True or False???? The best things in life are free.

AP economics Introduction

Topic 1: Definition of Economics

Economics studies how scarce resources are used to fulfill society’s needs and wants

Scarcity

Scarcity condition where wants are greater than resources *Because scarcity exists, choices must be made

Scarcity vs. Shortages Scarcity occurs at all times for all goods Shortages occur when producers will not or cannot offer goods or services at current prices. Shortages are temporary. Scarcity NOT the same as a shortage

Resources Anything that helps produce a good or service (factors of production)

The Four Factors of Production Types of Resources Land Labor Capital Entrepreneurship 9

The Four Factors of Production Land = natural resources (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.) 10

The Four Factors of Production Labor = Workers (manual laborers, lawyers, doctors, teachers, waiters, etc.) 11 11

The Four Factors of Production Capital: Resources that are used to create other goods (tools, tractors, machinery, buildings, factories, etc.) 12

The Four Factors of Production Entrepreneurship= Organizes other resources Ultimate goal: Make profit 13

The Four Factors of Production Classify the Factors of Production in the following scenario: You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

The Four Factors of Production Classify the Factors of Production in the following scenario: You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Resources Resources are interdependent of one another Have to have all resources in order to make a product/service

Needs Necessary for survival

Wants Not necessary for survival

Types of wants Consumer Good - goods purchased for direct consumption

Capital goods Goods purchased for indirect consumption (used to make other things)

In order for a product to have value, it must be scarce and provide utility (usefulness)

Conspicuous Consumption Purchase of items to impress others

Topic 2: principles of economics

1. People Economize People make decisions based on what THEY think will benefit them the most

2. All choices involve a cost Opportunity Cost – highest valued alternative given up when a choice is made There is no such thing as a free lunch

Nothing is Free!!!

Incentives influence people’s decisions

4. Rules influence individual choices

5. Voluntary trade creates wealth “TRADING UP” VIDEO CLIP

6. The consequences of choices lie in the future Sunk Cost: cost already made; should be ignored when making choices

Answer the following questions the way an economist would

1. Making a choice means: A. deciding among many possibilities B. being able to get everything C. not thinking about future consequences D. considering a daily horoscope

2. People throughout the world usually make decisions: A. impulsively; choosing quickly without much thought B. generously; thinking of the needs of others C. randomly; leaving the outcome up to chance D. purposefully; considering costs and benefits

3. Which of the following best explains the relationship between choices and incentives? A. incentives motivate people to make certain types of choices B. incentives rarely influence personal choices C. incentives make it difficult to predict what choice people will make D. incentives have nothing to do with choices

A. the chips cost less than the other snacks 4. A hungry economist decides to buy a bag of potato chips; which of the following would best explain his decision? explain his decision? A. the chips cost less than the other snacks B. the chips came in the largest bag C. the chips offer a greater benefit to him than the other snacks D. there are no other choices available

* In economics, decisions should always be made at the margin a rational person will weigh the additional benefits (MU) against the additional costs (MC) * Marginal utility = additional benefit from consuming one more item

Stop watch

Diminishing Marginal Utility Squidward - too many krabby patties When a person acquires more units of an item, ADDITIONAL UTILITY will go down

Maximizing utility Rule MU<MC = Don’t do it MU>MC = Do it MU=MC * Do it and STOP (utility maximized here)

True or False??? Anything worth doing is worth doing well. It is a good idea to make an informed decision and stick to it.

How many movies would you see???? Thinking at the Margin # Times Watching Movie Marginal Utility Price 1st 30 $10 2nd 15 3rd 5 Total 50 $30 How many movies would you see????

Calculate Marginal Utility # of Slices of Pizza Total Utility (in utils) Marginal Utility/Benefit 1 8 2 14 3 19 4 23 5 25 6 26 7 24 43

Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit 1 8 2 14 6 3 19 5 4 23 25 26 7 24 -2 Marginal Cost -- $2 How many pizzas would you buy if the price per slice was $2? 44

Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit 1 8 2 14 6 3 19 5 4 23 25 26 7 24 -2 Marginal Cost 2 You will continue to consume until Marginal utility = Marginal Cost How many pizzas would you buy if the price per slice was $2? 45

Maximizing utility if choosing between 2 items Must calculate the MU/P of each item. “Bang for your Buck” Calculating Marginal Utility Per Dollar allows you to compare products with different prices.

Marginal Utility Per Dollar Maximizing Utility You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? Destination Marginal Utility Price Tahiti 3000 $3,000 Chicago 1000 $500 Marginal Utility Per Dollar 1 Util 2 Utils 47 47

Maximizing Utility if CHOOSING between items You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? Destination Marginal Utility Price Tahiti 3000 $3,000 Chicago 1000 $500 MU/P 3000/3000= 1 1000/500= 2 48 48

Maximizing utility if buying combinations of items: If purchasing combinations of goods. The consumer’s money should be spent so that the marginal utility per dollar of each good equals each other. MU 1= MU2 P1 P2

Each slice of pizza costs $2.00 and the MU is 10. Each soft drink is $1.00. If you are maximizing your utility, what is the MU of the soft drink? 5

Utility Maximization with a budget constraint (combinations of items) 1. Figure out the marginal utility per price (MU/P) for each item 2. Spend $ on the item with the highest marginal utility per price until $ runs out *The MU/P of each item should be the same!

Utility Maximization $10 $5 # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) (Price =$5) 1st 30 10 2nd 20 5 3rd 2 4th 1 If you only have $25, what combination of movies and go carts maximizes your utility?

Utility Maximization $10 $5 # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) (Price =$5) 1st 30 3 10 2 2nd 20 5 1 3rd .40 4th .50 .20 If you only have $25, what combination of movies and go carts maximizes your utility?

Practice: utility max with budget constraint 3 apples and 2 oranges Assume apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the combination that maximizes utility. 54

Apples MU/P Oranges MU/P 0 0 20 15 15 10 10 7.5 5 5 2 2.5 3 apples and 2 oranges

Practice: utility maximization Find the Utility-Maximizing Combination of A and B, if you have an Income of $10 (2) Product A: Price = $1 (3) Product B: Price = $2 (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (1) Unit of Product 1 2 3 4 5 6 7 10 8 24 20 18 16 12 10 8 7 6 5 4 3 12 9 2

Purchase 2 of Item A and 4 of B Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (2) Product A: Price = $1 (3) Product B: Price = $2 (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (1) Unit of Product 1 2 3 4 Fifth Sixth Seventh 10 8 7 6 5 24 20 18 16 12 10 8 7 6 5 4 3 12 9 2 Purchase 2 of Item A and 4 of B

Topic 3 : Types of Economics

microeconomics studies specific segments of the economy Example: profits at McDonalds

macroeconomics Studies the economy as a whole; more general topic Examples: unemployment rate in the U.S.

Positive Economics - Collects and presents facts; concerns what the economy is really like Example???

Normative Economics - Involves value judgments about what the economy should be like Example??

Topic 4: Production Possibilities Curve/Frontier A production possibilities curve (PPC) is a model that shows alternative ways that an economy can use its scarce resources This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 63

Each point represents a specific combination of goods that can be produced given resources available. PPC A B C boats 9 7 4 trucks

PPC 4 Key Assumptions Only two goods can be produced Full employment All resources being utilized All technology being utilized

Each point represents a specific combination of goods that can be produced given resources available. PPC A B C boats 9 7 4 trucks

The Production Possibilities Curve and Efficiency 67

PPC illustrates two Types of Efficiency 1. Productive Efficiency Products are being produced in the least costly way. - any point on curve 2. Allocative Efficiency The products being produced are the ones most desired by society - Any point on curve 68

PPC Point inside (D) = unemployment Point outside (E) = unattainable given current resources Points on curve (A,B,C) = efficient All resources being utilized Economy at full employment

Opportunity Cost Example: 1. The opportunity cost of moving from a to b is… 2 Bikes 2.The opportunity cost of moving from b to d is… 7 Bikes 3.The opportunity cost of moving from d to b is… 4 Computers 4.The opportunity cost of moving from c to b is… 2 computers 70

Constant opportunity cost: Opportunity cost is always the SAME A B C D E Pizza 4 3 2 1 0 Calzones 0 1 2 3 4 Opportunity Cost of moving from a-b, b-c, c-d, and d-e? 71 71

Constant opportunity cost Resources are easily adaptable for producing either good Ex: pizza and calzones Results in a straight line PPC

Increasing opportunity cost: Opportunity costs increase as more of a good is produced A B C D E PIZZA 20 19 16 10 0 ROBOTS 0 1 2 3 4 Opportunity Cost of moving from a-b, b-c, c-d, and d-e? 73

As you produce more of any good, the opportunity cost will increase Why??? Resources are NOT easily adaptable to producing both goods Results in a BOWED OUT PPC

Constant vs. Increasing Opportunity Cost Corn Cactus Wheat Pineapples

Per Unit Opportunity Cost Gain Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt? $10 per shirt Take money out of the equation. Instead of producing 5 shirts you could have made 10 hats. What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up? 1 shirt costs 2 hats What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up? 1 hat costs ½ of a shirt 76

Ron can produce 20 pizzas or 200 burgers Per Unit Opportunity Cost Ron can produce 20 pizzas or 200 burgers 1. What is Ron’s opportunity cost for one pizza in terms of burgers given up? 1 P = _________ B 2. What is Ron’s opportunity cost for one burger in terms of pizza given up? 1 B = _________ P John can produce 100 pizzas or 200 burgers What is John’s opportunity cost for one pizza in terms of burgers given up? What is John’s opportunity cost for one burger in terms of pizza given up? 1 B = __________ P 77

PER UNIT Opportunity Cost How much each marginal unit costs Gain Example: 1. The PER UNIT opportunity cost of moving from a to b is… 1 Bike 2.The PER UNIT opportunity cost of moving from b to c is… 3/2 Bikes 3.The PER UNIT opportunity cost of moving from c to d is… 2 Bikes 4.The PER UNIT opportunity cost of moving from d to e is… 5/2 Bikes 78

Practice WS per unit costs

Practice per unit Opportunity cost B C D E Autos 2 4 6 8 missiles 30 27 21 12 1.What is the per unit cost of moving from point D to point E? 12/2= 6 missiles What is the per unit cost of moving from point C to point B?  2/6 = 1/3 autos What is the per unit cost of moving from point C to point D?  9/2 missiles What is the per unit cost of moving from point B to point A? 2/3/ autos

Shifting the Production Possibilities Curve 81

Production Possibilities 4 Key Assumptions Revisited Only two goods can be produced Full employment of resources Fixed Resources Fixed Technology 3 Shifters of the PPC/PPF 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade 82

Shifts in PPC Inward Shift Indicates economic decline Happens due to: - destruction of resources Less trade Decline in quality of resources

Shifts in PPC Outward Shift Indicates Economic growth Happens due to: -increase in #/quality of resources - Technology - More Trade

AB is original PPC… What happens??? 1. BP Oil Spill in the Gulf 2. Better technology in producing both items 3. Many workers unemployed 4. Significant increases in education 5. Full employment 85 85

Capital Goods and Future Growth Countries that produce more capital goods (as opposed to consumer goodswill have more growth in the future. Panama – Favors Consumer Goods Mexico – Favors Capital Goods Current PPC Future PPC Future PPC Capital Goods Current PPC Capital Goods Consumer goods Consumer goods Panama Mexico 86

Topic 5: PPC, trade and opportunity cost 2 types of problems: Output problems - look at total items being produced Input problems - look at resources that go into making a product 87

Input or Output Question? Number caught per day Deer Antelope Henry 4 6 John 24 12 88

Input or Output Question? Months to produce one Car Plane Canada 8 10 Japan 15 12 89

Absolute advantage Output problem: person/country can make more of the item than other country Input problem: person/country can make item using less resources (time, land etc) than other country 90

Absolute Advantage? Number caught per day Deer Antelope Henry 4 6 John 24 12 91

Absolute Advantage? Months to produce one Car Plane Canada 8 10 Japan 15 12 92

2. Comparative advantage ** Comparative advantage Is gained through specialization To figure comparative advantage, must first: Must calculate the PER UNIT opportunity cost * This will be different for INPUT and OUTPUT problems The country that can produce the item at a lower opportunity cost should specialize in that item

Comparative advantage in an output problem To figure opportunity cost - Cost/Gain The following chart illustrates the number of CDs and pounds of beef that Japan and Canada can produce in a day CDs beef Japan 4 2 Canada 4 6 Japan 1 CD = _____ 1 B = ______ CD Canada 1CD = _____ B Japan should produce __________ Canada should produce _________

Answers: Comparative advantage in an output problem Output Questions: CDs beef Japan 4 2 Canada 4 6 In Japan, 1 CD = 1/2 B, 1 B = 2 CD In Canada 1CD = 3/2 B, 1 B = 2/3 CD Japan should produce CDs Canada should produce Beef

Comparative advantage in an input problem Input Questions: ICU= Input Cost goes Under The following chart illustrates the number of hours it takes the U.S. and France to make one loaf of bred and one bushel of corn Bread Corn U.S. 4 2 France 4 6 In the U.S. 1 B = _________ C, 1C = __________ B In France 1 B = ________C, 1 C = __________B The U.S. should produce ________________ France should produce __________________

Answers to comparative advantage in input problem Bread Corn U.S. 4 2 France 4 6 In the U.S. 1 B = 2 C, 1C = 1/2 B In France 1 B = 2/3 C 1 C = 3/2 B The U.S. should produce Corn France should produce Bread

Practice: Who has the Comparative Advantage? Number caught per day Deer Antelope Henry 4 6 John 24 12 Henry 1 D = _____ A 1A = ______D John 1D = ______A 98

Comparative Advantage? Number caught per day Deer Antelope Henry 4 6 John 24 12 Henry 1D = 3/2 A 1 A = 2/3 D John 1 D = ½ A 1A = 2 D 99

Comparative Advantage? Number caught per day Deer Antelope Henry 4 6 John 24 12 Henry 1D = 3/2 A 1 A = 2/3 D John 1 D = ½ A 1A = 2 D 100

Practice: Who has the Comparative Advantage? Months to produce one Car Plane Canada 8 10 Japan 15 12 Canada 1C = _____ P 1 P = _____C Japan 1C = ______P 1P = _____C 101

Comparative Advantage? Months to produce one Car Plane Canada 8 10 Japan 15 12 ICU Canada 1 C = 4/5 P 1 P = 5/4 C Japan 1 C = 5/4 P 1P = 4/5 C 102

Comparative Advantage? Months to produce one Car Plane Canada 8 10 Japan 15 12 ICU Canada 1 C = 4/5 P 1 P = 5/4 C Japan 1 C = 5/4 P 1P = 4/5 C 103

PRACTICE 1. The following table gives the number of hours it takes in the United States and Scotland, using the same amount of resource, to produce a ton of oats or one bagpipe. Oats Bagpipes U.S. 2 hours 3 hours Scotland 5 hours 4 hours a. Output or input problem?? WHY?? b. Who has the absolute advantage in oats? Bagpipes? WHY?? c. Who has the comparative advantage in Oats? Bagpipes? WHY??

A. Input problem; looks at TIME making B. Absolute advantage: ICU B. Absolute advantage: Oats = U.S. (takes less time to make) Bagpipes = U.S. (takes less time to make) C. Comparative Advantage: U.S. Scotland 1 O = 2/3 BP 1 O = 5/4 BP 1 BP = 3/2 O 1BP = 4/5 O U.S = OATS Scotland = BAGPIPES

PRACTICE In other words: Country X: 4 pens 8 paper 2. The table below gives the total number of pens and paper that country X and country Y can produce. Country X Country Y A B C D E F A B C D E F Pens 0 4 8 12 16 20 Pens 0 3 6 9 12 15 Paper 40 32 24 16 8 0 paper 60 48 36 24 12 0 In other words: Country X: 4 pens 8 paper Country Y: 3 pens 12 paper a. Output or input problem???WHY??? b. Who has the absolute advantage in producing pens? paper ? WHY??? c. Who has the comparative advantage in producing pens? paper? WHY???

A. Output problem B. Absolute advantage: Comparative Advantage: Pens = X Paper = Y Comparative Advantage: Country X Country Y 1 Pen = 2 paper 1 pen =4 paper 1 paper = 1/2 pen 1 paper = ¼ pen

Practice WS “Introduction: absolute and comparative advantage”

Possible comparative advantage questions * Go to mimio

Topic 6: Economic Systems All societies must answer 3 economic questions 1. what will be produced 2. how will it be produced 3. who will get what *the way the questions are answered determine a country’s economic system 110

Traditional economies economic questions answered by past 111 111

Command Economies economic questions answered by government (communism and socialism)

Video clip “command vs market”

Command Economies Advantages Disadvantages 1.Economic equality 2.Capable of quick change Disadvantages 1.No incentive to work harder 2. No Competition = poor quality, little choices

Market Economy economic questions answered by people

Market Economies Advantages Disadvantages 1.Economic freedom 2.Competition = better quality, more choices 3.Incentive to make a profit Disadvantages 1.Unequal distribution of wealth 2.Economic loss

CONSUMER SOVEREIGNTY Consumer “power” Consumers determine the success of a product 117

The Invisible hand - Adam Smith The concept that society’s goals will be met as individuals seek their own self-interest. Example: Society wants fuel efficient cars… Profit seeking producers will make more. Competition between firms results in low prices, high quality, and greater efficiency. The government doesn’t need to get involved since the needs of society are automatically met. Competition and self-interest act as an invisible hand that regulates the free market. 118

The invisible hand: Adam Smith Video clip: “I, Pencil” “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

Mixed Economy elements of the all economic systems together (government and people answer economic questions)

Circular Flow of a market economy Shows the interdependence between business and households

The Circular Flow Model The Product Market- “place” where goods are produced by businesses and sold to households. The Resource (Factor) Market- “place” where resources are sold to businesses. 122

Individuals Businesses Resource Market Product Market $$$ Costs $$$ $$$ Income $$$ Resources Resources (Factors of Production) Individuals Businesses Goods and Services Goods and Services $$$ Spending $$$ $$$ Revenue $$$ Product Market 123