stop me here and we will review a bit on what you are having a tough time with.

Types of Economics Macroeconomics – branch of economics that deals with economic theory and the economic decisions of large bodies like the government. Theories of Economics Countries and their governments Trade between countries Microeconomics – branch of economics that deals with behavior and decisions of smaller unit like individuals and businesses. Families, businesses, and communities Domestic economies

Circular flow of income and output

n What does the circular flow model show us? n Why is a relationship between the factor market and the product market necessary for the economy to stay strong?

Business Cycle

Parts of the Business Cycle Peak (boom)– Highest point in the economic cycle. Economy is at its best and will likely begin to contract. Recession (contraction)– decline in the economies performance that could lead to depression. Not long term and does not always impact other economies

Trough (depression)– A sustained economic downturn that impacts our economy and that of other countries. Lowest economic point Recovery (expansion)- Economic activity begins to pick up and depression begins to end. Economic growth occurs

3 Basic Economic Questions What to produce? With limited resources, deciding what is needed the most is often a factor in determining what will be produced. What is the need or want of this product? What is the point of making a product that no one is going to buy. Businesses need to make money…so they choose products that people want.

3 Basic Questions Cont… n How should it be produced? n Technology, labor, capital, ect. n getting the lowest cost to make the product. n Are we going to make the product from scratch or will a machine be making the product. n What will each option cost? n Will having new technology allow us to lower our expenses?

3 Basic Questions Cont… Whom should it be produced for? Who is going to use this product? Did Apple market the ipod to the large population of elderly people in the U. S. or the youth? Why? Most goods and services are distributed to individuals through a price system. If you want it and can afford to buy it…you will. Products can also be distributed through other means; force, first come, lottery, majority, ect.

Recap What are three basic economic questions? Compare and contrast micro and macro economics. Explain the circular flow of income and output as it relates to the economy. Describe the business cycle.

Inflation The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1. 02 in a year.

Recession A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP). A recession generally lasts from six to 18 months, and interest rates usually fall in during these months to stimulate the economy by offering cheap rates at which to borrow money.

Recession is a normal (albeit unpleasant) part of the business cycle; however, one-time crisis events can often trigger the onset of a recession. The global recession of 2008 -2009 brought a great amount of attention to the risky investment strategies used by many large financial institutions, along with the truly global nature of the financial sytem. As a result of such a wide-spread global recession, the economies of virtually all the world's developed and developing nations suffered extreme setbacks and numerous government policies were implemented to help prevent a similar future financial crisis

What is the connection between Inflation and Recession? Which came first the chicken or the recession? In many cases the causes of recession can be confusing. Can inflation cause/worsen a recession? Or does a recession cause/worsen inflation? Both…a recession does not always have a single cause, but can be caused by many factors. Once a recession begins, it’s impact is usually felt all over the economy, including inflation. Inflation occurs without a recession, but a dramatic change in the value of money can push an unstable economy into a recession.

Look at the causes or influences of our most recent recession Poor business practices – started the recession It was likely on its way already Inflation Decline in the stock market Increased foreclosures/ drop in housing prices

In Short… Economics is common sense made confusing We can’t have everything that we want, so we have to make choices with our money. Businesses have to make choices with their products. Society has to make choices about how it should or will function. The Government makes choices about laws and expenses. Just to name a few!!!

Chapter Review n What is the basic Economic question? n What does a production possibilities curve show us? n What are the four factors of production? n What are trade offs and opportunity costs? n What are three basic economic questions? n Define microeconomics and macroeconomics. n What are inflation and recession? n How does the circular flow of income and output impact the economy?