Introduction to Macroeconomics Basic Economic Concepts Needs and

Introduction to Macroeconomics Basic Economic Concepts

Needs and Wants • Biological needs – Food – Water – Shelter

Needs and Wants • Societal Needs Comfort/Luxury Security Entertainment Love/Acceptance

The Concern of Economics • What its about • Our efforts to provide ourselves with our material needs and wants • Or…. how to get more stuff

Economic Resources and Income • Property resources – Land (Rent) – Capital (Interest) • Human Resources – Labor (wages, salaries and benefits) – Entrepreneurs (profit/loss)

Scarcity • The wants and needs for material things among people in a society are unlimited • The economic resources to fulfill those wants and needs are limited • This limits our options and forces us to make choices

Opportunity Cost • The value of the next best alternative given up when a choice is made • TINSTAAFL – “There is no such thing as a free lunch” • Everything has a cost, but not necessarily a price

Trade-Offs • To get one thing, you must always give up something else • Every choice involves both costs and benefits that must be evaluated • Marginal Cost v. Marginal Benefit • Rational Behavior – “The Invisible Hand”

The Invisible Hand “A cappuccino is intriguing to an economist: he doesn’t know how to make a cappuccino, and he knows that nobody else does either. Who, after all, could boast of being able to grow, pick, roast, and blend coffee, raise and milk cows, roll steel and mold plastics and assemble them into an espresso machine, and, finally, shape ceramics into a cute mug? Your cappuccino reflect the outcome of a system of staggering complexity. There isn’t a single person in the world who could produce what it takes to make a cappuccino. The economist know that the cappuccino is the product of an incredible team effort. Not only that, there is nobody in charge of the team. Economist Paul Seabright reminds us of the pleas of the Soviet official trying to comprehend the western system: “Tell me …who is in charge of the supply of bread to the population of London? ” The question is comical, but the answer – nobody – is dizzying. ” -Tim Hartford, The Undercover Economist

Economics Defined • “The science of economics is concerned with the efficient use of limited resources to achieve maximum satisfaction of human material wants. ” • How to get the most stuff that people want at the least cost

The Three Basic Questions • What to produce? • How to produce? • For whom to produce?

Economics Survivor Last summer, you went on a fabulous Alaskan Cruise!

There was much fun to be had…

…but unfortunately, you and two of your friends fell overboard.

You are now stranded on a previously uncharted and unknown island to the south of Kodiak Island in the Gulf of Alaska. You are here.

No one noticed you were missing.

You must now try to survive in the hopes that someday someone finds you. You cannot escape the island. Don’t even try.

There are sharks out there.

There is a sandy and rocky beach, and very rough cliffs. The interior of the island is mountainous, with thick forests of Douglas fir and Sitka spruce trees.

• The wildlife consists of deer, rabbits, seagulls, eagles, fish and clams. • It has a mild, temperate climate (lucky for you it is summer), but the weather is very changeable. • There are frequent rain showers and fog can be heavy in the mornings and evenings. .

Your salvaged equipment: • You have – – – – 1 compass 2 rain ponchos 1 book of matches (dry) 2 knives 3 life preservers 2 paddles 1 small axe And the wet clothes you are wearing.

You do not have…. • A lifeboat or raft (I have no idea why you have paddles!) • A radio • Any of the skills the Professor had on Gilligan’s Island. (Also, there are no coconuts. )

Your Task: Write a survival plan and create a storyboard (1 per group). It must include the following: 1. What are your resources? List all available land, capital, labor and entrepreneurial abilities. 2. How will you answer the three basic questions? 3. How will you meet all of your biological and societal needs? Please be detailed. Remember, escape is not an option. And, sadly, I must insist that neither murder and cannibalism nor suicide will be acceptable alternatives. Be creative!

Economics Survivor Rubric You will need to demonstrate understanding of the following basic economic concepts through the pictures/words on your storyboard: Three Basic Questions _____ What to produce? _____ How to produce? _____ For Whom to produce? Economic Resources _____ Land _____ Capital _____ Labor _____ Entrepreneurial Abilities Biological/Societal Needs _____ Food _____ Water _____ Shelter _____ Comfort/Luxury _____ Security _____ Entertainment Skills _____ Creativity _____ Participation ______ / 15 points Grade _____

The Three Basic Questions • What to produce? • How to produce? • For whom to produce?

Types of Economic Systems • For each of the following, know how they answer the three basic questions, some advantages and disadvantages, and examples. • Traditional • Command • Market

All economies are mixed economies! • Be able to give examples of traditional, command market economic systems within our own economy. • Technically, the United States has a modified free-enterprise economy

Production Possibilities Frontiers

Production Possibilities Frontier (PPF/PPC) Consumer Goods (Pizza) Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) 100 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) 100 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs 100 a b. 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs 100 a 90 b. 50 25 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs 100 a 90 Cost = 40 pizzas b. 50 Benefit = 20 robots 25 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds • Productive: producing at the least cost (any pt. on the PPF) • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) 100 a 90 Cost = 40 pizzas b. 50 Benefit = 20 robots 25 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds • Productive: producing at the least cost (any pt. on the PPF) • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) 100 a 90 Cost = 40 pizzas c 50 Inefficient – unemployed resources 25 b. Benefit = 20 robots 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds • Productive: producing at the least cost (any pt. on the PPF) • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) 100 a 90 Cost = 40 pizzas 50 policy c Inefficient – unemployed resources 25 b. Benefit = 20 robots 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds • Productive: producing at the least cost (any pt. on the PPF) • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) 100 a 90 Cost = 40 pizzas 50 d policy c Inefficient – unemployed resources 25 b. Benefit = 20 robots 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds • Productive: producing at the least cost (any pt. on the PPF) • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) 100 a 90 Cost = 40 pizzas 50 d Unattainable with current resources and technology policy c Inefficient – unemployed resources 25 b. Benefit = 20 robots 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds • Productive: producing at the least cost (any pt. on the PPF) • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) 100 a 90 Cost = 40 pizzas 50 d Unattainable with current resources and technology policy c Inefficient – unemployed resources 25 b. Benefit = 20 robots 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds 100 • Productive: producing at the least cost (any pt. on the PPF) 90 • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) • Economic Growth = a Cost = 40 pizzas 50 Increased quality of human resources (EDUCATION) or technology (INVESTMENT) Unattainable with current resources and technology policy c Inefficient – unemployed resources SOL d 25 b. Economic Growth Benefit = 20 robots 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds 100 • Productive: producing at the least cost (any pt. on the PPF) 90 • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) • Economic Growth = Developing a nation d Cost = 40 pizzas 50 policy c Inefficient – unemployed resources SOL Increased quality of human resources (EDUCATION) or technology (INVESTMENT) Unattainable with current resources and technology 25 b U. S. Economic Growth Benefit = 20 robots 45 50 Capital Goods (Robots)

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) NOW Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds 100 • Productive: producing at the least cost (any pt. on the PPF) 90 • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) • Economic Growth = Developing a nation d Cost = 40 pizzas 50 policy c Inefficient – unemployed resources SOL Increased quality of human resources (EDUCATION) or technology (INVESTMENT) Unattainable with current resources and technology 25 b U. S. Economic Growth Benefit = 20 robots 45 50 Capital Goods (Robots) FUTURE

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) NOW Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs • Efficiency – two kinds 100 • Productive: producing at the least cost (any pt. on the PPF) 90 • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) • Economic Growth = Developing a nation d Cost = 40 pizzas 50 Increased quality of human resources (EDUCATION) or technology (INVESTMENT) Unattainable with current resources and technology policy c Inefficient – unemployed resources SOL Economic Interdependence 25 b U. S. Economic Growth Benefit = 20 robots 45 50 Capital Goods (Robots) FUTURE

• Scarcity – unlimited wants, limited resources Consumer Goods (Pizza) NOW Production Possibilities Frontier (PPF/PPC) • Opportunity costs and trade-offs Economic Interdependence • Efficiency – two kinds 100 • Productive: producing at the least cost (any pt. on the PPF) 90 • Allocative: producing the goods and services most wanted by society (a particular pt. on the PPF) • Economic Growth = Developing a nation d SOL Cost = 40 pizzas 50 Unattainable with current resources and technology policy c Inefficient – unemployed resources 25 b U. S. Economic Growth Benefit = 20 robots 45 Investment = purchase of Increased quality of human resources capital goods (EDUCATION) or technology (INVESTMENT) 50 Capital Goods (Robots) FUTURE

Circular Flow Diagram

Consumers (Households) Producers (Businesses)

Consumers (Households) A market is anything that brings together buyers and sellers Producers (Businesses)

Consumers (Households) Product Market (goods/services) Producers (Businesses)

Consumers (Households) Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Producers (Businesses)

Consumers Get a job! (Households) Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Producers (Businesses)

Consumers Get a job! (Households) Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Producers Hire you! (Businesses)

Consumers Get a job! (Households) Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Producers Hire you! (Businesses) Make stuff!

Consumers Get a job! Buy stuff! (Households) Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Producers Hire you! (Businesses) Make stuff!

Buy stuff! Consumers Get a job! (Households) Spend $! Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Producers Hire you! (Businesses) Make stuff!

Buy stuff! Consumers Get a job! (Households) Spend $! Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Producers Hire you! (Businesses) Revenue $ Make stuff!

Buy stuff! Consumers Get a job! (Households) Spend $! Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Pay You! $ Producers Hire you! (Businesses) Revenue $ Make stuff!

Buy stuff! Consumers Get a job! Get Paid! $ (Households) Spend $! Resource Market Product Market (land, labor, capital, entrepreneurs) (goods/services) Pay You! $ Producers Hire you! (Businesses) Revenue $ Make stuff!

Buy stuff! Consumers Get a job! Get Paid! $ Resource Market (land, labor, capital, entrepreneurs) (Households) All parts of the circular flow diagram are dependent on all other parts! Pay You! $ Producers Hire you! (Businesses) Spend $! Product Market (goods/services) Revenue $ Make stuff!

The End