1 Sect. 1 - Basic Economic Concepts Module 1 - The Study of Economics What you will learn: How scarcity and choice are central to the study of economics The importance of opportunity cost in individual choice and decision making The difference between positive economics and normative economics What makes macroeconomics different from microeconomics

2 Sect. 1 - Basic Economic Concepts Module 1 - The Study of Economics Economics - The study of how we satisfy our needs and wants by making choices Scarcity - Limited amount of goods and services to meet unlimited wants - forces us to make choices Market Economy - Production and consumption decisions are made by consumers and producers - not by the govt. as in a “Command Economy”

3 Factors of Production - The resources used to make goods and services Land - All “natural resources” used to produce goods and services - includes land, water, forests, coal, iron ore, livestock, etc.

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5 Factors of Production - The resources used to make goods and services Land - All “natural resources” used to produce goods and services - includes land, water, forests, coal, iron ore, livestock, etc. Labor - The effort people devote to tasks for which they are paid

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7 Factors of Production - The resources used to make goods and services Land - All “natural resources” used to produce goods and services - includes land, water, forests, coal, iron ore, livestock, etc. Labor - The effort people devote to tasks for which they are paid Capital - Resources used to make other goods and services Physical - Man made objects used to make other goods and services

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Factors of Production - The resources used to make goods and services Land - All “natural resources” used to produce goods and services - includes land, water, forests, coal, iron ore, livestock, etc. Labor - The effort people devote to tasks for which they are paid Capital - Resources used to make other goods and services Physical - Man made objects used to make other goods and services Human - Knowledge, skill, and experience of a worker

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Factors of Production - The resources used to make goods and services Land - All “natural resources” used to produce goods and services - includes land, water, forests, coal, iron ore, livestock, etc. Labor - The effort people devote to tasks for which they are paid Capital - Resources used to make other goods and services Physical - Man made objects used to make other goods and services Human - Knowledge, skill, and experience of a worker

12 Entrepreneurs - People who take the risk to assemble the factors of production to make goods and services

Entrepreneur

14 Entrepreneurs - People who take the risk to assemble the factors of production to make goods and services Opportunity cost - The value of what is given up when you make a choice is the opportunity cost of your decision

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17 Entrepreneurs - People who take the risk to assemble the factors of production to make goods and services Opportunity cost - The value of what is given up when you make a choice is the opportunity cost of your decision Opportunity Cost

18 Microeconomics vs. Macroeconomics - Microeconomics focuses on choices made by individuals, households, or firms (businesses) Macroeconomics focuses on the economy as a whole and attempts to explain the ups and downs of the economy Positive Economics - Economic analysis that have a definite right or wrong answer - Laws of economics Normative Economics - Economic analysis involving how the world should work - Is it better to impose a certain economic policy or not

Positive - How much will revenue increase by raising the toll? Normative - Should the toll be raised - social impact?

20 Microeconomics vs. Macroeconomics - Microeconomics focuses on choices made by individuals, households, or firms (businesses) Macroeconomics focuses on the economy as a whole and attempts to explain the ups and downs of the economy Positive Economics - Economic analysis that have a definite right or wrong answer - Laws of economics Normative Economics - Economic analysis involving how the world should work - Is it better to impose a certain economic policy or not

21 Module Two - Intro to Macroeconomics What you will learn: What a business cycle is and why policy makers seek to diminish the severity of business cycles How employment and unemployment are measured Aggregate output and how it changes over the business cycle The meaning of inflation and deflation How economic growth determines a country’s standard of living Why models play a crucial role in economics

22 Module Two - Intro to Macroeconomics Business Cycle - Alternation between downturns (recession) and upturns (expansion) in the economy - a very deep, long recession is known as a depression

*Shaded area indicates a recession

25 Module Two - Intro to Macroeconomics Business Cycle - Alternation between downturns (recession) and upturns (expansion) in the economy - a very deep, long recession is known as a depression Business Cycle

26 Module Two - Intro to Macroeconomics Business Cycle - Alternation between downturns (recession) and upturns (expansion) in the economy - a very deep, long recession is known as a depression Employment - Number of people currently working for pay Unemployment - Number of people actively looking for work but are not currently employed - Labor Force is total of employed and unemployed

27 Who are NOT part of the Labor Force?

28 Minors

29 Have given up looking for work

30 Full time students

31 Stay at home parents

32 Retirees

33 Military personnel

34 Module Two - Intro to Macroeconomics Business Cycle - Alternation between downturns (recession) and upturns (expansion) in the economy - a very deep, long recession is known as a depression Employment - Number of people currently working for pay Unemployment - Number of people actively looking for work but are not currently employed - Labor Force is total of employed and unemployed

35 Unemployment Rate - Percentage of the Labor Force that is unemployed - good indicator of job market condition increases during recession - decreases during expansion Example: Number of people unemployed 7 million divided by total workforce 150 million X 100 =.046 x 100 = 4.6%

*Shaded area indicates a recession

37 Unemployment Rate - Percentage of the Labor Force that is unemployed - good indicator of job market condition increases during recession - decreases during expansion Aggregate Output - Total production of goods and services for a given time period - increases during expansion - decreases during recession Inflation - Rise in overall price level of goods and services - dollar buys less

39 Unemployment Rate - Percentage of the Labor Force that is unemployed - good indicator of job market condition increases during recession - decreases during expansion Aggregate Output - Total production of goods and services for a given time period - increases during expansion - decreases during recession Inflation - Rise in overall price level of goods and services - dollar buys less Deflation - Fall in the overall price level of goods and services - dollar buys more

40 Economic Growth - An increase in the maximum possible output of an economy - creates a sustained rise in aggregate output over time Economic Model - A simplified version of reality used to understand real-life economic situations - often in the form of a graph - assuming “all other factors remain constant” (Ceteris Paribus)

41 Module Three - Production Possibilities Curve What you will Learn: A very simple model can explain important economic concepts. How the production possibilities model helps economists think about the trade-offs every economy faces. How the production possibilities model helps us understand: efficiency, opportunity cost, and economic growth.

42 Module Three - Production Possibilities Curve Production Possibilities Curve - Economic model showing alternative ways to use productive resources

44 Module Three - Production Possibilities Curve Production Possibilities Curve - Economic model showing alternative ways to use productive resources Trade Off - Giving up one thing in order to have something else

45 Module Three - Production Possibilities Curve Production Possibilities Curve - Economic model showing alternative ways to use productive resources Trade Off - Giving up one thing in order to have something else Efficient - Using resources to maximize the output of goods and services - producing along the PPC line

47 Module Three - Production Possibilities Curve Production Possibilities Curve - Economic model showing alternative ways to use productive resources Trade Off - Giving up one thing in order to have something else Efficient - Using resources to maximize the output of goods and services - producing along the PPC line PPC

Opportunity Cost - - Opportunity cost of Fish to Coconuts - from pt. A to pt. B OC of 8 fish = 6 coconuts / OC of 1 fish = 6/8 or 3/4 of a coconut OC of 6 coconuts = 8 fish / OC of 1 coconut = 8/6 or 1&1/3 fish

49 Increasing Opportunity Cost - In reality most PPCs will have “Increasing Opportunity Cost” - more produced = higher OC The curve will be bowed out rather than a straight line

50 Economic Growth - Expansion of an economies production possibilities - ability to produce at a point outside original PPC Two main factors for economic growth: 1) Increase in resources - land, labor, capital 2) Technology - produce more with no increase in resources Technology

51 Economic Growth - Expansion of an economies production possibilities - ability to produce at a point outside original PPC

52 Module Four - Comparative Advantage and Trade What you will learn: How trade leads to gains for individual and national economies. The distinction between absolute advantage and comparative advantage. How comparative advantage leads to gains from trade

53 Module Four - Comparative Advantage and Trade Gains from Trade - People or nations can get more goods through trade than they could produce for themselves Specialization - Nations devote their resources to producing certain goods and trade for the other goods they need (how do they decide?) Absolute Advantage - Can produce more of a good with given resources

54 Tom has an absolute advantage in both coconuts and fish So why would he trade?

55 Module Four - Comparative Advantage and Trade Gains from Trade - People or nations can get more goods through trade than they could produce for themselves Specialization - Nations devote their resources to producing certain goods and trade for the other goods they need (how do they decide?) Absolute Advantage - Can produce more of a good with given resources Comparative Advantage - Having a lower opportunity cost for producing a good

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57 Tom has a comparative advantage (lower opp. cost) in producing fish Hank has a comparative advantage (lower opp. cost) in producing coconuts

58 Tom produces only fish (lower opp. cost) Hank produces only coconuts (lower opp. cost) They trade for what the other produces

59 Tom and Hank each increase their consumption of both goods by specializing and trading with each other

Comparative Advantage Example - Labron James has an absolute advantage over Frank both in playing basketball and stocking shelves at Home Depot - Why should Labron play basketball and let Frank stock shelves? - Labron’s opp. cost (what he gives up) to stock shelves is much higher than Frank’s

Same concept applies to international trade - Produce what you have lower opportunity cost for and trade for what you have a higher opportunity cost

Terms of trade - Must be greater than each countries’ opportunity costs to be mutually beneficial

63 1. Calculate the opportunity costs for each country 2. Determine the comparative advantage for each country 3. Determine mutually beneficial terms of trade

BangladeshUnited States Shirts (S) 750 S M 1 S = 1/3 M 1000 S M 1 S = 1 M Malaria Medicine (M) 250 M S 1 M = 3 S 1000 M S 1 M = 1 S

65 1. Calculate the opportunity costs for each country 2. Determine the comparative advantage for each country 3. Determine mutually beneficial terms of trade U.S. Consumption with Trade Bangladesh Consumption with Trade

Bangladesh produces clothing that the U.S. trades for - What the U.S. would have to give up to produce more clothing creates a higher opp. cost for the U.S - Bangladesh has a lower opp. cost to produce clothing Khan Academy - Gains from Trade

OC of 1 unit of Fish in U.S. _________. OC of 1 unit of Fish in England _________. OC of 1 unit of Chips in U.S. _________. OC of 1 unit of Chips in England _________. U.S. has comparative advantage in _________. England has comparative advantage in ________. U.S.England 1/2 Chips 4 Fish 2 Fish Fish Chips 1/4 Chips

Wheat Textiles Country A Country B

Corn Computers Country A Country B

MackenzieEli Lunches Dinners = = = 1 1 =

PamlandLillytonia Wheat DVDs = = =2 =3

U.S. Exports Top U.S. Exports: Transportation Equipment Chemicals Electronics / Electrical Equipment Medical Equipment Machinery Food

Trade Partners Top U.S. Trade Partners: Canada China Mexico Japan Germany United Kingdom

74 The End