INTRODUCTION TO ECONOMICS Choices, Choices, Choices,...

T HE B ASICS

WHAT IS ECONOMICS??? Economics – the study of how individuals and societies make decisions about ways to use scarce resources to fulfill wants and needs. What does THAT mean?!!??!!

T HE S TUDY OF E CONOMICS Macroeconomics The big picture: growth, employment, etc. Choices made by large groups (like countries) Microeconomics How do individuals make economic decisions

ECONOMICS: 5 E CONOMIC Q UESTIONS Society (we) must figure out: WHAT to produce (make) HOW MUCH to produce (quantity) HOW to Produce it (manufacture) FOR WHOM to Produce (who gets what) WHO gets to make these decisions?

W HAT ARE RESOURCES ? Resources : The things used to make other goods

BUT, THERE ’ S A F UNDAMENTAL P ROBLEM : SCARCITY : unlimited wants and needs but limited resources

SCARCITY Everyday we are faced with the principle of scarcity Example : You stand in front of a vending machine with only a dollar to spend and debated between two equally desirable options? (Choice) But scarcity is not limited to just money or choices. Time is a limited resource. Just as you spend money, you spend time.

ANALYZING SCARCITY You have to decide how to best use resources to maximize their return. How people do this generally increases their overall happiness or satisfaction The measure of this satisfaction is called a utility. Things that make you happy have high utility Those that don’t , have low utility The goal for everyone is to find the best way to allocate- distribute-limited resources in order to generate the most utility

C HOICES, C HOICES Because ALL resources, goods, and services are limited, WE MUST MAKE CHOICES!!!!

W HY C HOICES ? We make choices about how we spend our money, time, and energy so we can fulfill our NEEDS and WANTS.

W ANTS AND N EEDS, N EEDS AND W ANTS NEEDS – “stuff” we must have to survive Food/water, shelter, clothing, transportation WANTS – “stuff” we would really like to have fancy food, shelter, clothing, big screen TVs, jewelry, conveniences... Also known as LUXURIES

VS.

TRADE-OFFS You can’t have it all! (SCARCITY – remember?) You have to choose how to spend your money, time, and energy. These decisions involve picking one thing over all the other possibilities – a TRADE-OFF !

T RADE -O FFS, CONT. Question: What COULD you have done instead of come to school today? These are all Trade-Offs! Thanks for being here!

A special kind of Trade-Off is an OPPORTUNITY COST = The Value of the Next Best Choice (Ex: Sleeping is the opportunity cost of studying for a test)

O PPORTUNITY C OSTS This is really IMPORTANT – when you choose to do ONE thing, its value (how much it is worth) is measured by the value of the NEXT BEST CHOICE. This can be in time, energy, or even MONEY If I buy a pizza… Then I can’t afford the movies… Q: What is the opportunity cost of buying pizza?

E VERY C HOICE C OMES AT A C OST Every choice you make comes at a cost, without enough resources, you are forced to make choices. Opportunity cost is their next best choice that you give up in order to do something else. (The best value given up.) Some things have a lower opportunity cost. Ex. go buy a new jacket or go to the movies. Other things have a higher opportunity cost. Ex. Should I buy a car or save for College? ACTIVITY

T HE P LUS AND M INUS OF J UST O NE M ORE Marginal Benefit -Extra benefit you get from purchasing one more unit of a product Marginal Cost -Additional cost of purchasing that extra unit Ex. You are at a street fair and purchase one large, chocolate chip cookie for $1. It tastes so delicious you buy another one, so you’ve spent $2. Benefit -Enjoyment both of anticipating the good taste and savoring it. How much would you enjoy a third cookie? Cost -Additional $1 and sensation of feeling stuffed. Reap additional benefits only if the benefits exceeds the costs.

M ARGINAL C OST VS. M ARGINAL BENEFIT

H OW CAN MARGINAL BENEFIT AND MARGINAL COST BE USED TO IMPROVE DECISION - MAKING As long as the marginal benefit of an activity exceeds the marginal cost, people are better off doing more of it; When the marginal cost exceeds the marginal benefit, they are better off doing less of it. To determine the best level of consumption of a product or whether to participate in an activity, people must compare the additional benefits with the additional costs of consuming or participating a little more or a little less.

P RODUCTION So how do we get all this “stuff” that we have to decide about? Decisions, decisions …

PRODUCTION, CONT. Production is how much stuff an individual, business, country, even the WORLD makes. But what is “STUFF”? STUFF – Goods and Services. Goods – tangible (you can touch it) products we can buy Services – work that is performed for others for a fee

F ACTORS OF P RODUCTION So, what do we need to make all of this sStuff?

4 F ACTORS OF P RODUCTION LAND – Natural Resources Water, natural gas, oil, trees (all the stuff we find on, in, and under the land) LABOR – Physical and Intellectual Labor is manpower CAPITAL Physical capital Human capital ENTREPRENEURSHIP – Investment $$$ Investing time, natural resources, labor and capital are all risks associated with production

CAPITAL Capital – Any resource used by humans to make goods and services Physical Capital – human made objects used to make goods and services. Ex. Buildings, machinery, tools and equipment Human Capital –knowledge and skills gained from education and experience; brainpower, ideas, innovation Going to school and learning new skills is an investment Reading, working with a computer, and playing a musical instrument People with more skills usually earn more money that a person with few skills

BENEFITS OF CAPITAL Physical Capital (machines, tools) helps produce goods and services more easily Workers become more productive; make more of the product in less time and less money Business offer workers extra training (increase human capital); makes them more productive

E NTREPRENEURS Entrepreneurs are individuals who are willing to (1) take risks (2) to bring the other resources together and develop new products (3) start new businesses They recognize opportunities, like working for themselves, and accept challenges. They expect to earn a profit.

W HICH F ACTOR OF P RODUCTION ? LABOR

W HICH F ACTOR OF P RODUCTION ? ENTREPRENEU RSHIP

W HICH F ACTOR OF P RODUCTION ? CAPITAL

W HICH F ACTOR OF PRODUCTION ? LAND

THREE PARTS TO THE P RODUCTION P ROCESS Factors of Production – what we need to make goods and services Producer – company that makes goods and/or delivers services Consumer – people who buy goods and services (formerly known as “stuff”) Which Came First?

P RODUCTION P ROCESS Capital Labor Land Entrepreneurship Production/Manufacturing “Factory” Goods Services Consumers

C APITAL G OODS AND C ONSUMER G OODS Capital Goods : are used to make other goods Consumer Goods : final products that are purchased directly by the consumer

CHANGES IN PRODUCTION Specialization – dividing up production so that goods are produced efficiently Nike makes shoes, not hamburgers Hardee’s makes hamburgers, not shoes!!

CHANGES IN PRODUCTION Division of Labor – different people perform different jobs to achieve greater efficiency (assembly line). You do your job, and I will do my Job and we will be more EFFICIENT

CHANGES IN PRODUCTION Consumption – how much we buy ( Consumer Sovereignty ) The DELL store is empty because…. Everyone is at the APPLE STORE!!!

CHANGES IN PRODUCTION If we INCREASE land, labor, capital we INCREASE production Many entrepreneurs invest profit back into production If we DECREASE land, labor, capital we DECREASE production BUT WHY would we ever DECREASE production?

T HE C IRCULAR F LOW M ODEL

GROSS DOMESTIC PRODUCT A measure of the production of an entire country in one year is GDP The total $ value of ALL final goods and services produced in a country in a year. (GROSS DOMESTIC PRODUCT)

MEASURING THE ECONOMY Indicators – Economists use a variety of mathematical tools and equation to measure the health of the economy Consumer Price Index – Economists use CPI to measure changes in the prices of goods and services CPI shows whether milk, cars, or houses are more or less expensive from month to month Inflation – When the average price of goods goes up rapidly Recession – Economic downturn: Unemployment to be rising Investments falling GDP decreasing over a long period of time

UNEMPLOYMENT RATE When the Unemployment Rate is high, more people are out of work: Fewer people earning a paycheck Fewer people are spending Can lead to a slower economy