Economics – Unit 1 – Fall 2014
8/7: Economic Decision Making – Study of Choices
Economics – study of how individuals/nations decide to allocate (distribute) scarce resources
One of the main ways to allocate is by putting a price on the resources:
Price – what is used for Allocation of Resources
* We study Economics to determine how to allocate resources due to SCARCITY
Scarcity- most basic economic problem- we do not have everything we need or want- permanent
1.
2.
3.
4.
when items are BOTH limited (not enough) and desired (people want)
always exists – EVERYTHING is considered scarce in economics so we make choices
not just natural resources are scarce – goods and services may also be scarce.
Time – the most scarce resource
Resource – something used to produce a good/service
Resources in Economics are called Factors of Productions
Factors of Production – need 4 things to make a product/good (tangible) or a service
1.
2.
3.
4.
Labor – workers
Land – natural resources – oil, water, minerals, wood, natural gas
Capital – tools: machinery, factories, trucks (things to make product)
Entrepreneurship – idea man, risk takers
Bakery Example: Land – wheat Labor – baker Capital – mixer Entrepreneurship – owner/risk
Zoo Ex: Land – 25 acres
Labor – Vet
Capital – bulldozer/animals Entrepreneurship - you
CELL can be used to remember the 4 factors of production
C – Capital
E – Entrepreneurship
How do we decide what to produce?
L – Land
L - Labor
Or how do we decide what to have in the zoo?
We normally make decisions based on the:
Trade-Off – what you have to give up and…
Opportunity Costs - best alternatives – your second choice - the cost/value of the next best
alternative given up when making a decision
1.
2.
3.
4.
Make decisions where opportunity cost will be the lowest.
Before we can figure out opportunity costs we need to know the trade-off.
All decisions have opportunity costs.
Opportunity cost is NEVER a dollar amount – it is the value.
8/8:
“Thinking at the Margin” – Marginal Cost vs Marginal Benefit – (Oreos)
1. Margin – addition of or consuming one more unit
a. Marginal Benefit – good that comes from adding one more unit
b. Marginal Cost – what is cost from adding one more unit
c. If MB>MC then you should eat one more biscuit
d. If MB<MC then you should not eat one more biscuit
2. Utility – satisfaction you get from consuming a unit
a. Used to determine if one more unit will be consumed
b. Law of Diminishing Marginal Utility – as resources are consumed each additional
unity of a resource is less useful than the previous unit
c. Oreo Example – the satisfaction of consuming each additional oreo decreases
3. Thinking at the Margin (Cost/Benefit Analysis)
a. Deciding when the cost outweighs the benefit
b. Example: cost vs benefit of doing hair
i. boy just washing and going
ii. girl – wash dry straighten – 45 minutes of girl styling hair - benefit of
looking great!
iii. If boy added additional time to 45 minutes gets no more benefit – hair
looks the same.
c. Must decide if it is worth the cost.
8/11:
Production Possibilities Curve or Production Possibilities Frontier (PPF)
1. A graph that shows all of the combinations of goods and services that can be produced if
all of society’s resources are used efficiently
a. Production – process of creating goods and services using the factors of
production
b. Efficiency – using your limited resources to produce the most goods and services
OR using all resources as efficiently as we can
2. Production possibilities graph shows:
a. alternative ways that an economy can use its resources
b. the most you can make using all your resources
c. us our Opportunity Costs
3. Production possibilities frontier is the line that shows the maximum possible output for
the economy.
a. Shows production at the most efficient level
b. Shows production when wasting NO resources
Production Possibilities
Shoes (millions of pairs)
16
14
12
Unattainable
10
8
6
Y-Values
Underutilization
4
2
0
0
5
10
15
20
25
Watermelons (millions of tons)
This graph shows: Production of one product over another with the resources that we
have available.
Should not be at Underutilization – Inefficient - something must be wrong – machines
broken, problems with weather etc. HOWEVER, Producers may choose to underutilize
production if a rise in price is expected in the future or if they want to save resources.
If production is Unattainable it means that there are not the resources currently to produce
at this point. However, there may be a shift to this area through the use of technology
and/or becoming more efficient - will promote economic growth. This is considered an
outward shift or shift to the right.
Production Possibility Graphs will show us our Opportunity Costs – must look at our
resources, technology, what we will be giving up and decide the best choices for
economic growth.
Quiz Tues 8/12 over Opportunity Costs, Factors of Production, Production Possibilites Curve
Quiz will cover the following: Factors of Production, Production Possibilities Graphs
including frontier, underutilization, unattainable, Opportunity Costs; review all
information covered in notes and worksheets completed in class
8/12: Quiz/Read Chap 2 – Sec 2
Division of Labor/Specialization – allows for better production/efficiency
1. Division of Labor – work is divided up so each person is only doing part of the process
2. Specialization – specialize in one aspect of production -workers become ‘experts’ at one
task so that they can produce quicker
Economies work off a Circular Flow of Economic Activity
Circular Flow Model: How Goods and Services are transferred in the two types of markets:
Factor Market – Market for Resources (Factors of Production)
Product Market – Market for Goods/Services
Circular Flow Model…………..
1. Demonstrates flows of money and goods and services
2. In our economy, all decisions are made voluntarily to benefit ourselves
3. Voluntary Exchange
a. Buyers and sellers are not forced into product or factor market purchases
b. Both buyer and seller are satisfied in Voluntary Exchange
4. Parts of the Circular Flow
a. Individuals –us
b. Businesses – Publix, AT&T, etc
c. Product Markets – goods and services
1. shows how the households give money payments to the business
2. In return the businesses give the households goods/services
d. Factor/Resource Markets – Factors of Production: Land, Labor, Capital,
Entrepreneurship
1. Shows how households give service/work for businesses
2. In return the businesses give households money
e. Counterclockwise – flow of money
1. Individual buy products
2. Money goes to businesses
3. Then goes to buy factors of production
f. Clockwise – Resources – flow of goods and services
5. OVERVIEW:
a. Households ultimate goal is to get as many products as they can.
b. Businesses want to make as much money as possible.
c. To achieve this, businesses will buy Productive Resources (human, capital, natural)
from households to make a product
d. Then households will purchase the products so the companies will make a profit
(money).
TEST – TUESDAY 8/19 – CHAP 1-3 & CH 1-3 STUDY GUIDE DUE
8/14: 3 Basic Economic Questions:
Because of scarcity, every society must find ways to answer the 3 basic economic questions:
1. What goods and services should be produced?
2. How should these goods and services be produced?
3. For whom should we produce these goods and services?
Societies answer the three economic questions based on their values. According to how
these questions are answered determines the type of economic system present in that
country. Traditional, Command, Market, Mixed
Economic Systems - a method to distribute the factors of production (resources)
1. Market Economy – US, Brazil, Japan, England, Australia, Germany, etc
a. Also known as capitalism or free market
b. Consumers rule how economic questions are answered
c. Advantages
i. Little or no govt interference
ii. Self-regulated and efficient distribution of resources
iii. Motivation to start businesses to earn profits
iv. Private property allowed
v. Potential for high economic growth
vi. Free enterprise system
d. Disadvantages
i. No public goods
ii. Basic needs not guaranteed
iii. Unemployment and business closure inevitable
iv. Economic swings are inevitable
v. Economic equality hard to guarantee
vi. Uncertainty
vii. Not enough public goods/services
2. Traditional Economy – Haiti, African countries with tribes
a. Economic questions answered by custom/time honored methods
b. Very few traditional economies left (usually in developing countries)
c. Advantages
i. Everyone has a job – defined economic roles
ii. Basic needs met
d. Disadvantages
i. Low standard of living
ii. Little hope for advancement or education
iii. Little societal wealth
3. Command Economy – North Korea, China, Cuba, etc
a. Also known as Communism
b. Government answers the 3 economic questions
c. Advantages
i. No unemployment, guaranteed employment and basic needs
ii. Health care, education, etc paid for by govt
iii. Everyone equal
iv. Can make changes quickly
v. Protection against adverse economic events (layoffs, illness, etc)
d. Disadvantages
i. No incentives
ii. No private property
iii. No profit motive or incentive
iv. Not designed to meet the wants of consumers
v. Little economic growth
vi. Low quality goods
The US economic system is Mixed between Command and Market, but predominantly Market.
Government involvement is mostly in the form of:
providing public goods, regulating products and competition, redistributing income through
taxation, and providing a social safety net.
Every economy has the following Economic Goals: Efficiency, Freedom, Security and
Predictability, Equity, Growth and Innovation
Five Economic Goals –
Economic Efficiency: societies strive for efficiency and maximize what they can
get for the resources they have
Economic Freedom: value placed on the ability of people/businesses to make their
own choices in relationship to their business without interference from govt
Economic Security and Predictability: reassurance people get from knowing
goods and services will be available when needed and that they will receive
payments when expected; also provides government programs for people
experiencing unfavorable economic conditions
Economic Equity: way to divide up the economic pie – how society decides to
distribute wealth - what should be provided for ill or disabled since they are
unable to work; should nurses make as much as lawyers, etc
Economic Growth and Innovation: Innovation providing for economic growth, ie
technology is changing the way people work, conduct business, etc.
8/18: REVIEW
Public Good is a shared good or service for which it would be impractical to make
consumers pay individually and to exclude nonpayers
Examples – library, park, roads
*Funded by the public sector, the part of the economy that involves transactions
of the govt
*Free Rider is someone who would not choose to pay for certain good or service,
but who would get the benefits of it anyway if it is provided as a public good.
Private Good – goods purchased by consumer
Market’s Self–Regulating Nature - Everything we do in economics in our system is
based on a theory by Adam Smith –“Invisible Hand in the Marketplace” phenomenon
– buyer and seller considers only their self-interest, or their own personal gain. Selfinterest is the motivating force in the free market.
Self-interest is the motivating force in the free market.
Competition – regulating force of the free market - producers struggling for consumer
dollars in a free market.
Interaction of buyers/sellers, motivated by self-interest and regulated by competition, all
happens without a central plan – Invisible Hand phenomenon
Externalities – economic side effect of a good or service that generates benefits or costs
to someone other than the person deciding how much to produce or consume
Building of a new dam and creation of a lake generates:
Positive externalities – swimming, boating fishing, source of power
Negative externalities – loss of wildlife habitat, overcrowding due to tourism
Division of Labor/Specialization – specialize in one aspect of production– allows better
production/efficiency
Underutilization - Using fewer resources than an economy is capable of using
Production Possibilities Graph - Graph that represents alternative ways to use an
economy’s resources
Shortage – Temporary limited amount of a resource
Economic Goals - Economic efficiency, security, predictability, and economic freedom
Consumer purchases - Most effective way consumers make their decisions known to
businesses
Factors of Production - Resources used to make all goods/services
Efficiency - One that used its resources to make the most goods/services
Causes PPC to shift to the right - Increased technology
Business Cycle - Economics cycle that shows major, prolonged fluctuation of movement
in the economy rather than day to day
Scarcity - Limited quantities of resources to meet unlimited needs or desires
Product Market - Market in which households purchase the goods/services
Centrally Planned Economy = Command Economy
Basic Economic Questions – whoever answers these questions determines what type of
economy it is (What, How, By Whom)
What does the PPC show? Maximum amount an economy can produce
Labor - Paid effort that people devote to a task
Thinking at the Margin – what are benefits of adding one additional unit
Positive and Negative Externalities – vaccinations, pollution from factories
Guns and Butter – term used to discuss Opportunity Costs
Specialization – one person has one perfected skill – Division of Labor
Entrepreneur incentive is Profit
Motivation of Economics – Self-Interest
Temporary Assistance for Needy Families – safety nets – Medicare, Unemployment, etc
Public Good – something provided by the government – library book
Private Good – what is purchased as a consumer
Copyright & Patents – protects research & promotes innovation