WELCOME
TO
ECONOMICS
Are YOU as EXCITED as I AM?
Top Ten
Reasons to
Study
Economics
•
1. Economists are armed and dangerous: "Watch out for our invisible
hands."
•
2. Economists can supply it on demand.
•
3. You can talk about money without every having to make any.
•
4. You get to say "trickle down" with a straight face.
•
5. Mick Jagger and Arnold Schwarzenegger both studied economics and
look how they turned out.
Spending Time
with Mrs. Burton?
•
6. When you are in the unemployment line,
at least you will know why you are there.
•
7. If you rearrange the letters in
"ECONOMICS", you get "COMIC NOSE".
•
8. It is the only discipline where two
people can share a Nobel Prize for saying
contradictory things. i.e. Dr. Douglas
North & Mrs. Burton
•
9. When you get a failing grade, you can
tell everyone that you are just researching
the law of diminishing marginal utility.
•
10. When you call 1-900-LUV-ECON and
get Kandi Keynes, you will have
something to talk about. Don’t
understand this? You will later this
semester.
Why Are You Studying
Economics?
• 1. It explains why things
are as they are
• 2. It predicts what is likely
to happen under certain
conditions.
• 3. It makes us wise
decision makers in our
democratic world
• Understanding
– Economic ideas are all
around you. You cannot
ignore them.
Educational
Attainment
Unemployment
Rate
Average Annual
Earnings
1-3 years of high
school
9.3
$25,300 (HS dropout)
4 year of high school
no diploma
8.1
NA
HS graduate
4.7
$32,300
Some College, no
degree
4.0
$38,500
Associates
3.3
$38,900
Bachelors
2.4
$52,400
Masters
NA
$70,900
Doctorate
1.6
$86,400
Why is Economics Worth Studying?
• Expanded Career
Opportunities
– Most students of
economics don’t
become economists.
– But knowledge of
economics is vital in
many fields such as
banking, finance,
business, management,
insurance, real estate,
law, government,
journalism, health care
and the arts.
Chapter 1: The Economic
Way of Thinking
NO!
Section 1: Scarcity: The Basic
Economic Problem
•
•
•
•
•
•
•
Economics is about CHOICE driven by SCARCITY.
1. What is Economics?
2. Define wants.
3. Identify 5 ‘wants’ in your life.
4. Define needs.
5. Identify 5 needs in your life.
6. What is scarcity?
What is Scarcity?
• Scarcity is a situation in which resources are limited
but can be used in different ways; so one good or
service must be sacrificed for another.
• 7. What is the Fundamental Problem in Economics?
• 8. What are the 2 principles which govern scarcity?
What is Economics?
•
•
•
•
•
•
9. Define goods.
10. List 5 goods in this room.
11. Define services.
12. Identify 5 services provided here at school.
13. Are you a consumer or producer?
14. Identify 5 producers which supply goods/services to our school.
Scarcity Leads to Three
Economic Questions
15. What is question 1?
16. What are we producing in this
classroom?
17. What is question 2?
18. What is question 3?
The Factors of Production
(Resources)
• 19. What is the definition
for Factors of
production?
The four categories of
resources are:
• Land
• Labor
• Entrepreneurship
• Capital
– Human capital
– Physical capital
LAND and LABOR
• 20. Land includes all
_______________
• 21. These can be renewable.
Give 5 examples.
• 22. Or nonrenewable. Give 5
examples.
• 23. Labor is human
_________, _____________,
and _________ used by
workers in the production of
goods and services.
Physical Capital
24. Physical capital
is all the
resources made
and used by
people to
__________ and
________ goods
and services.
What is Your Human Capital?
• 25. People invest in human
capital, which is all the
_______________ and
__________ gained
through experience.
• 26. When workers posses
human capital, they are
more ___________ and
therefore have better
chance at securing and
holding a job.
Entrepreneurship
•
27. Entrepreneurship is the
combination of what four
components?
•
28. THINK: What is the
difference between an
inventor and an innovator?
•
29. What do they risk in the
hopes of making a profit?
•
30. THINK: Why are
entrepreneurs important in
an economy?
Entrepreneurs take risk and
commit time and money to
a business without any
guarantee of profit.
•
Section 2: Economic Choice
Today: Opportunity Cost
• 31. Productive resources are limited.
People cannot have all the goods and
services they want. What encourages
people to act in certain ways and
guides their resources?
• 32. What are 5 incentives you value?
• 33. Define utility.
• 34. What are 5 items with high utility
in this classroom?
• 35. When we make decisions based on
the most profitable use of our
resources it is known as
_________________.
Unlimited Wants with Limited Resources
• 36. What does your text mean “There is
no such thing as a free lunch”?
• 37. Record an example in your life where
you had to make a choice.
• 38. What people give up when they
make a choice is known as a
______________.
• 39. Define opportunity cost.
•
Scarcity necessitates choice; therefore
trade-offs cannot be avoided.
• As a result, they must choose some
things and give up others.
• 40. Give 5 examples of trade-offs you
have experienced.
COST: What You Must Give Up
• 41. What is Opportunity cost?
• Represents the value of forgone
alternatives
• Only actions have costs; "things"
have no cost independent of
decisions about using them.
• 42. What is a Sunk Cost?
• A previously incurred
and irreversible cost.
• Examples?
• Your reputation
• Your GPA
45. What is meant by
Ceteris Paribus?
Ceteris paribus means
“other things being
equal.”
Is a Choice ALWAYS
Rational?
• 43. Why is the success of
a market economy
dependent on Rational
Choices?
– Using the available
resources to satisfy most
effectively the wants of the
person making the choice.
• 44. What type of economy
does NOT have an
incentive mechanism of
price and profits to guide
the decisions?
Choosing is Refusing
In making our choices, we respond to incentives.
Tuition and books
(4 years at $10,000 per year)
$40,000
Opportunity cost of college time
(4 years at $20,000 per year
$80,000
Total opportunity cost
$120,000
45. THINK: What are incentives?
• An incentive is a reward or a penalty—a “carrot” or a “stick”—that encourages or
discourages an action.
• If the cost of something rises, we try to find a less costly alternative. (substitution
effect)
– If the benefit of something rises, we do more of that thing.
– A falling price (or a low price) means that buyers bear lower opportunity costs.
• 46. What is an incentive YOU respond to?
Making Decisions at the Margin
means looking at the incremental changes a decision causes.
• This involves weighing and
balancing the marginal costs
and benefits of any given
action.
• 47. What is marginal cost?
• 48. How is this political
cartoon an example of
marginal cost?
• 49. What is marginal benefit?
• 50. Give an example of ONE
good or service you choose
which has given you a
marginal benefit.
Marginal Analysis
•
•
•
•
•
Marginal benefit: The extra benefit
resulting from a small increase in some
activity.
Marginal cost: The additional cost
resulting from a small increase in some
activity.
Cost and price are not the same, in
economics terms.
Prices reflect opportunity costs and help
buyers make decisions.
Few choices are "all or nothing"
decisions.
• A person’s willingness to bear costs is
‘situation-specific’ – would change if
the situation changed!
51. Cite an example of a
“situation-specific” choice
you have made.
The Marginal Principle
and TV Time
• If the opportunity
cost of TV time is
$0.35 per hour and
pedaling is not
required for TV time,
the marginal
principle is satisfied
at point n, and the
child will watch 20
hours of TV per
week.
If Pedaling is Required
• If pedaling is required
and the discomfort of
pedaling is $0.85 per
hour, the marginal cost
of TV time is $1.20
(equal to $0.35 +
$0.85), and the
marginal principle is
satisfied at point m,
with only 3 hours of TV
time per week.
Opportunity Cost and
Production Possibilities
• A drought decreases the
amount of electric power
available for aluminum
smelting and irrigation,
shifting the production
possibilities curve inward.
• The region’s economy
moved from point i to
point f, with aluminum
production dropping to
zero.
How do Nations Decide?
• The same way
you do – CostBenefit Analysis
• Determine the
costs of each
choice and the
benefits derived.
• Use your brain,
not your heart!
So What are the Possibilities?
• 52. What do
economists call the
diagram they use to
show the
combinations of goods
and services our
economy can
produce?
Production Possibilities Frontiers
22
21
19
F
E
D
C
16
•
Coconuts
B
10
A production possibility
frontier is a model that
illustrates both SCARCITY
and CHOICE by assuming
only 2 goods may be
produced
A
1
2
3
4
5
Fish
Production Possibilities Frontier
• We also must assume that all
resources depicted on the PPF
are fixed and will not change.
• Given that all productive
resources are fully and
efficiently employed.
• The points directly on the curve
represent a nation’s resources
fully employed.
• Points inside the curve do NOT
fully use all resources
• Points outside the curve can
never be reached in the nation’s
current economic situation,
unless you go in DEBT
Resources NOT fully
employed
• When the economy is
at point i, resources
are not fully
employed and/or
they are not used
efficiently.
NOT attainable with Given
Resources
• Point g is
desirable because
it yields more of
both goods, but
not attainable
given the amount
of resources
available.
Resources FULLY and
EFFICIENTLY employed
• Point d is one of the
possible combinations
of goods produced
when resources are
fully and efficiently
employed.
Scarcity and the Production
Possibilities Curve
• To increase the
amount of farm
goods by 10 tons,
we must sacrifice
100 tons of
factory goods.
Resources NOT
perfectly adaptable
• The PPF curve is
bowed out because
resources are not
perfectly adaptable
to the production of
the two goods.
• As we increase the
production of one
good, we sacrifice
progressively more
of the other.
Shifting the Production
Possibilities Frontier
Curve
• To increase the
production of
one good
without
decreasing the
production of
the other, the
PPF curve must
shift outward.
ECONOMIC GROWTH
53. The PPF curve shifts outward
as a result of what 2 changes?
a. An increase in the
economy’s resources, or
b. A technological innovation
that increases the output
obtained from a given
amount of
resources.
• Whenever the production
possibility frontier shifts
outward, the economy is
said to have experienced
economic growth.
Additional Goods
Possible
• From point d, an
additional 200 tons
of factory goods or
20 tons of farm
goods are now
possible (or any
combination in
between).
• This is most often
created by an
increase in
resources.
Negative Economic Growth can be
caused by the Destruction of
resources.
Examples are
disasters or war.
Good X
Specialized growth
pivots the production possibility frontier in the direction of more output in
the industry affected by the technological change.
General Growth
Specialized Growth
New PPF
New PPF
Starting PPF
Starting PPF
Pretzels
Pretzels
The Economy of Castaway
Island
Data Point Fish Caught per Day Coconuts Collected per Day
A
5
0
B
4
10
C
3
16
D
2
19
E
1
21
F
0
22
53. On your paper create a Production Possibilities Graph
from this data.
PPC Shows the Opportunity
Cost of Each Choice
• 54. What is the name for the condition in which
economic resources are being used to produce the
maximum amount of G and S ? (allocative efficiency)
• 55. If they are not being used to their full potential we
have what situation? (market failure)
• 56. How does a government try to inhibit or decrease
market failure? (policy changes and regulation)
Law of Increasing
Opportunity Costs
• 57. As production
switches from one
product to another,
increasingly more
resources are needed
to increase production
of the second product,
which causes WHAT
to rise?
Changing Production Possibilities
• 58. If a PPF shifts to the right or outward, what can we interpret that to
mean about our economy?
• 59. If the PPF shifts to the left or inward, what assumption can we make
about our economy?
Microeconomics and
Macroeconomics
60. What is
Microeconomics?
Examines the individual
components of the
economy, through
interactions of consumers
and producers
61. What is
Macroeconomics? The
analysis of economic
aggregates that describe the
whole economy
62. What is the concern of
POSITIVE ECONOMICS?
• Positive economics
concerns the forces that
affect economic activity,
and predicts the
consequences of
alternative actions.
•
Positive economic
statements have to do
with facts.
• They may involve
current, historical, or
even future facts.
• It is the focus of most
modern economic
reasoning.
63. What is the concern of
Normative Economics?
Normative economic
statements have to
do with behavioral
norms.
They are judgments
as to what is good or
bad.
• Normative economics
answers the question,
What ought to be?
• Most economists shy
away from normative
questions.
Did Mrs. Burton invent Economics?
• In 1776 Adam Smith wrote Wealth
of Nations.
• He identified the value of capitalism
and discouraged government
intervention in trade and exchange.
• This was called “Laissez faire”.
• Adam Smith used the metaphor of
the invisible hand to explain how
producers, acting in their own selfinterest, are guided by the
INVISIBLE HAND to produce what
consumers want to consume.
 64. What is the invisible hand?
Chapter 2
Economic Systems
• 65. What is a
traditional
economy?
• 66. What are the 4
disadvantages for
a traditional
economy?
• 67. THINK: What
would be an
advantage of a
traditional
economy?
Command Economics
• 68. What is a “command and control” economy?
– Economies that do NOT use the market to answer the
economic questions of society and do NOT have INCENTIVE
MECHANISMS of price and profits to guide the decisions.
• 69. Who developed the theory that all of history is a
struggle between factories and workers?
• 70. In which system does the government own just
some of the FOP?
• 71. In which system does the government own all FOP,
there is no private ownership of any resources?
• 72. THINK: What are the two most notable command
economies today?
Command and Control
• 73. What are 2
advantages of a
command economy?
• 74. What are 3
disadvantages of a
command system?
– Motivating workers
– Quota systems result in
emphasis on quantity
over quality
– Can not match
production to
consumption
Market Economies
Essential ingredients for Invisible Hand:
– Competition among producers for customers
– Prices act as signals for scarcity and desirability.
• There are 5 features of a market economy
Specialization
And
Markets
Competition and
Consumer
Sovereignty
Limited Government
Involvement
Private Property
and Markets
Voluntary Exchange
In Markets
Circular Flow of Economic Activity
75.
What are the two markets in our economic system?
Goods &
Services
Businesses
Product Markets
Goods &
Services
Red dashed Lines indicate
MONEY
Individuals
Payments
for
Resources
Factor Markets
Land, Labor, Capital,
Entrepreneurs
Impact of Market
Economies
76. What is the primary
advantage of a market
economy?
77. Individuals are free to
develop their _____ and
______ in work they find
rewarding rather than an
assigned job.
78. The driving force in a market
economy is
__________________!!
• Market economies are not all
sunshine and roses.
• 79. There is no means for
providing for ________
goods and services such as
national defense.
• There is no security for those
who through age or sickness
are not economically
productive.
• 80. There is often an unequal
distribution of _________.
• THINK: Does the US have a
pure market economy? Why?
Markets and the Invisible
Hand
• What is a market? An arrangement
that allows buyers and sellers to
exchange PRIVATE PROPERTY:
•
A buyer exchanges money for a
product
• A seller exchanges a product for
money.
 81. Identify a market you are in.
• Markets make possible the
voluntary exchange of resources,
goods, and services
• Market prices serve as signals that
guide the allocation of resources.
• 82. Competitive markets are based
on WHAT? voluntary
exchange.
MIXED ECONOMIES
• Meaning they choose with a combination
of both markets and government.
• 83. What is an example of a traditional
economy in the United States?
• 84. Where can we find an element of a
command economy?
• 85. What is the term for movement
FROM private ownership to government
ownership?
• 86. What is the term for movement
FROM government to private ownership?
Resource Allocation Encourages
Interdependence
When something is
scarce we must
choose.
87. What term refers to
the uses to which
resources are put?
Resource allocation
• 88. Specialization
requires
interdependence,
between people and
between countries. What
is interdependence?
EXPANDING CONSUMPTION
POSSIBILITIES THROUGH TRADE
• For their own self interest
economies & people
engage in trade with other
economies or people
• Exports: Goods and
services a country sells to
other countries
89. What does the US
export?
 Imports: Goods and
services a country buys
from other countries.
90. What does the US
import?
91. What is the
Paradox of Value?
• Value – the quality that
makes something
desirable
• Utility – the usefulness
in a given time and
place
• Wealth – abundance of
resources
When a necessity carries
little monetary value, while a
luxury costs a great deal.
92.
What is Specialization?
Whenever individual workers do fewer tasks than before they specialize
because then have shown they can do one task more efficiently
• The Tortoise and the
Hare live in a very nice
village. The animals of
the village own different
businesses and their
specialization works
very well. Daniel Hare is
the very fast mail carrier
and Mr. R.S. Tortoise is
the slow, methodical
inventor. Everyone
benefits from their
special strengths!
Chapter 3
The American Free Enterprise System
• 93. What is the fundamental
freedom in a capitalist economy?
• 94. The situation in which
everyone has the same
economic rights under law is ?
• 95. The option for people to
voluntarily exchange their work
for an income is ?
• 96. The incentive that guides
resources is the ?
How Does Free Enterprise
Allocate Resources?
• 97. In a free
market,
producers seek
what?
• 98. And
consumers vote
with what?
• 99. Give an
example of a
vote you have
made recently in
our market.
Government in the US Economy
• The US economic
system is actually
called a mixed free
enterprise economy
OR FREE MARKET
• 100. WHY?
• 101. Give 5 examples
of things you consume
which are supplied by
our government.
Section 3
Government and Free Enterprise
• 102. When people who are NOT part of a marketplace
interaction benefit from it or pay part of its costs what do we
find?
• 103. Products provided by any level of government and
consumed by the public are called what?
• 104. What are the 2 characteristics of public goods?
• 105. When a person chooses not to pay for a G or S but
benefits anyway, that is called a “free rider”. Give an example
of an instance when you were a free rider.
• 106. The G and S needed for a society are called what?
• 107. Give 5 examples of Infrastructures.
Will the Real Capitalism
Please Stand Up?
The Spectrum of Economic Systems
Command
Mixed
Laissez-Faire
Free Markets
In answering the three basic questions society must
choose among three kinds of economic systems.
No nation has a pure market economy and none has a pure
command economy, so we can describe economies in terms of
a continuum, from those with a preponderance of strong
capitalist institutions to those with few or none.
Spillover PRINCIPLE
or
•
Externalities
108. What is a Spillover? A cost or benefit
experienced by people who are external to the
decision about how much of a good to produce or
consume.
Spillover PRINCIPLE
For some goods the costs or benefits
associated with producing or
consuming those goods are not
confined to the person or organization
producing or consuming them.
109. Give 5 examples of externalities in
your life.
Comparative
Advantage
vs. Absolute
Advantage
An economy has a comparative advantage in producing a good if it can
produce a good at a lower opportunity cost than could other countries.
110. In what good does the US have a comparative advantage?
An economy has an absolute advantage if it is able to produce something
with fewer resources than others could.
111. In what good does the US have an absolute advantage?
112. What is another country with an absolute advantage and what is their
good?
Specialization According
to Comparative Advantage
Country Computer Memory Chips
Japan
10 units per day
England
5 units per day
Barrels of Oil
4 per day
3 per day
Productivity per worker in
Japan and England
Allocative Efficiency?
Allocative efficiency
In general, there
will be only one
point on the PPF
that is allocatively
efficient.
implies a specific point
on the PPF that is the
most valuable
combination of
outputs.
Good X
Different methods can be used to
allocate goods and services.
• I have 3 CDs, Frank
Sinatra, Beatles and All
American Rejects.
• Who wants them for free?
• How should I solve the
dilemma?
• What process and/or
criteria should be used to
distribute or ration the
CDs?
–
–
–
–
–
–
–
–
first-come-first-served,
lottery,
contest
winner-take-all,
money-price,
need,
auction,
sharing equally
The opportunity cost (what is refused or
given up) may change as the available
alternatives change and as people's tastes
change.
• How much will you pay for an
old (and sweaty?) T-shirt that I
brought to sell?
•
Is it’s value different if it
belonged to Brad Pitt or
Orlando Bloom instead of
belonging to me? Why?
•
If I give you a choice between
the old T-shirt or a new one,
which would you choose?
Which would you refuse?
•
What was your opportunity
cost to obtain the new shirt?
•
Was that a high or low cost?
Identify the Opportunity Cost in
each of the Following Dilemmas.
113. why farmers often wait until a rainy day to do errands in
town, while a man in a new suit will decide to forego his
errands on the same day;
114. why a highly talented person who travels a lot might hire a
chauffeur;
115. why young women in India cut the grass surrounding the Taj
Mahal with kitchen shears rather than using lawn mowers;
116. why movie stars, fashion models, and rock singers have
higher divorce rates than the rest of the American population.
Section 3: Analyzing Production
Possibilities
117. What are
Models?
They emphasize
features central to
the questions we
are trying to
answer.
Economic Assumptions
 To keep models simple,
economist make
assumptions.
 One common
assumption is termed
ceteris paribus:
 “Ceteris paribus” is Latin
for “all else being equal.”
 To study the relationship
between two variables, we
assume that other
variables do not change.
 This enables us to clearly
see the effects of choices
made AT THE MARGIN!
Examples of Choices at the Margin
• Choices Facing a
Consumer:
o Should I eat the last
slice of Pizza?
o What is the best use of
the next hour of time?
o How should I spend the
last dollar in my pocket?
CHOICES FACING A BUSINESS
o Should revenues be used to
hire another worker or to
upgrade the office computer
system?
o Should one more entrée be
added to a restaurant’s menu?
Should one be deleted?
o Should the restaurant stay
open one hour later, or close
an hour earlier?
CHOICES FACING GOVERNMENT
Should we add
another freeway exit
ramp?
Should a new new
elementary school
be built?
How badly does a
city need another
water plant?
What are the two goals in our
economic system?
The first is objective
equity, which refers
to fairness.
Equity is ultimately a
matter of personal
perception
The second objective
is efficiency.
Efficiency means
resources are used in
ways that provide the
most value.
What is Economic
Inefficiency?
• Market failures occurs in situations
when markets fail to achieve an
efficient outcome.
118. What is the result of market
failure?
119. What is
an
Institution?
• Established behavior practices and patterns that form the
foundation for community life.
• Institutions evolve in market economies to help individuals
and groups accomplish their goals
120. What are the Four Key Institutions
of Capitalism?
Markets
Private property
The rule of law
Entrepreneurship
The
persistence of
the summer
vacation model
even though
few work in
agriculture
Public
schooling paid
for by
government
Going to a school
building
Homework
One teacher in a
classroom of
students
121. What is the Rule of Law?
 Societies may have laws, stable governments, and even
benevolent rulers, and still be without the rule of law.
 The key requirement of the rule of law is that both the
governed and the governors are subject to the law.
Defined Property Rights
to Goods and Person
• Well-defined and
enforced property rights
free owners from the
restriction of constant
vigil over the land,
business, homes, or
buildings they own and
allow them to spend
more time producing
• They also affect the
ability to acquire capital
by determining whether
property will be accepted
as collateral for
productive debt.
Societies may define, allocate, and
enforce property rights in one of 3 ways:
• by the rule of
physical force, or
anarchy by the rule
of men, or by the
rule of law.
• The methods differ in
the extent to which
they encourage
investment and
economic growth.
Rule of Physical Force
(Anarchy)
• 122. In Rule of Physical Force,
how are property rights secured?
– coercion by physical force.
• Access to property is restricted
to those with the physical ability
to take and defend it.
• Peaceful transfer of property
rights is difficult and uncommon.
123. What is Rule of Men?
• The rule of men is “the ability of
government officials to govern by
their personal whim or desire.“
• Formal law may exist, but the
elite determines if, when, and
how it is applied.
• Decisions are frequently arbitrary,
tinged with political favoritism.
• Because ownership continues
only at the whim of the elite,
assets are of little use as
collateral.
124. What are the Benefits
of the Rule of Law?
a. Government officials
are not exempt from
the law.
b. Government power is
limited by a system of
checks and balances.
c. The court system
guarantees the
provision of due
process before life,
liberty or property is
taken.
United States
• The U.S.
economy is the
largest in the
world, and most
products are
sold in private
markets where
prices reflect
the interaction
of supply and
demand.
Starting a New Business
• It is relatively easy and
affordable to start a
business in the United
States.
• Procedures – for
incorporation or obtaining a
tax ID, for example – are
relatively uncomplicated
and inexpensive.
• From 2000-2001,
approximately 725,000 new
businesses were started
and 675,000
establishments went out of
business for various
reasons.
Government and Public Goods
• A very limited number of
corporations (examples
include the U.S. Postal
Service and Amtrak rail) are
government owned.
• The government provides a
number of public goods like
police and fire protection and
highway construction and
maintenance.
Protection of Property
Rights
• There is a trend toward restricting private property
rights, as seen in increasing land seizure by local
governments using eminent domain powers,
and in growing regulation and land-use controls
(zoning, growth controls, use permit requirements, and
environmental and habit restrictions)
• 125. What is the principle of eminent domain?
• The World Bank’s “governance indicators” rank the
United States in the 91st percentile (out of 100) for rule
of law and 92nd percentile for control of corruption.
Value and Opportunity
Cost
126. The opportunity cost of a new city
police contract is:
a.
b.
c.
d.
the amount of money it takes in order to
provide the city with the most highly qualified
personnel.
the value of the other goods and services
that the city and taxpayers will be forced to
give up in order to pay for the contract.
the cost to victims of crimes that the new
contract would prevent.
the value of the opportunities that city
policemen acquire by accepting it.
Outputs and Inputs
127. A production possibilities frontier shows
combinations of:
a. inputs that can produce a specific quantity
of output.
b. outputs that people consume.
c. outputs that can be achieved as technology
improves.
d. outputs that can be achieved in a given time
period with all available resources employed
using current technology.
Production Possibilities
Frontier
128. As a nation develops economically,
and new resources are discovered,
invented, created, its production
possibilities frontier:
a. remains stable.
b. shifts towards the origin.
c. shifts away from the origin.
d. becomes steeper, but does not shift.
What Kind of Advantage?
129. When a country can produce a good
with fewer resources than any other
country, the country has:
a. a comparative advantage.
b. a resource advantage.
c. an absolute advantage.
d. an unfair advantage.
What is Economics?
130. Economics is primarily the study of
•
•
•
•
stocks and bonds.
allocating limited resources to meet
unlimited wants.
methods to eliminate scarcity.
why consumers want what they do.
131. The three basic questions an economy
must answer are
a. why produce; how much to
produce; who to produce it.
b. what to produce; how to produce
it; who to consumes it.
c. what to produce; why produce;
how to produce.
d. when to produce; how to produce;
what to produce.
132. Scarcity is correctly described by
which of the following statements?
I. Scarcity exists if there are more uses for resources than can
be satisfied at one time.
II. Scarcity exists if decisions must be made about alternative
uses for resources.
III. Scarcity would not exist in a society in which people wanted
to help others instead of themselves.
(a) I only
(b) II only
(c) III only
(d) I and II only
(e) I, II, and I
133. The expression, "There's no such
thing as a free lunch," implies that
a. everyone has to pay for his own lunch.
b. the person consuming a good must always pay
for it.
c. opportunity costs are incurred when resources
are used to produce goods and services.
d. no one has time for a good lunch anymore.
134. Which of the following scenarios best describes the concepts of
scarcity and opportunity cost?
a. As a birthday present, your cousin sends you a $20 bill.
b. Your state government, in order to increase support for
higher education, must increase the sales tax to keep the
budget balanced.
c. Your state government, in order to increase support for
higher education, must cut spending for environmental
protection to keep the budget balanced.
d. The local fire department conducts a raffle to raise funds for
new equipment.
e. Smoke from a forest fire impairs air quality in a small
mountain town.
135. Incentives matter
a. only when people are greedy and selfish.
b. only in a free market system.
c. only in the private sector.
d. to all human beings regardless of environment.
Handy Dandy Guide to Economics
•
1. People economize.
–
•
People choose the alternative which seems best to them
because it involves the least cost and greatest benefit.
2. All choices involve cost.
–
•
Cost is the second best choice people give up when they
make their best choice.
3. People respond to incentives.
–
Incentives are actions or rewards that encourage people to
act. When incentives change, people's behavior changes in
predictable ways.
Economic Systems
• 4. Economics systems influence individual choices and incentives.
– How people cooperate is governed by written and unwritten rules. As rules
change, incentives change and behavior changes.
• 5. Voluntary trade creates wealth.
– People can produce more in less time by concentrating on what they do
best. The surplus goods or services they produce can be traded to obtain
other valuable goods or services.
• 6. The consequences of choices lie in the future.
– The important costs and benefits in economic decision making are
those which will appear in the future. Economics stresses making decisions
about the future because it is only the future that we can influence. We
cannot influence things that have happened in the past.
Direct versus Inverse
Relationships
Y variable
Direct Relationship
(positive) upward sloping
to the right.
Inverse Relationship
(negative) downward
sloping to the right.
X Variable
Direct Relationships
Graph this data!
Data Point
Community
Yearly
Rainfall
Umbrella
Sales
A
Center City
30 inches
100 units
B
Moose
Haven
40 inches
200 units
C
Blountville
50 inches
300 units
D
Houckton
60 inches
400 units
E
Echo Ridge
70 inches
500 units
Positive Slope
Umbrella
Sales
E
500
Slope = 100/10 = 10
D
400
100
C
300
B
200
10
A
100
10
20
30
40
50
60
70
80
Yearly
Rainfall
Inverse Relationships
Graph this data!
Data
Point
City
Coat Sales
Average
January
Temperatures
F
Tropical City
100 units
50 degrees
G
North Town
200 units
40 degrees
H
Snowbound
300 units
30 degrees
I
Cold City
400 units
20 degrees
J
Arctica
500 units
10 degrees
Negative Slope
Sales of
woolen
coats
500
J
Slope = -100/10 = -10
I
400
-100
H
300
10
G
200
F
100
10
20
30
40
50
60
70
80
January
temperatures
Information at the Margin
The slope shown equals
–25, which means that
the additional spending
by restaurant customers
decreases by $25 with
each passing hour.
Incremental
Spending
100
75
-25
50
1
0
1
2
3
Hours
Nonlinear Relationships
(a) Decreasingly positive slope
(c) Decreasingly negative slope
(b) Decreasingly positive slope
(d) Increasingly negative slope
A Shift in the Curve
Umbrella
Sales
When a curve changes
position, we say there
has been a shift in the
curve. A shift represents
a new relationship
between the variables.
E
500
D
400
C
300
B
200
A
100
10
20
30
40
50
60
70
80
Yearly
Rainfall
An Intersection Point
Y
At the intersection point
of two curves, their values
are identical.
A
Curve 1
Curve 1
X
Practice Graphing with 2
curves
• Graph the following data for
– A. wheat
– B. sweatshirts
– C. slices of pizza
• Attach the graphs to your notes.