MONETARY POLICY

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Introduction to Economics
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Economics is a Way of Thinking,
a Thought Process
You already know and use some of the
economic principles we will discuss
 Your informal economic education began
when your parents gave you your first
dollar to spend
 You had to choose the combination of
economic goods and services
(commodities) to buy, that would give you
the greatest satisfaction (utility)
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Common Knowledge in our
Economic System:
That all commodities have a price
determined by a market (legal or illegal)
 Usually
price is thought of as the
monetary sacrifice that must be made to
obtain a commodity
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The monetary price of a
commodity
may not be the true or total cost of
obtaining the economic good or service



Bag Lunch vs. Buying Lunch
Living on Campus vs. Commuting
Eating Out vs. Eating at Home
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Introduction to Economics
Definition of economics:
A social science concerned with the way
an individual or society CHOOSES to
employ limited resources having
alternative uses to produce economic
goods and services for present and future
consumption.
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Let's take this definition apart
and analyze it.
Think of economics as being a core area,
surrounded by outlying extensions into
areas more usually associated with other
disciplines.
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Core Area is Considered a
SOCIAL SCIENCE
Turf Management
Landscape Tech.
Livestock Mgmt.
Economics
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Because it Deals with Human
Activity.
Economics deals with a limited range of
human activity characterized by
RATIONAL BEHAVIOR, and the
interaction of individuals upon one
another through the mechanism known
as a
MARKET.
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Rational Behavior:
An action well suited to achieve specific
goals within the limitations and
capacities of an individual.
You learn from your mistakes, and do not
repeat them.
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Limited Resources:
Resources are also called "factors of
production" or "inputs."
 LIMITED
implies the concept of
SCARCITY
 For all practical purposes, human wants
may be regarded as limitless. Do we
ever have enough goods and services?
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Scarcity
Scarcity simply means that
there is not enough FOP's in
the world to create all of the
goods and services that people
desire at a PRICE = 0.
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Scarcity
The supply of resources
available at any particular
time, only allow for the
production of a small fraction
of the goods and services that
people desire.
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Factors of Production (Inputs)
Inputs
Production
Process
Output
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Resources:
AKA "factors of production", or "inputs"
 LAND
Property Resources
 CAPITAL
 LABOR
 ENTREPRENEURSHIP
Human
Resources
(Management)
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LAND
All
raw materials available in
nature, i.e. land, coal, timber, rivers,
air , fish, etc.
– Nonrenewable resources
– Renewable resources
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CAPITAL
Man made aids to the
production process. Tools,
machinery, and buildings
used to produce other goods
and services.
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LABOR
All the human physical and
mental skills that can be used
in the production of goods
and services.
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ENTREPRENEURSHIP
Also known as MANAGEMENT.
The ability to organize Production,
innovate, and take risks. Ability to
collect information, and analyze that
information to solve problems or
create opportunities.
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What does a entrep. do?
Takes
the initiative in combining
land, labor, and capital in order to
produce a good or service.
Undertakes
basic decision-making
for the business.
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What does a entrep. do?
Takes
risk of losing money or
going bankrupt.
Forms
a business and introduces
new products and techniques of
production.
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Owners of resources receive
payments
LAND
receives RENT
CAPITAL receives INTEREST
LABOR receives WAGES
 MANAGEMENT receives PROFIT
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Owners of resources receive
payments
LAND
receives RENT
CAPITAL receives INTEREST
LABOR receives WAGES
 MANAGEMENT receives PROFIT
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Limited resources have
alternative uses
CHOICES must be made!!!
How will these scarce resources be used ?
(1) Will we use oil to make gasoline, plastic,
fertilizer etc.
(2) Use fertilizer to raise corn, soybeans,
tobacco, cotton, turf, hostas, tulips etc.
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Limited resources have
alternative uses
(3) Use corn to feed people, feed hogs to
produce pork, feed beef cattle to
produce beef, feed dairy cattle to
produce milk.
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HOW DO WE ALLOCATE THESE
SCARCE RESOURCES ?
 WHAT
SHOULD WE PRODUCE ?
 HOW
MUCH OF EACH GOOD OR
SERVICE SHOULD WE PRODUCE ?
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ECONOMICS?
So far we have determined
that economics is the study
of the allocation of scarce
resources to satisfy
unlimited human wants.
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Produce economic goods and
services for
present and future consumption
 Factors
of production are used to
produce things that people want.
 These
"things" are known as
commodities. Commodities consist of
goods and services.
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Goods are Tangible Items that
Consist of:
Economic
Goods
– Consumer Goods
» Durable Goods: last 3 years or longer
» Non-durable Goods: last less than 3 years
– Capital Goods
Free
Goods
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Economic Goods
Tangible items in which the
quantity demanded by society
exceeds the quantity available at
a price equal to zero.
Qd > Qs @ P = 0
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Consumer Goods
Are Economic Goods
used directly by consumers to
generate satisfaction.
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Capital Goods
Man-made goods used to
produce consumer goods.
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Free Goods
Tangible items in which the
quantity available exceeds the
quantity demanded at a price
equal to zero.
Qd < Qs @ P = 0
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Services Are Intangibles Such as:
mowing, custom combining,
education, tractor repair,
income tax services,landscape
planning, hair cuts, etc.
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Production
The act of making goods and
providing services.
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Consumption
The act of using goods and
services to satisfy needs and
wants.
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Present Consumption
Consumption within a short
period of time, also referred to as
short run consumption.
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Future Consumption
Consumption outside the short
period of time
(long run consumption).
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Price:
RATIONS consumption over time
given a certain income!!!
Grocery Store Example.
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SUMMARY
Three key words in our definition and
discussion?
1. Scarcity
2. Choice
3. Time
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Law of Scarcity
Economic resources are scarce!
 There
are never enough at any given time
to produce all the things that people want
at a price = 0.
 Scarce
resources can be increased, if at
all, only through effort and sacrifice.
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Choice
 Scarcity
forces every economic system,
every business, every individual to make
choices.
 A decision
to produce one commodity
frequently implies a decision to produce
less of another commodity (production
possibilities curve).
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Choice
 Often,
the decision to produce a
particular commodity may lead to the
decision to completely stop production of
another.
 In
other words, some tradeoffs must be
made since we do not have the resources
to produce the variety and quantity of
commodities we would like to produce.
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Choice
PRICES assist us in determining which
choices to make concerning:
 What
 How
to produce ?
much to produce ?
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Time
Production requires time,
consumption requires time, choice
requires time, adjustments to price
changes or resource limitations
requires time.
Nothing about economics is
instantaneous !!!
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Time
 There
is always what we call a LAG in
response to changes, or shocks to the
economic system.
 One
of the functions of PRICE is to
ration out resources and commodities
over time.
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Time
 Time
itself is scarce. Do we ever have
enough time?
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CONCLUSIONS
 Economics
is fundamentally concerned
with choices or decisions concerning the
use of resources (factors of production).
 Problems
of choice arise when there are
alternative ways of achieving a given
objective.
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CONCLUSIONS
 Economics
develops specific criteria
which define the conditions for making
the best use of society's resources.
 We
employ these criteria as guide lines
for formulating and evaluating decisions.
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