Economic Principles
Economic Principles http://www.youtube.com/watch?v=yoVc_S_...
Unit 1 Vocab
Economics
2. Microeconomics
3. Macroeconomics
4. Economic model
5. Economic system
6. Scarcity
7. Trade-off
8. Opportunity cost
9. Marginal cost
10. Cost-benefit
analysis
11.Factors of
production
1.
12.Gross
Domestic
Product (GDP)
13.Standard of living
14.Productivity
15.Specialization
16.Division of labor
17.Economic
interdependence
18.Market
19.Product market
20.Capitalism
21.Consumer
sovereignty
22.Competition
23.Profit
motive
24.Voluntary
exchange
25.Laissez-faire
economics
26.Per capita GDP
27.Socialism
28.Communism
Economic Models
 Economy
 All
activity that affects production,
distribution & use of goods & services
 Economists use economic models to study
the economy
 They
study past and present to predict the
future
 Based
on assumptions
 Businesses
& government make decisions
based on models
Economic Principles
 Economics:
Study of how decisions are
made when resources are limited.
 Scarcity:
Not enough income, time, and
resources to satisfy every desire. Faces
individuals, businesses, and countries.
 Economics
must answer the questions of
what, how, and whom when dealing with
production.
SCARCITY
IS THE FUNDAMENTAL
ECONOMIC PROBLEM
 Because
of Scarcity we must answer 3
questions in economics
 What to Produce?
 How to Produce?
 Whom to produce for?
Assessment Activity:


All economic questions and problems
arise from scarcity. Economics assumes
people do not have the resources do
satisfy all of their wants. Therefore, we
must make choices about how to
allocate those resources. We make
decisions about how to spend our
money and use our time. This activity
will focus on the central idea of
economics- every choice involves a cost.
Let's say you have five dollars. What
would you like to spend it on? There are
a million things you would love to spend
five bucks on, but let's imagine there
are only three things out there you
really want to buy: gum, soda, and
movie tickets. Look at the price chart to
the right and answer the questions.
Good
Price
Gum
$ . 50
Soda
$1.oo
Movie
Ticket
$5.00
Questions:
1.
2.
3.

How many sodas can you buy instead of one movie
ticket?
How many packs of gum can you buy instead of one
soda?
If buy 4 packs of gum, how many sodas could you
have bought?
For example, if you go to the movies you have to
give up a certain amount of gum and soda. If you
are a sodaholic, you have to give up five sodas. If
you are gum fanatic, you surrender ten packs of
gum. But, the opportunity cost of a movie is not
five sodas and ten packs of gum. It is five sodas or
ten packs of gum.
Which of the following best
describes scarcity?
A.
Not enough goods for everyone
B.
Not enough resources to provide
every desire
Lack of desire to produce enough
resources
The amount that people want
C.
D.
What is the fundamental
economic problem?
1.
2.
3.
4.
Money
Time
Scarcity
Economics
All of the following are questions we
must ask because of scarcity
except:
1.
2.
3.
4.
When to produce?
How to produce?
What to produce?
Whom to produce
for?
Goods and Services
 Good:
Anything manufactured.
 Service:
others.
Something people do for
Needs and Wants
 Need:
 Want:
Basic item for survival.
Anything including and
beyond needs.
Factors of Production
1.
2.
3.
4.
Capital
Land and Natural Resources
Labor
Entrepreneurship or management
Capital
 Capital
goods: All tools, buildings, and
machinery businesses use to make goods
and provide services. Same as Resources
Land and Natural Resources
 All
land used for the business.
 Natural resources are things that
come form the earth such as water
and minerals.
 All energy is considered a natural
resource.
Labor
 Hired
workers to help in production.
 Labor earns money, which they use
to buy other goods and services.
 Division
of Labor: Separating a big job
into smaller jobs. Each person is
responsible for doing one job.
(Assembly line).
Entrepreneurship
 Entrepreneurs
are people willing to
take risks in business.
 Plan
and supervise production.
 Decision
makers.
With a neighbor, list the land, labor, capital,
and entrepreneur that went into making each
of the following (you can list more than one
item for each…)
 Your shoes
 iPod
 Dominos
pepperoni pizza
Trade-off and Opportunity Cost
 Scarcity
forces people to make choices.
 Trade-off: Decision that must be made
when choosing between items.
 Opportunity cost: Value of the next best
alternative that was given up when a
choice was made. Can involve time or
money.
 When choosing to do something, you lose.
You lose the ability of doing something else.
____________________________________________
 Production Possibilities: The combinations
of goods and services that can be
produced from a fixed amount of
resources.
What is the opportunity cost of
passing the Health Care Bill?
A.
B.
C.
D.
More people will have health care
coverage.
Grandparents will be put to sleep
because of Death Panels.
Obama will become the Devil and the
Four Horseman will arrive.
The government will have less money to
spend on other services like the military.
Which economic term best explains a
consumer’s choice of buying a new
car or opening a savings account:
A. trade-off
B. scarcity
C. opportunity cost
D. comparative advantage
 How
do you make trade-offs with
your time? What do you give up?
 Consider
time studying, time with
friends, or time sleeping.
Business Costs
 Fixed
Costs
Expense is the same no matter how much is produced
 Example - Rent

 Variable

Costs
Expenses that change with number of items produced.
 Fixed
Costs + Variable Costs = Total Cost
 Marginal Cost

extra cost of producing one additional unit of output
 Marginal

additional benefit after all costs are accounted for
producing one more unit
 Cost

Benefit /Revenue
Benefit Analysis
economic model used to compare marginal costs &
benefits of a decision – Which should be greater the
benefits or the costs??
Considerations for Businesses
 Productivity  Measure of the amount of output produced by a given
amount of inputs in a specific period of time. In other
words – How resources are being used efficiently to
produce goods and services.
 Specialization
 Takes place when people, businesses, regions & countries
concentrate on goods or services that they can produce
better than anyone else
 Examples – China and electronics
 Human Capital
 Sum of the skills, abilities & motivations of people
 How would businesses and employee’s benefit from this?
Productivity
 Goes
up when more output can be
produced when scarce resources
are used efficiently
 Requires labor and human capital
 Increases when businesses invest in
human capital
 Increases with specialization
What is an example of a fixed
cost of doing business?
1.
2.
3.
4.
Wages
Cost of fuel
Price of materials
Rent on a building
Economic systems
Gross Domestic Product (GDP)
 Measure
of an economy’s size & success (monetary
measure - $13.78 trillion in 2007)
 Total value of all the final goods & services
produced in a country during a single year
 Used cars not counted in GDP because second
hand sales are not counted
 Used to measure standard of living (quality of life
based on the possession of necessities and luxuries
that make life easier) in a country
 Measures quantity not quality
Gross Domestic Product (GDP) cont.
 Per
Capita GDP – total GDP divided by the
country’s population (U.S. was $45,800
(2007 est.) )
 Compared yearly to check growth of
country
 Higher GDP from previous year = growing
economy
 Lower GDP from previous year = shrinking
economy
Economic Systems
 Three
major types:
 Traditional
 Command
 Market
The distinguishing factors are the role of
government in the economy and the
decision making for production.
Traditional Economy
Economic decisions are made by
customs handed down through
generations.
 Hunting, farming, and gathering.
 No technology.
 Activities center around the family.
 Men and women have defined social
roles.
 Found in rural, non-industrialized areas.
(Africa, S. America, Asia)
Traditional Economies
Command Economy
Government makes all economic decisions.
(China, N. Korea, Vietnam, Cuba, and the former
Soviet Union).
 Advantages:
 The Govt. can set prices of goods.
 Set low prices for consumers and give help to
factories.
 Disadvantages
 No competition.
 Factories are poorly run and shortages are
common.
 No individual freedoms.
Command Economies – Former Soviet Union
Command Economies – North
Korea
Slideshow
Video
Command Economies - Cuba
Market Economy
Decisions are made by the principles of
supply and demand.
 People buy, sell, and produce what ever
they want. People can work where they
want. Individual freedoms
 Capitalism: Private citizens own most
means of production – land, labor, capital
& entrepreneurship – to make a profit.
 Free Enterprise: Freedom of businesses to
compete for profit without govt.
interference.
7 Characteristics of a Market Economy
1.
2.
3.
4.
Markets – exchanges here determine prices of goods
& services. It’s the free and willing exchange of goods
and services between buyers and sellers.
Consumer Sovereignty – the consumer is ‘king’ of the
market
• They are the ones who determine what products
will be produced
• It exists only in Market based economies
Economic freedom – freedom of choice with
consequences
• Example – an entrepreneur starts a business and
it fails. The gov’t usually will not help out.
Private Property Rights – the freedom to own, use, or
dispose of our own property as long as it doesn’t
interfere with the rights of others.
Competition – struggle between buyers and sellers to
get the best products and the lowest prices.
• Capitalism thrives on competition
• Rewards the most efficient producers
5.
6. Profit Motive – the driving force that encourages
individuals and organizations to improve their material
well-being.
• Purpose is to raise the standard of living
• It is the reason for growth in a market system
7. Voluntary Exchange – act of buyers and sellers freely
and willingly engaging in market transactions
• Both buyers & sellers must feel a benefit
Mixed Economy
Any combination of Economic systems.
 The United States is a mixed economy
because capitalism and free enterprise
exist with government regulations.
 The U.S. govt. provides services such as
highways, postal system, and
transportation.
 Some government regulation.
 At certain times, govt. can take control of
the means of production.
Capitalism & Free Enterprise
The U.S. economy is built on a market
economy, but government still plays a role
Free Enterprise – minimum gov’t
interference
Capitalism – private citizens own and use
factors of production (land, labor, capital,
& entrepreneurship) to make a profit.
The Drawbacks
of capitalism
The Drawbacks of capitalism
The
Rise
of
Capitalism
2 concepts developed
People work for economic gain
Government should have a limited role
1200s C.E. trade routes opened between Europe & the East
Silk Roads, Marco Polo
Throughout hundreds of years trade increased
Development of ideas of wealth
Adam Smith
Scottish Economist
Wealth of Nations
Basic Principles of Economics
Individuals who seek profit benefit all of society
Laissez-Faire – to leave alone
The government should not interfere in the market
Government’s only role should be to ensure free
competition
Adam Smith and The Wealth of Nations
Socialism
 Socialism
– belief that the means of
production should be owned & controlled
by society either directly or through the
gov’t
 Karl Marx
 Wrote “The Communist Manifesto”
 Socialist – believed industrialized nations
divided into bourgeoisie (entrepreneurs)
& proletariat (workers)
 Predicted revolution of the proletariat
 Believed socialism would develop into
communism
Communism
 Communism
– one class would
evolve where property would be
commonly held & there would be
no need for government
 Built
on the idea of socialism
Transitioning Economies
 Former
Soviet Union & the Soviet Bloc
 Inefficiency of command economies led
to no or very small growth
 Transition of this type of economy led to
transition from Communism to
Democracies
 Why would a transition be hard?
NAFTA
 North
America Free
Trade Agreement
(NAFTA) – agreement
between Canada,
Mexico, and the USA
where tariffs were
almost completely
eliminated (“free
trade”)
 Began
on Jan. 1, 1994