Unit 1: Fundamentals of Economics

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 SSEF1, SSEF2, SSEF4, SSEF5, SSEF6, SSMI1
What is scarcity?
What are the factors of production?
How are limited resources allocated?
What trade-offs appear on a production possibilities frontier?
How are rational decisions made?
What are the similarities and differences of a command, market,
and mixed economic system?
7. How does each economic system answer the three basic
economic questions of what to produce, how to produce, and
for whom to produce?
8. How does each economic system meet a society’s broad
economic and social goals?
9. What is the role of government in a market economy?
10. How do goods and services flow in a market economy?
11. What is the role of money in a market economy?
1.
2.
3.
4.
5.
6.
Scarcity
Choice
Opportunity cost
Trade-offs
Factors of production
Marginal thinking
Production
Possibilities curve
(frontier)
9. Economic systems
10. 3 basic economic
questions
1.
2.
3.
4.
5.
6.
7.
8.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
Market economy
Public goods and services
Property rights
Market failures
Government regulations
Deregulation
Circular flow diagram
Product market
Factor market
Households
Firms
 SSEF1 The student will explain why limited productive
resources and unlimited wants result in scarcity,
opportunity costs, and tradeoffs for individuals, businesses,
and governments.
 a. Define scarcity as a basic condition that exists when
unlimited wants exceed limited productive resources.
 b. Define and give examples of productive resources (factors
of production) (e.g., land (natural), labor (human), capital
(capital goods), entrepreneurship).
 c. List a variety of strategies for allocating scarce resources.
 d. Define opportunity cost as the next best alternative given
up when individuals, businesses, and governments confront
scarcity by making choices.
 Scarcity is the fundamental economic problem of
having seemingly unlimited human needs and wants,
in a world of limited resources.
 not all of society's goals can be pursued at the same
time
 trade-offs are made of one good against others.
 A.K.A. productive resources
 Anything used in the production of a good or
service
 They are classified into one of the following areas:
 Land
 Labor
 Capital
 Physical capital
 Human capital
 Entrepreneurship
 Private property
 Natural resources used
in production
 i.e. trees, coal, and
wheat
 People who provide skills that assist in the production
of a good or service
 Physical – technology, equipment, buildings, and tools
that assist in the production of a good or service
 Human – the knowledge and skills that assist in the
production of a good or service
 Example: taxi cab driver’s knowledge of city streets
 The risk-taking and managerial skills needed to start
any business
What
Productive
Resource do
they represent??
What type of
productive
resource is
pictured???
What Factor of
Production is
in this lady’s
brain????
I started a business making computers
and other electronic devices. I am an
__________.
What Factor of Production do these
represent?
 the benefit that is lost in making a choice between two
competing uses of scarce resources.
 It is always the next best alternative.
EXAMPLE: an individual has $25 to either
purchase groceries or new clothes. The individual
weighs the choices against each other and decides
that it’s more important to eat for the week and
forgo the new pair of jeans. The opportunity cost
of the groceries is……
 Choose a product
 Divide paper up into four sections + label
Land
Labor
Capital
Entrepreneurship
 In each section, draw the factors of production
involved in the production of that particular
good/service
 Include AT LEAST 8 things
LAND
LABOR
CAPITAL
ENTERPRENUERSHIP
 SSEF2 The student will give examples of how rational
decision making entails comparing the marginal
benefits and the marginal costs of an action.
 a. Illustrate by means of a production possibilities curve
the trade offs between two options.
 b. Explain that rational decisions occur when the
marginal benefits of an action equal or exceed the
marginal costs.
 Sometimes, making a decision can be complex or
unclear
 Putting this kind of information “on paper” can make
the opportunity cost clear, and make the decision
easier
Decision Making Grid
Alternatives
Choice 1
Benefits
Decision
Opportunity Cost
Benefits Forgone
Choice 2
Decision Making Grid: Studying
Alternatives
Sleep Late
Wake up early to study
Benefits
-More sleep!
-More energy during the day.
-Better grade
-Teacher and parental approval
-Personal satisfaction
Decision
Sleep Late
Wake up early to study
Opportunity Cost
Extra study time!
Extra sleep time!
Benefits Forgone
-Better grade on the test
-Teacher and parental approval
-Personal Satisfaction
-More sleep
-More energy during the day!
 Not all choices are all or nothing
 Sometimes you can decide “how much” of one choice
you can do and “how much” of the other
 This is called “Thinking at the Margin”
Decision making at the Margin1
OPTIONS
BENEFIT
OPPROTUNITY COST
1 hour of extra studying
Grade of a C on test
1 hour of sleep
2 hours of extra studying
Grade of a B on test
2 hours of sleep
3 hours of extra studying
Grade of an A on test
3 hours of sleep
 Graph used to various
ways an economy can
choose to utilize their
resources
 Two axes can show
categories of goods
(military vs consumer)
or specific goods (guns
v. butter)
 The frontier on a P.P.C.
represents the
maximum
combination of goods
that can be produced
with current resources
 Point Y represents
production beyond
available resources
 Can reach point Y with
an increase in resources
or better technology
that allows more
efficient production
 Point X represents
underutilization
 The economy is not
using its resources
efficiently to produce
the maximum amount
of goods
 In order to produce
more of one good, you
have to produce less of
another
 The amount of one
item lost when
increasing production
of another is the
opportunity cost
 A change in Factors of Production or technology will
cause the PPC to “shift”
 Increase = Shift right
 Decrease = Shift left
 Example: More land on a farm would increase the
production possibilities for wheat and corn (shift
right)
 Create a table showing the production possibilities
between two alternatives
 Graph the points & create a Production Possibilities
curve
 Include 2 things that could cause Production
Possibilities to increase
 Sketch an additional curve showing growth
 Include 2 things that could cause Production
Possibilities to decrease
 Sketch an additional curve showing reduction
Unit 1
Notes 3
 SSEF4 The student will compare and contrast different
economic systems and explain how they answer the
three basic economic questions of what to produce,
how to produce, and for whom to produce.
 a. Compare command, market, and mixed economic systems
with regard to private ownership, profit motive, consumer
sovereignty, competition, and government regulation.
 b. Evaluate how well each type of system answers the three
economic questions and meets the broad social and economic
goals of freedom, security, equity, growth, efficiency, and
stability.
 Because resources are limited, all societies must
answer the following:
 What goods and services to produce?
 How to produce?
 For whom to produce?
 Relies on habit/custom to answer economic questions
 Usually small/close communities
 Slow to adapt to change
 Economic questions answered by individuals
 Buyers and sellers consider self-interest
 Competition regulates the market
Advantages
Disadvantages
 Freedom
 Less stability
 Efficiency
 Inequality
 Encourages growth
 Consumers have a great
deal of control
 Governments answer economic questions
 Terms associated:
 Socialism
 Democratic means should be used to distribute wealth evenly
though society
 democracy
 Communism
 All economic and political power lies with the government
 authoritarian
Advantages
Disadvantages
 Guarantee jobs and
 Can not always meet
income
 Can jumpstart industry
consumer demands
 No reward for innovation
 Little individual freedom
 In reality, no one economic system can answer all
economic questions
 Most economies use aspects of both free market and
centrally planned economics to accomplish their goals
 SSEMI1 The student will describe how households,
businesses, and governments are interdependent and
interact through flows of goods, services, and money.
 a. Illustrate by means of a circular flow diagram, the
Product market; the Resource (factor) market; the real
flow of goods and services between and among
businesses, households, and government; and the flow
of money.
 b. Explain the role of money as a medium of exchange
and how it facilitates exchange.
 Players
 Households
 Own the factors of production and consume goods + services
 Firms
 Uses factors of production to produce a product
 Factors of production and products are exchanged in 2
markets
 FACTOR MARKET (A.k.a. Resource Market)
 Households supply Factors of Production to firms in
exchange for money
 PRODUCT MARKET
 Firms supply households with goods and services in exchange
for money
 3rd player is added to market
 Government
 Factor market – purchases Factors of Production from
households
 Product Market – buys goods and services from firms
 Government collects money from firms and households
through taxes + provides goods and services
 Create a MARKET ECONOMY circular flow model using a
specific business
 Draw & label the firm and the household
 20%
 Show which way money is moving around the economy
 20%
 Show which way goods/resources are moving around the
economy
 20%
 Explain what is happening in the factor market
 20%
 Explain what is happening in the product market
 20%
 SSEF5 The student will describe the roles of
government in a market economy.
 a. Explain why government provides public goods and
services, redistributes income, protects property rights,
and resolves market failures.
 b. Give examples of government regulation and
deregulation and their effects on consumers and
producers.
 Because of the business cycle, the American government
aims to stabilize the economy by
 Keeping employment high
 Unemployment between 3% and 6%
 Keeping growth steady
 Economy must grow with population for there to be jobs and
goods for everyone
 Keeping prices stable
 Prevent inflation through regulating banks and businesses
 The Federal Government promotes technological
innovation through federal agencies (like NASA) and
by offering patents
 The government provides goods when it is inefficient
or impractical to
 Make consumers pay individually
 Exclude non-payers
 Examples: parks, highways, police + fire service, and
education
 With any public good, people who would chose not to
pay can still benefit
 These individuals are called “free riders”
 An economic side effect of a good or service that
generates benefits or costs to someone other then the
person deciding how much to produce or consume
 Two Types:
 Positive
 Generates benefits for someone other then the individuals
paying
 Negative
 Generates costs for someone other then the person paying for
the good or service
 Positive
 Public education
improves communities
and impacts all
households
 Negative
 A new airport would
generate a great deal of
noise, traffic, and
pollution
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