Economics Chapter 1
Hooray for Notes!
What is Economics?
• Economics is the study of how people seek to
satisfy their needs and wants by making
choices
Economics
• The study of Economics can be broke into two
distinct areas:
• MICROeconomics is study of economics which
deals with single businesses, firms and
households
Economics
• MACROeconomics which deals with
governments, international economic
relations, and world wide economic issues
Need
• Something necessary for survival such as Air,
Water, or Shelter
Want
• An item we desire but is not essential to survival
Are these items Needs or Wants?
Goods and Services
• Economists refer to the things that individuals
and institutions want as either goods or
services
• Goods- are tangible items of value, things that
we can see or touch.
• Examples- scissors, medicines, textbooks, cars,
footballs, make-up/ cosmetics, etc
Goods and Services
• Services are intangible things that have value.
• Intangibles can neither be seen or touched
• Haircuts, medical care, and education are
examples of services
Do they make goods or perform services?
Consumers
• As goods and services satisfy our wants, we
consume them
• Consumers are people who buy goods and
services for personal use
• Consumption is the final act of buying goods
and services
Consumption
NO
NO
NO
NO
NO
(CREEPY /\)
Almost…
CONSUMPTION!!!!
POST CONSUMPTION
(Not consumption though)
Factors of Production
• Factors of production are the ingredients that
go into the production of goods and services.
Land
• As a factor of production land is all natural
resources used in order to produce other
goods and services
• Land can be the actual land where a business
can be located
• Land is also anything someone uses that
comes from nature to make goods or services
How is land used in these examples?
http://www.youtube.com/watch?v=3GD5EUVIvWo
Standard of Living
• Standard of Living (SOL) refers to the quantity
and quality of goods that are available to an
individual or a society.
• Some nations have inferior land or natural
resources which contribute to their lower
standard of living.
Example of Inferior Natural Resources
That Contribute to a Lower Standard
of Living
http://maps.google.com/maps?ct=reset
Standard of Living
• If land is limited or inferior, regions have to
strengthen their other production factors.
• Examples include Japan, Denmark, and
Switzerland
• http://maps.google.com/maps?ct=reset
Renewable vs. Non-Renewable Resources
• Renewable Resources are natural resources
that can be replaced or renewed.
– For example Christmas trees that are replanted
and regrown after being cut down.
Non-Renewable Reasources
• Non-Renewable resources are natural items
that once they are used, they are gone forever
– Oil/ Petroleum is the easiest example of a non
renewable resource.
Oil as a Non-renewable resource
Scarcity
• Scarcity is the idea in economics that everything
has a value and nothing is unlimited
• Regardless if a resource is renewable or nonrenewable, the law of scarcity tells us nothing is
unlimited.
• From the air we breath, to time itself, there is
nothing in our existence that is unlimited
THE START FOR TODAYYYYY
• http://www.youtube.com/watch?v=AiIHvQov
Kkk
Labor
• Labor is the effort that a person devotes to a
task for which that person is paid
• Individual Labor is easy to analyze: What does
a Fireman do? What about that Pawn Stars
clip?
• Labor on a Macroeconomics level is measured
by Labor Productivity
Labor Productivity
• Labor Productivity is defined as the output per
worker per time period
• Another way to say it: the amount each
worker produces in a specified time
• Countries can effect productivity on the
following levels:
3 Factors of Labor Productivity
1) The skill of the labor force
-Countries can invest in a variety of ways to
educate, improve, or further the skills of their
workers.
-Examples include: trade schools, workshops,
classes on new technology, etc
3 Factors of Labor Productivity
2) The quality and quantity of machinery and
tool available
-Countries can provide more tools or
improve the impact these items have
VS.
Another Way to Put It…
This…
http://www.youtube.com/watch?v=B3vXhLt4bAc&feature=related
Versus…
THIS!
http://www.youtube.com/watch?v=QC8jnSaCqxY
3 Factors of Labor Productivity
3) TECHNOLOGY- society’s knowledge of
production or production methods
For example: The United States has twice the
population as Bangladesh
Yet the United States produces well over 20
times the amount of goods and services as
Bangladesh
Labor Productivity
Capital
• The FINAL factor of production, capital is any
human made resource that is used to produce
other goods and services
• The two categories of capital are human
capital and physical capital
Human Capital
• Human Capital is the knowledge and skills a
worker gains through education and experience
• Right now, YOU ARE GAINING HUMAN CAPITAL
Physical Capital
• Capital Goods = Physical Capital
• Physical Capital is human-made objects used
to create other goods and services
Physical Capital Continued…
• Physical Capital is easier said to be all
buildings and tools used in production of
goods and services
Physical Capital Continued…
• Physical Capital is easier said to be all
buildings and tools used in production of
goods and services
Depreciation
• Depreciation is the accounting term we use to
measure the decline in the value of capital
goods.
• Tools and buildings that we as being modern
today will not be seen that way in 50 years,
100 years, etc.
Easy Examples of Depreciation
< “Old”
“New” >
Easy Examples of Depreciation
< “Old”
“New” >
Capital Formation
• Capital Formation is the production of capital
goods
• Because capital goods are so vital to the
production of goods and services, capital
formation is an essential economic process in
all societies
• “Improve or be left in the dust”
Japan After World War II
• After World War II, the country of Japan was
devastated after 4 years of total war.
Japanese City
Percentage of city destroyed
Size of American City
Yokohama
58 %
Cleveland
Tokyo
51 %
New York
Toyama
99 %
Chattanooga
Nagoya
40 %
Los Angeles
Osaka
35.1 %
Chicago
Shimonoseki
37.6 %
San Diego
Kure
41.9 %
Toledo
Kobe
55.7 %
Baltimore
Omuta
35.9 %
Miami
Wakayama
50 %
Salt Lake City
Kawasaki
36.2 %
Portland
Okayama
68.9 %
Long Beach
Kagoshima
63.4 %
Richmond
Japan After World War II
• In the year following the year and their
subsequent banning of all armed forces, Japan
invested heavily in the production of capital
goods instead of consumer goods
• “A factory built instead of products made”
• While this hurt their country in the short run,
today Japan is one of the largest exporting
countries of goods in the world.
Entrepreneurship
• Entrepreneurship describes the process of
individuals called entrepreneurs create new
enterprises or improve existing ones.
Famous Entrepreneurs
•
John Davison Rockefeller (July 8, 1839 – May 23, 1937) was an American oil
magnate and philanthropist. He was the founder of the Standard Oil Company,
which dominated the oil industry and was the first great U.S. business trust.
•
The first man in history to be worth over a billion dollars in 1916
Net worth
$663.4 billion in 2007 dollars, according
to List of wealthiest historical figures,
based on information from Forbes –
February 2008.
NOT So Famous Entrepreneurs…
Hussain "Jeff" Jaffarie
(Picture not found)
• The innovator of the “Toasted Sandwich” in which he put
gas station sandwiches into an oven created by the
Tombstone pizza company
• This was the central idea behind a chain of sandwich
shops which are now known as Quiznos. In 2004, they
made a $104 Million in Sales.
Your Turn
• On the index cards handed out:
• Write a job on this card
• (A G rated- PG13 rated occupation please)
• Then write on this card this…
• (The title of the job)
-Land
-Labor
-Human Capital
-Physical Capital
Exchange Cards!
• See if you can figure out all the factors of
production of this card
• When your done, switch with someone else
• Which one is the easiest, which is the hardest?
THE THREE FUNDAMENTAL
ECONOMIC QUESTIONS
Question 1
• What Goods and Services Should Be
Produced?
– Unable to have everything, individuals and
institutions need to choose between those goods
and services they will buy or produce and those
they will forgo.
QUESTION 1 CONTINUED…
• Because we cant have everything, we now
need to make choices with what we want.
• For example, If I want to go on vacation and I
go to Florida, I cannot go to the Bahamas
during the same time
• In this case, The Bahamas is a trade off and an
opportunity cost.
My Vacation
Switzerland
If I choose to go to
Rome…
Paris
Venice
Then I can’t go to these places at the
same time…
Morocco
These are all trade offs…
London
Trade-off
• A trade-off takes place when one thing is
given up in order to obtain something else…
Instead
of…
Opportunity Cost
• Opportunity cost is most optimal alternative
that you DID NOT choose when you made
your trade off
• “The Best Trade-off”
• In the previous example just simply pick your
favorite fast food alternative to McDonald’s.
That is your opportunity cost
• All the rest are referred to as “Trade-offs”
Friday Night Lights
• Friday nights in the Fall
mean football games for
our players, cheerleaders,
game workers, fans, etc.
• However, what would be
something else you would
do instead?
• What would be the best
alterative?
Marginal Cost (Marginalism)
• Marginal Cost, or Marginalism, is when
economists refer to the usefulness of adding
one more item to the production of a product
or service
• An easy way to put it, adding another student
to this current class… Could be good, or bad…
Question 2
• How Should Goods and Services Should Be
Produced?
– There is more then one way to produce a good or
service but what's the optimal way to combine the
factors of production to create them?
The Textbook’s 3 Examples
• Example 1: Manufacturing Automobiles
-Pros/ Cons of many workers vs less workers and more technology
•
Example 2: Building a New School
– Pros/ Cons of building a 1 floor school that takes up 3 acres of land or
a 2 story school with higher construction costs.
•
Example 3: Mining Companies
– Extracting ores from the ground, mining companies can have a high
cost and protect the environment or low cost and heavy
environmental damage.
Question 3
• WHO Should Receive the Goods and Services
Produced?
– Sub questions in this category can include:
• Should everyone have an equal share?
• Should some people be allowed to have more than
others?
• Should goods and services be awarded according to
people’s contributions to society?
• Should we divide goods and services based on need?
• How should we measure a person’s contribution on
society?
In the USA…
• Our athletes are some of the highest workers
we pay…
http://sports.espn.g
o.com/espn/thelife/
news/story?id=3762
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Alex Rodriguez- $27 Million
Eli Manning- $8.5 Million
However…
• Shouldn’t Neurosurgeons, who save people’s
lives every time they perform, be paid more
then these guys?
Imagine these two guys as your neurosurgeons…
“Would Doctors Rodriguez and Manning please report to
the operating room?” NO THANKS!!!
While in other countries…
• Athletes may be considered just jobs like
everyone else in certain countries…
– The Cuban National Baseball Team has won the gold
medal 3 times and the silver 2 times the 5 total times
they have played in the Olympic Games
– They have won 25 of 35 gold medals at the Baseball
World Cup
– Yet because they are a communist country, members
of the team are paid on par with everyone else in the
country…
Economic Systems
• Economic Systems answer these 3 economic
questions…
• There are 3 general Economic Systems to be
aware of
– Traditional Economy
– Command Economy
– Market Economy
Traditional Economy
• In this type of Economy, FAMILIES answer
WHAT gets produced
• These economies are local to 3rd World
countries found in Africa, Asia, and Latin
America
• Who receives the goods and services and
HOW it is produced are a matter of custom
and tradition
Traditional Economy
Who makes our
economic decisions?
WE DO!!!
Command Economy
• ALL ECONOMIC QUESTIONS ARE ANSWERED
BY THE GOVERNMENT!!!
Command Economy
• In this type of Economy, GOVERNMENTS answer WHAT
gets produced
• WHO gets the goods and services- GOVERNMENT
• HOW it is produced- GOVERNMENT
• These countries would include: Cuba, North Korea,
China, and, not now, but historically, the Soviet Union.
Command Economy
Who makes our
economic decisions?
Market Economy
• The WHAT, HOW, and WHO are all made by
individuals and businesses (Buyers and sellers)
• With this said these buyers and sellers make
up the “Market System”
• In this system, even though it may seem
opposite, the government plays a much less
role then a Command Economy
Market Economy
Who makes our
economic decisions?
Market Economy
Scales of Economies
Last thing for Chapter 1…
Ceteris Paribus
• Ceteris Paribus translates into “Other Things
Being Equal” in Latin
• This is an idea where we ignore exceptions
and simply say that “People will buy more of
an item at a lower price, ‘all other things being
equal’”
Ceteris Paribus continued…
• For example… we know that this type of shoe…
• People are willing to buy at $100 plus…
Ceteris Paribus continued…
• But with this type of shoe…
• Are people are willing to buy at $100 plus?
Air Jordan vs. Black Shoe
Now even if the Jordan is $100 and the shoe on the
right is just $75, will people buy more of the shoe on
the right? NO, BUT IF WE USE CETERIS PARIBUS,
WE CAN SAY YES!!!
Ceteris Paribus continued…
• Ceteris Paribus enables observer to focus on
one or two variables
• While, at the same time, Recognizing that
other variables exist
• In other words, at time in Economics class,
THERE ARE NO “WHAT IF’S”!!!!
But Mr. Newman… What if?
The… FREAKIN…