Unit 1 Basic Economic Concepts 1 Scarcity Means
Unit 1: Basic Economic Concepts 1
Scarcity Means There Is Not Enough For Everyone Government must step in to help allocate (distribute) resources 2
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. 3
Economic Systems 1. Centrally Planned (Command) Economy 2. Free-Market Economy 3. Mixed Economy 4
Centrally Planned Economies (aka Communism) 5
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, China, North Korea, former Soviet Union Why do centrally planned economies face problems of poor-quality goods, shortages and unhappy citizens? NO PROFIT MEANS NO INCENTIVES!! 6
Advantages and Disadvantages What is GOOD about Communism? 1. Low unemployment: everyone has a job 2. Great Job Security: the 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 7
Free Market System (aka Capitalism) 8
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). Reword for Communism 9
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. 10
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 because the needs of society are automatically met. Competition and self-interest act as an invisible hand that regulates the free market. 11
Connection to the PPC Free Markets in the Long Run CURRENT CURVE FUTURE CURVE Consumer goods Cuba FUTURE CURVE Capital Goods Communism in the Long Run CURRENT CURVE Consumer goods Puerto Rico 12
Unit I: Basic Economic Concepts
Warm Up • Discuss the following… • Is there any limit to what the United States can produce? • Is there any limit to what you can buy?
What is Economics in General? • Economics is the science of scarcity. • Scarcity is the condition in which our wants are greater than our limited 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
Micro vs. Macro MICROeconomics. Study of small economic units such as individuals, firms, and industries (competitive markets, labor markets, personal decision making, etc. ) MACROeconomics. Study of the large economy as a whole or in its basic subdivisions (National Economic Growth, Government Spending, Inflation, Unemployment, etc. )
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). Normative Statements- Includes value judgments (what ought to be).
Thinking at the Margin # Times Watching Movie Benefit Cost 1 st 2 nd 3 rd Total $30 $15 $5 $50 $10 $10 $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 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.
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 analyzed through simplified models and graphs.
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 the weekend 2. You work every weekday earning $100 per day 3. You have three flights to choose from: Thursday Night Flight = $300 Friday Early Morning Flight = $345 Friday Night Flight = $380 Which flight should you choose? Why? 22
Trade-offs 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? 23
Homer Teaches Economics • https: //www. youtube. com/watch? v=E 2 dmfn. Sar. DI • http: //www. criticalcommons. org/Members/Adrian. Fohr/cli ps/simpsons-trade-offs/view
The Factors of Production 25
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 graphs 26
What is the Production Possibilities Curve? • A production possibilities curve or graph (PPG or PPC) 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 27
Production “Possibilities” Table Bikes Computers a 14 0 b 12 2 c 9 4 d 5 6 e 0 8 f 0 10 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 28
PRODUCTION POSSIBILITIES How does the PPC graphically demonstrates scarcity, trade-offs, opportunity costs and efficiency? Impossible/Unattainable 14 (given current resources) A B Bikes 12 G C 10 8 Efficient D 6 Inefficient/ Unemployment 4 2 E 0 0 2 4 6 8 10 Computers 29
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 Computers 4. The opportunity cost of moving from f to c is… 0 Computers 5. What can you say about point G? Unattainable 30
The Production Possibilities Curve (or Frontier) 31
PRODUCTION POSSIBILITIES CALZONES PIZZA A B C D E 4 0 3 1 2 2 1 3 0 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) 32
PRODUCTION POSSIBILITIES PIZZA ROBOTS A B 18 17 0 1 C 15 2 D 10 3 E 0 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
PER UNIT Opportunity Cost How much each marginal = Opportunity Cost unit costs 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 34
Shifting the Production Possibilities Curve 35
PRODUCTION POSSIBILITIES 4 Key Assumptions Revisited • Only two goods can be produced • Full employment of resources • Fixed Resources (4 Factors) • 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 36
PRODUCTION POSSIBILITIES What happens if there is an increase in population? Robots Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 37
PRODUCTION POSSIBILITIES Robots Q 14 What happens if there is an increase in population? C’ A’ 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ D’ E’ 1 2 3 4 5 Pizzas 6 7 8 Q 38
PRODUCTION POSSIBILITIES Robots Q 14 Technology improvements in pizza ovens 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 39
The Production Possibilities Curve and Efficiency 40
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. 41
Productive and Allocative Efficiency Which points are productively efficient? Which are allocatively efficient? 14 A B 12 Bikes Productively Efficient points are A through D G Allocatively Efficient points depend on the wants of society 10 8 C E 6 4 (What if this represents a country with no electricity? ) F 2 D 0 0 2 4 6 8 10 Computers 42
Capital Goods and Future Growth Mexico - FAVORS CAPITAL GOODS CURRENT CURVE FUTURE CURVE Consumer goods Panama FUTURE CURVE Capital Goods Panama - FAVORS CONSUMER GOODS CURRENT CURVE Consumer goods Mexico 43
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 44
Question #1 New robot making technology Q Robots A shift only for Robots Pizzas Q 45
Question #2 Decrease in the demand for pizza Robots Q The curve doesn’t shift! A change in demand doesn’t shift the curve Pizzas Q 46
Question #3 Mad cow disease kills 85% of cows Robots Q A shift inward only for Pizzas Q 47
Capital Goods (Guns) Q Question #4 BP Oil Spill in the Gulf Decrease in resources decreases production possibilities for both Consumer Goods (Butter) Q 48
Question #5 Faster computer hardware Capital Goods (Guns) Q Quality of a resource improves, shifting the curve outward Consumer Goods (Butter) Q 49
Question #6 Many workers unemployed Capital Goods (Guns) Q The curve doesn’t shift! Unemployment is just a point inside the curve Consumer Goods (Butter) Q 50
Question #7 Significant increases in education Capital Goods (Guns) Q The quality of labor is improved. Curve shifts outward. Consumer Goods (Butter) Q 51
Monsters Inc. • https: //www. youtube. com/watch? v=t. W 4 G 5 I Ppz. FY 52
International Trade Why do countries trade and what is specialization? 53
Warm Up • Discuss… • Why does Japan produce so many electrical goods? • Why does Brazil produce so much coffee? 54
Trump Tariffs 55
Per Unit Opportunity Cost Review Per Unit Opportunity Cost = Opportunity Cost Units Gained Assume it costs you $50 to produce 5 T-shirts. What is your PER UNIT cost for each shirt? $10 per shirt Now, take money out of the equation. Instead of producing 5 shirts, you could have made 10 hats. 1. What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up? 1 shirt “costs” 2 hats 2. What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up? 1 hat “costs” half a shirt 56
Per Unit Opportunity Cost Review Ronald Mc. Donald can produce 20 pizzas or 200 burgers Papa John can produce 100 pizzas or 200 burgers 1. What is Ronald’s opportunity cost for one pizza in terms of burgers given up? 1 pizza costs 10 burgers 2. What is Ronald’s opportunity cost for one burger in terms of pizza given up? 1 burger costs 1/10 pizza 3. What is Papa John’s opportunity cost for one pizza in terms of burgers given up? 1 pizza costs 2 burgers 4. What is Papa John’s opportunity cost for one burger in terms of pizza given up? 1 burger costs 1/2 pizza Ronald has a COMPARATIVE ADVANTAGE in the production of burgers Papa John has a COMPARATIVE ADVANTAGE in the 57 production of pizza
Absolute and Comparative Advantage Absolute Advantage • The producer that can produce the most output (fixed resources) OR requires the least amount of inputs (fixed output) • Ex: Papa John has an absolute advantage in pizzas because with fixed resources he can produce 100 and Ronald can only make 20. Comparative Advantage • The producer with the lowest opportunity cost. • Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost. Countries should trade if they have a relatively lower opportunity cost. They should specialize in the good that is “cheaper” for them to produce. 58
Benefits of Specialization and Trade 59
International Trade W 0 30 1. 5 29 3 28 27 6 26 30 7. 5 25 9 24 10. 5 23 12 22 13. 5 21 15 20 16. 5 19 5 18 18 0 Sugar (tons) 4. 5 17 W 20 0 18. 5 1 17 2 15. 5 3 14 4 25 12. 5 5 20 11 6 15 9. 5 7 10 8 8 6. 5 9 5 10 3. 5 11 Brazil 40 35 19. 5 S USA 45 The U. S. Specializes and makes ONLY Wheat Sugar (tons) S Trade: 1 Wheat for 1. 5 Sugar 25 20 15 10 30 Brazil Makes ONLY Sugar 5 5 10 15 20 Wheat (tons) 25 30 0 5 10 15 20 Wheat (tons) 60
International Trade TRADE SHIFTS THE PPC! USA 45 Brazil 40 AFTER TRADE 35 30 Sugar (tons) 30 25 20 15 25 15 10 10 5 5 0 5 10 15 20 Wheat (tons) 25 30 AFTER TRADE 20 0 5 10 15 20 Wheat (tons) 61
Wheat USA Sugar 30 (1 W costs 1 S) 30 (1 S costs 1 W) Brazil 10 (1 W costs 2 S) 20 (1 S costs 1/2 W) Which country has a comparative advantage in wheat? 45 Sugar (tons) 1. Which country should EXPORT Sugar? 40 2. Which country should EXPORT Wheat? 35 30 3. Which country should IMPORT Wheat? 30 25 20 15 15 10 15 20 Wheat (tons) 25 30 5 10 15 20 Wheat (tons) 62
Output Questions: OOO= Output: Other goes Over 63
Input Questions: IOU= Input: Other goes Under 64
Comparative Advantage Practice Create a chart for each of the following problems. • First- Identify if it is an output or input question • Second-Identify who has the ABSOLUTE ADVANTAGE • Third-Identify who has a COMPARATIVE ADVANTAGE • Fourth- Identify how they should specialize 1. Sara gives 2 haircuts or 1 perm an hour. Megan gives 3 haircuts or 2 perms per hour. 2. Justin fixes 16 flats or 8 brakes per day. Tim fixes 14 flats or 8 brakes per day. 3. Hannah takes 30 minutes to wash dishes and 1 hour to vacuum the house. Kevin takes 15 minutes to wash dishes and 45 minutes to vacuum. 4. Americans produce 50 computers or 50 TVs per hour. Chinese produce 30 computers or 40 TVs per hour. 65
Supply and Demand Determining Price in a Market Economy
Supply & Demand • https: //www. youtube. com/watch? v=RP 0 j 3 Lnlazs 67
Demand • The amount of a product that consumers are able and willing to buy at a particular price.
Law of Demand • An inverse relationship exists between demand the price of a good. • As the price of a good goes up, buyers demand less of the good. • This relationship is seen using a demand curve, a graph of the demand schedule.
Supply • The amount of a good or service producers are willing and able to provide at a certain price.
Law of Supply • A direct relationship exists between the price of a good and the quantity supplied of that good. • As the price of a good goes up, producers are willing to supply more of a product or service. • This may be shown graphically on a supply curve, which is a graph of the supply schedule.
Equilibrium Quantity and Price What happens if the price is $10? $6? $8? Visual 1. 9
Change in Quantity Demanded • A change in the quantity demanded is a movement along the demand curve due to a change in the price of the good being demanded.
Movement Along a Demand Curve As the price declines from P to P 1, the quantity increases from Q to Q 1 Visual 1. 5
Change in Quantity Supplied • A change in the quantity supplied is a movement along the supply curve due to a change in the price of the good or service being provided.
Movement Along a Supply Curve As the price declines from P 1 to P, the quantity decreases from Q 1 to Q. Visual 1. 7
Change in Demand • A change in demand is represented by a shift of the demand curve. As a result of this shift, the quantity demanded at all prices will have changed. • A leftward shift means at all possible prices, the demand for the good will be less than before. A rightward shift means the demand will be more than before.
Shift in Demand Factors that Shift Demand: 1. Number of Consumers 2. Price of complementary and substitute good 3. Change in consumer tastes 4. Consumer income 5. Expectations about income or prices Increase in demand from D to D 1 shows that at the same price (P), the quantity increased from Q to Q 1 Visual 1. 6
Homer Teaches Economics http: //www. criticalcommons. org/Members/Adrian. Fohr/clip s/shifting-the-demand-curve-in-the-simpsons Shifting the Demand Curve 79
Change in Supply • A change in supply, like a change in demand, is represented by a shift in the supply curve. • A leftward shift of the original curve results in a reduced supply of the good at all times. A rightward shift of the original curve results in an increased supply of the good at all times.
Shift in Supply Factors that Shift supply: Increase in supply from S to S 1 shows that at the same price (P), the quantity increased from Q to Q 1. Visual 1. 8 1. Change in number of suppliers 2. Change in price of resources or inputs 3. Change in prices of related goods produced 4. Change in Technology 5. Change in producer expectations 6. Change in taxes and subsidies
Equilibrium Price • http: //www. criticalcommons. org/Members/Bailey. Norwood /clips/supply-and-demand-illustrated-on-frozen 82
Business Cycle Is the economy getting better or worse?
Micro vs. Macro • Microeconomics: The study of personal, or small finances. – Individuals, families or businesses • Macroeconomics: The study of economic systems on a large scale – National or Global economies
Gross Domestic Product • Def. The total value, in dollars, of all final goods and services produced within the nation each year • Abbreviated as the GDP
What does the GDP tell us? • If the GDP is larger than last year the economy is expanding (getting bigger) • If the GDP is smaller, the economy is shrinking (getting smaller)
Business Cycle • The Business Cycle allows people to understand the direction the economy (GDP) is going (growing or shrinking) and plan accordingly. • The economy follows the Business Cycle regularly.
Phases of the Business Cycle Expansion (Growing) Peak (Top) Contraction (Shrinking) Trough (Bottom)
Business Cycle ion ns pa Ex sio pa n n io ct ra n tio ac Trough nt ntr Ex Peak Co Co n Peak
Expansion • During a period of expansion: – Wages increase – Low unemployment – People are optimistic and spending money – High demand for goods – Businesses start – Easy to get a bank loan – Businesses make profits and stock prices increase
Peak • When the economic cycle peaks: – The economy stops growing (reached the top) – GDP reaches maximum – Businesses can’t produce any more or hire more people – Cycle begins to contract
Contraction • During a period of contraction: – Businesses cut back production and layoff people – Unemployment increases – Number of jobs decline – People are pessimistic (negative) and stop spending money – Banks stop lending money
Trough • When the economic cycle reaches a trough: – Economy “bottoms-out” (reaches lowest point) – High unemployment and low spending – Stock prices drop But, when we hit bottom, no where to go but up! UNLESS….
Recession/Depression • A prolonged contraction is called a recession (contraction for over 6 months) • A recession of more than one year is called a depression
What keeps the Business Cycle Going? • 4 variables cause changes in the Business Cycle: 1. Business Investment When the economy is expanding, sales and profit keep rising, so companies invest in new plants and equipment, creating new jobs and more expansion. In contraction, the opposite is true
What Keeps the Business Cycle Going? 2. Interest Rates and Credit Low interest rates, companies make new investments, adding jobs. When interest rates climb, investment dries up and less job growth 3. Consumer Expectations Forecasts of an expanding economy fuels more spending, while fear of a recession decreases consumer spending
What keeps the Business Cycle Going? 4. External Shocks, such as disruptions of the oil supply, wars, or natural disasters greatly influence the output of the economy Ex. 1992 -2000 was the longest period of expansion in U. S. history. Early in 2001, signs of contraction appeared, though the Bush administration denied it. The Sept. 11 th 2001 terrorist attacks quickly caused the business cycle to shift into a contraction.
Who Cares? ? ? • Why should you care about the business cycle and economy? • Lots of reasons!
“Don’t quit that job!” • If the economy is going into a contraction, jobs will become more scarce. If you quit, you may not find another job! • But, if the economy is in a period of expansion, jobs are readily available. It may be a good time to switch careers.
“Should I make a big purchase? ” • Only if you know that you won’t lose your job in a contraction. So, buy your house during an expansion. HOWEVER, • When the economy starts to slow down (contraction), interest rates will decrease. Wait to buy a house until the rates drop to a low point, if you are sure you won’t lose your job.
Quick Review! • What phase of the business cycle do wages go up? • Expansion • What phase of the business cycle do wages go down? • Contraction
Review cont. • When are wages at their highest? • Peak • When are wages at their lowest? • Trough
More Review • When will borrowing decrease? • Contraction • When will borrowing increase? • Expansion • When will borrowing be at it’s lowest? • Trough
Even More Review! • When will unemployment be at its lowest? • Peak • When will business profits be the highest? • Peak • When should you look for a new job? • Expansion
The Circular Flow Model 105
106
- Slides: 106