Positive vs. Normative Statements Positive Statements – statements that describe the world as it is. “A rise in consumer incomes will lead to a rise in the demand for new cars.” “A fall in the exchange rate will lead to an increase in exports overseas.” “More competition in markets can lead to lower prices for consumers.” “If the government raises the tax on beer, this will lead to a fall in profits of the brewers.” Normative Statements – opinions that describe how the world should be “The government should increase the national minimum wage to $6 per hour in order to reduce relative poverty.” “The government is right to introduce a ban on smoking in public places.” “The retirement age should be raised to 75 to combat the effects of our ageing population.” Chapter 2 – Thinking Like an Economist Macroeconomics – study of the performance, structure, behavior and decision-making of the economy as a whole Microeconomics – study of the decisions of individuals; households and firms and their interaction Economics is a science Devise theories, collect and analyze data, make assumptions Economic Models – diagrams, graphs and equations used to represent human behavior and economic theory Factors of Production - Factors of Production - resources required to produce economic products, goods and services 1. 2. 3. 4. Land Labor Capital Entrepreneurship Land • Land – natural resources not created by human effort that are used to produce goods and services • The "gifts of nature". • Examples: Forests, fish, oil, gas, cattle, etc… Labor • Labor – time and effort that a person devotes to producing goods and services. • Labor resources are those provided by the body and minds of men and women. • Examples: doctors, teachers, construction workers, etc... Capital Capital – resource that is used to produce additional goods and services Capital is the machinery or tools that workers use to transform natural resources into finished products. Examples: machines, computers, tablets, etc… 3 Types of Capital Physical Capital – also known as Capital Goods, human made objects used to create other goods and services Examples: Machines, phones, computers, equipment Human Capital –skills, abilities, and specialized talents of people Examples: College, training, technical school, etc. Financial Capital – money, used by entrepreneurs and businesses to buy what they need to produce their goods or services Examples: money Entrepreneurs • Entrepreneurs – ambitious business people who organize the factors of production to create new goods and services • Entrepreneurs are the "risk takers" who produce a good or service that they believe will succeed in the marketplace. Goods Good – physical, tangible(touchable) product i.e. – Automobiles, Video Games, Cell Phones, CD’s, Tickle Me Elmo, etc… Services Service – a non-tangible action or activity that is performed for someone else i.e – Financial Advisor, Stock Broker, Movies, Dentist, Teachers, etc.. Need – a basic requirement for survival e.g. – food, clothing, education, etc… Want – not a basic requirement for survival; a means of expressing a need e.g. – cheeseburger, Abercrombie and Fitch, University of Georgia, etc… OR Goods and Services Chart Item Good/Service Want/Need advertised Market Classify the Factors of Production in the following scenario: •You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. The information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook cook used his knowledge of mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door. Classify the Factors of Production in the following scenario: Entrepreneur 1. Owner _________________________________ Physical Capital 2. Computer _________________________________ Physical Capital 3. Chief baker’s monitor _________________________________ Physical Capital 4. Kitchen _________________________________ Labor 5. Cooks _________________________________ 6. Knowledge of mixing dough _________________________________ Human Capital Land 7. Salt, flour, eggs, and milk _________________________________ Physical Capital 8. Sink _________________________________ Land 9. Tomato sauce, cheese, and sausage _________________________________ Physical Capital 10. Oven _________________________________ Physical Capital 11. Cardboard box _________________________________ Labor 12. Delivery person _________________________________ Physical Capital 13. Company car _________________________________ Households and Firms Household – Person or group of people living in a residence; consumers of goods/services Firm – business organization that uses resources (inputs) to produce a product, which it then sells Product Markets Product Markets – Houses and firms interact; producers sell their goods and services to consumers Ebay, Amazon, the mall, McDonalds, Babies R Us, etc. Households are buyers of goods and services Firms are sellers of goods and services Factor Markets Factor Markets – the markets where productive resources (F.O.P) are bought and sold Labor - Firms (businesses) hire workers and pay them salaries Land - Purchase/rent land Capital - Use money from households (spending,investment, etc) to purchase capital goods Circular-Flow Diagram Circular-flow diagram – visual model of a free market economy simplified into households and firms communicating in the factor and product markets Shows how dollars and stuff flows in an economy from households to firms and vice versa. Circular Flow Model - shows the flow of money and inputs/outputs from and to firms and households in a market economy Consumer Spending Business Revenue Product Market Consumer Goods and Services Purchased Households Firms Land, Labor, Capital, Entrepreneurs Income, Wages, Salaries Goods and Services (outputs sold Inputs for production Factor Market Payments for the F.O.P Daily Assignment - Circular Flow Model of Economic Activity Consumer Spending Business Income 1. _________________________ 1. _________________________ Product Market Goods Purchased Goods Offered 1. ___________________________ 1. ______________________________ 2. ___________________________ 2. _______________________________ Firm Household 1. ________________________ Firm 1. _____________________________ Firm 2. _____________________________ Inputs for Production Factor of Production Offered 1. ___________________________ 1. ___________________________ Weekly Income 1. __________________ Factor Market Payments for F.O.P 1. _________________ Circular Flow Model of Economic Activity Consumer Spending Business Income 9.49 1. _________________________ 1. _________________________ 9.49 Product Market Goods Purchased Goods Offered Tacos Burritos 2. ___________________________ Fajitas Fajitas 1. ___________________________ 1. ______________________________ 3.___________________________ Household Elisa 1. ________________________ Marcella 2. ________________________ Firm Cilantros Firm 1. _____________________________ Books a Million Firm 2. _____________________________ Input for Production Factor of Production Offered 1. Labor/Salesperson 1. ___________________________ 2. 3. Weekly Income 200 1. __________________ Factor Market Stockers _________________________ Coffee Sellers _________________________ Cashiers ________________________ Payments for F.O.P 3000- Lease 1. ________________ 2200 – Electric 2. ________________ 3. ________________ 400 - Water Circular Flow Model of a Mixed Economy Consumer Spending/Investing Business Income/Revenue Product Market Goods and Services Sold Goods and Services Purchased: Households Expenditures Expenditures Land, Labor, Capital, Entrepreneur Income to Households/Individuals Firms Inputs for Production (F.O.P.) Factor Market Payment for F.O.P. – Wages, rent, capital goods PPF Model – shows/illustrates the possible combinations of output that can be produced given the productive resources available Used to visually represent tradeoffs and opportunity cost Good A A B C Good B Production Possibilities Frontier Activity Round Links Smiles 1 2 3 4 5 • • • 1. 2. 3. Materials for each student: – 8 sheets of 8 1/2 x 11 paper 1 roll tape 1 pair scissors 1 pencil or pen Conducting the experiment: – For each round, students begin with 16 strips, 16 rectangles, a pen, a roll of tape, and a pair of scissors. You will have 4 minutes of production time for each round. Round 1: Make only links (maximum 32). Round 2: Make only smiles (maximum 32). Round 3: Make half links and half smiles (16/16) Quick quizzes, Questions for Review and Problems and Application’s due Tuesday night, 1-17 by 9 pm (answers will be posted after 9). Chapter 2 Test Wednesday, 1-18. Homework and Youtube videos due on Wednesday, 1-18 included in manilla folder. Prequiz – Due Thursday, 1-19 at 11:45am 1. 2. 3. 4. 5. 6. 7. What resources were scarce? What was the opportunity cost of producing all smiles? What was the opportunity cost of producing all links? How did you increase efficiency? When did you experience underutilization/inefficiency? What allowed for growth? How does this relate to the real world? Individual PPF – Individual tradeoffs Constant opportunity cost - Linear shape of the curve represents a perfect/proportional tradeoff between two goods Work A 1 Hour B 30 Min C 0 30 Min 1 Hour Play Society’s PPF – social tradeoffs Shape of the curve is generally bowed outwards Law of increasing opportunity cost - as production increases, the cost to produce an additional unit of that product increases as well. Some resources are specialized to only efficiently produce one product so using those specialized resources on a different product is inefficient 30 29 25 10 What is the PPC Model? PPC Model – shows/illustrates the possible combinations of goods and services that can be produced by a single nation, firm or individual given the productive resources available What does it show? That nothing is free and that everything has an opportunity cost If society wants more of one thing then it must give up something in return Used to visually represent opportunity cost •What basic economic concepts can it be used to model? •Scarcity •Tradeoffs •Opportunity cost •Economic growth •Efficiency •Unemployment Quantity of Computers Produced F 3,000 Production Possibilities Frontier A 2,200 2,000 B 1,000 E 0 300 600 700 1,000 Quantity of Cars Produced Efficiency – using resources in such a way as to maximize the production of goods and services * Points along the curve, (a – c) * Efficiency Underutilization – using fewer resources than an economy/business is capable of; inefficient use of resources Points inside the curve, d (inefficient use of resources) Underutilization /Inefficiency Growth (future technology) – the change in ability to produce, reflects a change in the curve; Currently unattainable level of production New frontier, point e, (usually as a result of new technology) Growth Unattainable/Economic Growth C F A Underutilization /Inefficiency B Frontier /Efficiency D E 1,000 Increase in available resources Decrease in available resources 39 PPC Activity 12 Good B 10 8 6 4 2 0 1 2 3 4 5 Good A 0 1 2 3 4 5 Good B 12 10 8 6 4 2 6 0 6 Good A Answer the following questions based on the model above: 1. The opportunity cost of increasing production from Good A from zero units to one unit is the loss of __________ unit (s) of Good B. 2. The opportunity cost of increasing production from Good A from one unit to two units is the loss of __________ unit (s) of Good B. The total loss is ____ 3. The opportunity cost of increasing production from Good A from zero units to 6 units is the loss of _________ unit (s) of Good B. Review - Guns or Butter PPF 1. How many guns can be produced when no butter is produced? ________ 2. How much butter can be produced when no guns are produced? _______ 3. The opportunity cost of increasing the production of guns from 0 to 40 units is ________ units of butter. 4. What would it say about this society if the production decision was to produce at the (20, 45) point; assuming that it takes 30 units of butter to provide basic foodstuffs to society and 40 units of Guns to protect their This society cares more about military than providing consumer goods for the people society? ___________________________________________________ PPF Exercise A 200 B 180 160 140 C 120 100 25 55 60 60 D 80 60 40 20 E 5 1. 2. 3. 10 15 20 25 30 35 40 45 50 55 60 Along the curve (frontier) Inside the curve Outside the curve PPF Exercise 1. 2. 3. 4. 5. True False True True False Shoes 40 A 35 B 30 25 20 C 15 D 10 5 E 10 20 30 40 50 60 70 CD Players Due Today 8-30 Chapter 1 - 2 1. Chapter 1 Notes 2. Chapter 2 Notes 3. PPF Practice 1 4. PPF Practice 2 5. Circular Flow Practice Review Junk!!! Agenda 1. Short Answers 2. Prequiz – Chapter 3 Prequiz A • Due Wednesday – Online Video Quiz “Comparative and Absolute Advantage” Include on your Test 1.Name 2.Date 3.Class Period 4.ID: A, B or C 5.Chapter 2 Test Junk!!! Extra Credit 1. Write a positive statement about the benefits of investing in human capital. 2. Write a normative statement about the government’s role in the economy. 3. Explain your interpretation of the political cartoon: 1. Illustrator’s message 2. Clues (people, symbols etc.) 3. Do you agree or disagree?