UNIT 1 Fundamental Economics Basic economic concepts choices

UNIT 1: Fundamental Economics Basic economic concepts, choices, rational decision making, investment in education/training, etc

Scarcity ● SCARCITY: a condition that exists when UNLIMITED needs/wants exceed the LIMITED available resources – – – The central problem in economics, all things revolve around scarcity Must be a want/need for the item and a limited amount There are DEGREES of scarcity ● If there is a lot of something that no one wants, it is less scarce than something MANY people want

Scarcity Example Time Water Garbage Air We Breath Is it limited? Is it desirable? Is it scarce?

Factors of Production (Productive Resources)

Productive Resources (FOPs) ● Productive Resources- scarce items used in the production of goods and services in an economy. – There are four types of productive resources (aka Factors of Production) 1. 2. 3. 4. Natural Resources (land) Human Resources (labor and human capital) Physical Capital Entrepreneurship

4 Categories of Productive Resources (Factors of Production) 1. Natural Resources • Land • • 2. Items from nature that we use to produce goods and services Example: tree is a natural resource used to produce goods like lumber and paper Human Resources • Labor • • People involved in the production of goods and services Human Capital – abilities someone brings to the production process

4 Categories of Productive Resources (Factors of Production) 3. Physical Capital • • • Tools, machines, and structures used over and over again in the production of goods and services NOT MONEY! Example: a mower for a lawn company 4. Entrepreneurship • • Brings resources together in an innovative way to produce a product Takes all the risk • • Think SHARK TANK! Example: Steve Jobs

Factors of Production ● Write down everything you can think of that would be needed to make a pencil like this.

What went into this? Rubber (from Malaysia) machines metal Someone who put all of this together. wood graphite

What motivates an entrepreneur? • Entrepreneur’s take all the risk when starting a business • • They believe the potential rewards of success outweigh the cost of the risk What motivates them? • • Profit motive Provide jobs Innovation Improve society

What motivates an entrepreneur? • • Profit Motive • #1 motivating factor • Believe the revenue they receive will be greater than the costs Provide Jobs • 2015 accounted for 20% of all net new job creation • • Innovation • Typically work as an employee in the industry before going out on their own • Often see ways companies could improve efficiency or production Improve society

Opportunity Costs

Opportunity Costs • The study of economics is all about the choices made by individuals, businesses, and governments • • ALL choices involve both benefits and costs Every choice has an opportunity cost and trade-offs

Opportunity Costs • Opportunity Costs- values of one’s NEXT BEST alternative given up when a choice is made • • Example: Sarah decides to go for a run instead of studying. Her opportunity cost is… Trade-offs- ALL the alternatives we give up whenever a choice is made • Example: Clay chooses to go to the Braves game instead of going to a concert or going to work. What are Clay’s trade-offs?

Opportunity Cost Example • On Fridays, Ms. Wilkins has the option to go home and nap, go to Chickfila, or go to the gym. She chooses to go to the gym. Her next best choice is Chickfila. • What are her trade-offs? • What is her opportunity cost?

Opportunity Costs ● You have $100 to spend at the mall, rank the following in the order (1, 2, 3) you would purchase them. DVD set of a TV Show($60) New outfit ($85) New pair of shoes ($65)

Marginal Benefit & Marginal Costs

Marginal Benefit & Marginal Costs • Economics is based on the idea that individuals make rational decisions • • • Rational decisions are based on comparing the marginal benefits to the marginal cost of an action Marginal- incremental or small changes The rational decision is one in which the marginal benefit is greater than or equal to the marginal cost of the choice

What is marginal benefit? • Marginal benefit- additional positive value one receives from undertaking one more unit of an action • Example: The marginal benefit of running one more mile after running the previous two miles could be the calories burned.

What is marginal cost? • Marginal cost- refers to the additional amount of effort, expense, or time one incurs from undertaking one more unit of an action • Example: The marginal cost of running an extra mile could be ten minutes of time you could have used to study for your Economics test.

Help! • A firm wants to know how many workers it should hire to maximize its profit. They hire you, the economist, to help them make this decision. Use the table on your paper to help you decide the number of workers the firm should hire.

Number of Total Units. Marginal Price of Workers produced Number of Each Unit Unis Produced Total Revenue for Units Produced Marginal Revenue cost of Generated hiring by Each each additional worker 0 0 ____ $2. 50 0 ____ $10. 00 1 6 6 $2. 50 $15. 00 $10. 00 2 11 5 $2. 50 $27. 50 $12. 50 $10. 00 3 15 4 $2. 50 $37. 50 $10. 00 4 18 3 $2. 50 $45. 00 $7. 50 $10. 00 5 20 2 $2. 50 $50. 00 $5. 00 $10. 00 6 21 1 $2. 50 $52. 50 $10. 00

Diminishing Marginal Utility ● Diminishing Marginal Utility- with each additional unit, the experience (benefit or utility) declines – Example: After the first cookie, your enjoyment of each additional cookie decreases.

Incentives

What is an incentive? • Incentive- motivates individuals, businesses, and/or governments to undertake an action or avoid an action • • Positive incentive- choose an option associated with a perceived benefit or gain Negative incentive- does not choose a particular option because they associate with a cost that is too high • AKA: disincentives

Example ● ● An income tax credit for purchasing a home – Positive Incentive Individuals caught breaking traffic laws face fines or other penalties – Negative Incentive – Now you do the other two on your paper!

Production Possibilities Curve (PPC)

What is the PPC? • Production possibilities curve- economic model used by economists to illustrate all possible combinations of efficient production available to produce two goods or services • Shows the amount of one good or service sacrificed to produce additional units of the other good or service • Shows production combinations that are inefficient or impossible given the current resources

Efficient • • Points B, C, and D indicate examples of efficient production combinations Any point on the line is efficient

Inefficient Production • • Point A is an example of inefficient production Represents underutilized resources Represents a recession Any point inside the curve is inefficient

Unattainable Production • • Point E is an example of an unattainable production combination There are not enough factors of production to produce at this point

Opportunity Cost • • • Movement along the curve show the opportunity cost When moving from point B to point A, the opportunity cost is 26 text books. The marginal benefit of moving from point B to A is 4 computers

Economic Growth • • Curve B 1 shows the economy’s original efficient production Curve B 2 shows the PPC following investment in physical capital and technology

Productivity ● Productivity- looks at the relationship between inputs and outputs – Inputs: items that go into making a good or service. ● Example: A baker needs flour and sugar that come from natural resources like wheat and sugarcane. – Output: amount of a good or service produced ● Example: ● You The baker cooks a dozen cookies. always want to produce the right amount of goods at the right price to make a profit

Increase in Productivity ● Increase in productivity occurs when producers produce more output with fewer inputs

What is specialization? ● Specialization: when individuals or businesses concentrate on a single activity or area of expertise when producing a good or service – Boost overall productivity of a business or country – Division of Labor ● Example: At a fast food restaurant one employee takes drive-thru orders while another employee makes food

Investment ● Investment: refers to the introduction of machines and equipment, building new factories, and/or purchasing and implementing new technology – Imagine if everyone invests in the new oven, this would increase the total value of good and services produced encouraging economic growth

Investment in Human Capital ● Standards of living: material well-being people in an economy enjoy – Higher real GDP per capita the higher the standard of living ● Change in standard of living requires investment in Human Capital – Higher the education level, higher the wage, and the lower the unemployment risk

Economic Systems

Economic Systems ● Economic system: refers to the way a country organizes economic activity – Four economic systems are traditional, command, market, and mixed ● Each economic system must answer the three basic economic questions: 1. 2. 3. What to produce? How to produce? For whom to produce?

Three Economic Questions ● How societies respond to the three economic questions determine what economic system they closely relate to – Traditional: three economic questions are answered based on how things have been done in the past – Command: the questions are answered by a central authority or government – Market: the answers to the questions are determined by the interactions of buyers and sellers in the market

Definitions • • Private ownership: ability of individuals and businesses in an economy to buy, sell and hold property as they wish without fear of government interference or seizure. Profit: amount of revenue (price x quantity sold) received by a business minus the costs of operating the business.

Definitions ● Consumer sovereignty: determines the goods and services an economy produces because businesses will only produce the products that consumers are willing to buy ● Competition: the characteristics and behavior of firms in a particular market or industry ● Government regulations: extent to which a central authority has control over the production and consumption decisions in an economy

Social Economic Goals ● Social economic goals: values underlying the economic system a country chooses and act as a guiding force as individuals, businesses, and governments in the economy make economic choices. Economic freedom – Economic equity – Economic security – Economic efficiency – Price stability – Full employment – Economic sustainability –

Economic Freedom ● Economic Freedom: ability of consumers, producers, and workers to make their own decisions about consumption, production, and distribution of goods and services. – More individuals and business make these decisions the more economic freedom – Market economies: have a large amount of economic freedom – Command economies: limit economic freedom in favor of an equal distribution of wealth

Economic Equity ● Economic equity: refers to fairness within the economy – There is a lot of debate over what is “fair” – Market economies: ensuring competitive markets and protecting property rights – Command economies: redistributing wealth and ensuring access to public goods

Economic Security ● Economic security: protecting individuals and businesses from risk – Market economies: individual workers and business owners are usually responsible for themselves during the ups and downs of the economy – Command economies: government provides security through government insurance programs, guaranteed jobs, and housing/food allowance

Economic Growth ● Economic growth: increasing production of goods and services over time – Increases in factors of production or new technological innovations – Command economies: capable of growing rapidly when using targeted sectors and guided by a central planner – Market economies: grow more slowly, but growth is more sustainable

Economic Efficiency ● Economic efficiency: factors of production are allocated to their most productive use – Market economies: very efficient due to competition and free trade. Supply and demand allows prices to ration factors of production, goods, and services and allocate them to the most efficient uses – Command economies: less efficient because no competition since government owns all the resources, everyone has a job and no profit motive

Price Stability ● Price stability: making sure the increases in the overall price level of goods and services in the economy is predictable and protects the purchasing power of money in the economy over time – Market economies: price levels can fluctuate with increases and decreases in the economy – Command economies: central authorities who take action against rising or falling price levels

Full Employment ● Full employment: seeks to ensure that all those who are willing and able to work have the opportunity to do so – Market economies: can achieve full employment during a strong economy, but will suffer high levels of unemployment during economic slump – Command economies: try to ensure full employment, but will often employ resources in less efficient uses and pay lower income

Economic Sustainability ● Economic sustainability: individual countries try to maintain an upward trend of growth in the long run – Includes food systems, environmental protection, new businesses, technological development, and health of financial system – Market economies: it is up to the firm to pursue sustainability – Command economies: government or central planner will determine the type of sustainability to pursue

Allocating Scarce Resources

Allocation Strategies ● Allocation Strategies: methods available to societies as they seek to answer the question for whom to produce. ● What strategies can be used? • • • Price Authority Lottery • • First come, First served Majority Rule Personal Characteristics Contest

Price ● This strategy allows the forces of supply and demand to determine a market price – Supply: amount of a good, service, or factor of production a seller is willing and able to sell at each price – Demand: amount of a good, service, or factor of production that a buyer is willing and able to purchase at each price – The price where the quantity demanded is equal to the quantity supplied

Price ● The more desirable and scarce an item is the higher the price – This method is efficient because you can easily tell whether you will get the good based off your willingness to pay the high price ● Example: If you want to buy a diamond necklace, you must be able to afford that diamond necklace.

Authority ● This strategy is based on the decisions of a power person or group of people who decide who gets a good – Works for quick action because a person or a group of people in power can make and implement the decision quickly. Very efficient ● Example: Elected representatives have the authority to pass legislation requiring workers to pay a tax on the income they earn

Lottery ● This strategy gives everyone who wants the good, service, or factor of production equal odds in obtaining it – AKA random selection – Method is inefficient because it may allocate the resource to a purpose or person who does not need it or will not put it to productive use ● Example: The government randomly selects individuals to receive farmland, the land may go to someone who has no knowledge of farming techniques and the land resources may be underutilized

First come, first served ● This strategy allows people to receive a good, service, or factor of production if they get to it first or are one of the people close enough to the front of the line to receive it – Inefficient strategy since the time spent waiting in physical or virtual line takes time away from more productive activities ● Example: At one time, a teenager had to wait in line to take the driver’s license road test.

Majority Rule ● This strategy occurs when a group of people who have control over a good, service, or factor of production vote to decide how it will be distributed – If the majority is corrupt or makes a decision based on favoritism or fear then it is not going to be an efficient allocation ● Example: National, state, and local governments vote to establish public parks and greenspace that could be used for commercial production

Personal Characteristics ● This strategy allows resources to be distributed based on need or merit – The one who gets the good, service, or resource should put it to the best use – Personal characteristics can be barriers to keep certain individuals from receiving the allocation ● Example: During the 1800 s and early 1900 s, African Americans were excluded from the right to own land based off of their skin color

Contest ● This strategy can distribute the resource to the person who wins – The “winning” could be based on running a race (who is the fastest), in academics (valedictorian has the highest GPA), or a test of knowledge (Jeopardy) – Inefficient on a day to day basis ● You would never run a race to see who gets the last slice of pizza because that would take too long!

Role of the Government

Public Goods & Services ● Governments in the United States produce public goods and services only when there is a reason that the private market is unable to provide the good or service at a level considered beneficial to society – Usually paid for by tax dollars

Public Goods & Services ● Two main characteristics of purely public goods – Shared consumption/non-rival goods ● Consumption of the good by one person does not diminish the satisfaction enjoyed by another consumer who consumes the exact same good – Example: public interstate highways – Non-exclusion ● Difficult or impossible to keep a person who is unwilling to pay from enjoying the benefits of the public good – Example: national defense

Public Goods & Services

Redistribute Income ● When pursuing equity, governments may choose to redistribute income – Taking tax money from one group of individuals or firms and giving it to another ● Include social welfare payments to low income citizens, unemployment compensation, or Social Security payments – May redistribute to higher income people such as tax credits for buying electric cars

Private Property Rights ● In a market economy, protection of property rights is essential – Property rights are protected by intellectual property laws such as copyrights and patents, legal documents, and business licenses – The court system is available to hear property dispute and settle them

Market Failures ● Market failures occur when the private market is unable to produce goods and services in a way that the marginal benefit to society is equal to or greater than the marginal cost to society – Include externalities and market power

Externalities ● Externalities: occur when a third party other than the consumer or producer of a good is hurt or benefits from the production or consumption of that good – Can be positive or negative – Example: A resident gets sick because of pollution ● The US government attempts to correct negative externalities like pollution through increasing taxes or regulations on the polluting industry

Market Power ● Market power: refers to a market failure resulting from the formation of a monopoly and oligopoly market structures – Monopoly: controlled primarily by one seller of a good or service – Oligopoly: controlled by several large firms ● US government traditionally breaks up monopolies and oligopolies into smaller companies – Many people believe market power is fine as long as prices are reasonable and new competitors are not barred from entering the market

Government Regulation ● The goal of the government is to provide for the health and safety of its citizens and businesses – Some protect citizens from corporate abuse and others help businesses recover from external problems

Examples of Government Regulation ● Increased Regulation – Sarbanes-Oxley Act of 2002 was a response to major problems with accounting practices of large public companies. ● Response to Enron, Tyco, and World. Com ● Must publish financial records ● Decreased – Banking Regulation Act of 1933 or Glass-Steagall included many provisions connected with the US banking system.