Economics Unit 1

Economics The study of how people seek to satisfy their needs and wants by making choices

What do we mean when we say choices? Does this mean everything we have to make a choice about? Does your choice of what to wear have an affect or is affected by economics? Does your choice of where to go for lunch have an affect or is affected by economics?

The reason we must make choices is because there is not enough of everything in the world to satisfy every single person’s needs and wants.

There probably is enough food, clothes and shelter to satisfy everyone’s needs and desires, but not everyone will settle for the basics.

The easiest way to encapsulate the definition of Economics is unlimited wants and limited resources. Because of this situation we must make choices. Can somebody name a choice they have had to make in the past couple of days?

Rational Self-Interest When we say choice is the key to economics, this doesn’t mean that people just make whatever choice they feel like. People look at economic choices and make their decisions based on something called Rational Self-Interest. The means by which people choose the options that give them the greatest amount of satisfaction.

Example…. Remember the Martha Stewart case Example… Remember the Martha Stewart case? In this case she took money out of a company that she knew was not going to turn a profit because she had information of a product of theirs was going to be taken off the market before anyone else knew about this situation. She would get caught doing this and eventually go to prison for a short period of time.

How did Martha practice rational self-interest? She did make a choice based on rational self-interest though. She made the choice to take her money out of the company, which she knew she would lose if she let it in. She did not think she would get in trouble for this, but she did. Although she did get in trouble, she made the decision that benefited herself the most with all the information she had available to her.

Economic Reasoning: Why are we a nation of couch potatoes Economic Reasoning: Why are we a nation of couch potatoes? Capstone Unit 1 Lesson 1 We are going to see if we can use economic reasoning and apply it to a wide range of human behavior. Specifically, this lesson uses it to examine why it is that America is becoming a land of couch potatoes.

Which well known people do Americans tend to admire? Exercise and diet have recently become an important issue in the United States. Visual 1 ..\Capstone\Capstone Visuals\capstone_lesson1_visual.pdf Which well known people do Americans tend to admire? How are Americans’ exercise and diet habits changing? What is the Mystery?

Speculate whether each statement is true or false. Visual 2 ..\Capstone\Capstone Visuals\capstone_lesson1_visual.pdf False, True, False, True, False

Activity 1 Read the Activity What is the economic view of choice? People strive to choose the best combination of costs and benefits in making decisions. How do choices influence people in respect to exercise and diet? The level of exercise people maintain and the diet they favor reflect their personal choices. What is an opportunity cost? The opportunity cost is the second-best choice. What is an incentive? A reward

Why is money such an attractive incentive? Money can be exchanged for many other things that people desire. What incentives influence people in their decisions about exercise and diet? The incentives that influence people in their decisions about exercise include forms of passive entertainment, like television and computer games. One incentive influencing decisions about diet is the reduced cost of food. How do the rules of the economic system influence people in their decisions about exercise and diet? The American economy responds to changes in technology. Many of these changes have eased the physical demand of working. Consumer demand also has encouraged the development of work-saving products.

What is voluntary trade? Voluntary trade is a cooperative activity in which people exchange something they value less for something they value more. How does voluntary trade influence people in their decisions about exercise and diet? Many people today are exchanging their labor for service jobs in which they are less likely to be injured and more likely to live longer. What does it mean to say that people’s choices have future consequences? People strive to make decisions they hope will benefit them in the future.

How do future consequences influence people in their decisions about exercise and diet? Many Americans have in effect decided to be less thin today in order to live longer and healthier lives by working in a service-based economy that demands little in the way of physical work. However, this choice comes with costs; losses in physical fitness many spur people to search out new ways to exercise.

Solve the mystery Americans are gaining extra weight not because they are lazy or because of a sudden increase in the desire to eat fatty foods. Instead, many Americans have accepted the new jobs created in a changing market system---jobs that involve less exercise than the jobs of an earlier era. In an economic sense, American employees have traded thinness and some level of health benefits that came with strenuous, dangerous work for other values and work related benefits that enable them to live longer and healthier lives. Outside the workforce, Americans have benefited from engagement with new forms of passive entertainment. The opportunity cost of physical activity has gone up, prompting people to make new choices regarding exercise.

Principles of the Guide to Economic Reasoning? People choose People’s choices involve costs People respond to incentives in predictable ways People create economic systems that influence individual choices and incentives People gain when they trade voluntarily People’s choices have consequences that lie in the future

Scarcity The shortage that exists when less of something is available than is wanted at a zero price Scarcity is the main problem in economics. If there was not a problem of scarcity, the wants (things we desire) and the needs (things we must have to survive) would be fulfilled.

Free and Economic Goods Free Good-Any item for which there is no scarcity Does anybody know of a free good? Air is a good example, but lately with the price to clean up pollution and the desire for cleaner air. This good can also become known as a economic good ( any item that is scarce) because people in a polluted environment such as Los Angeles would love to breathe air that is pure, like that from the Rocky Mountains.

Shortage You may confuse scarcity with a shortage (a situation in which a good or service is unavailable). But an item that is scarce will always be so because of the economic wants and needs, an item that is in shortage can be in that state temporarily, like the gasoline shortage of the 70’s.

Scarcity and Abundance Unit 1 Lesson 2 Give an example of scarcity Visual 1 ..\Capstone\Capstone Visuals\capstone_lesson2_visual.pdf

Activity 1 Old economics textbooks collected in a bookcase near the teacher’s desk with a sign that says “free books, take as many as you want.” The books have been there for three years. Not Scarce, No alternative valuable use. Old economics textbooks collected in a bookcase near the teacher’s desk with a sign that says “free books, take as many as you want.” Another sign posted in the hallway says “$10 paid for any recycled textbook. Bring books to Principal’s office.” Scarce. The books may be read or they may be recycled, two valuable uses.

One economics textbook, five students who wish to do well in the economics course, and an important test in class the next day. Scarce, The one book could be used by five different people; it has valuable alternative uses. One economics textbook, five students who are not taking economics, and an important test in class the next day. Not scarce. Same number relationship, but the information in the book is not valuable to the five students.

Petroleum in Japan, a country without its own oil fields without oil reserves Scarce. Petroleum has many valuable uses in Japan Petroleum in Saudi Arabia, a country with many oil fields and oil reserves Scarce. Petroleum has many valuable uses in Saudi Arabia, and it can be sold to other people in other countries. Several valuable uses.

Scarce resources being treated as not scarce Teachers assign unnecessary homework to their classes, not recognizing that the students have many assignments from many classes. The teachers do not bear the cost of the assignment overload (how to spend scarce study time?), so they may neglect to take scarcity into account when they assign students their homework.

Scarce resources being treated as not scarce Land used as a site for new school buildings was once prime wildlife habitat. The people designing the school had no interest in wildlife, so to them there was no cost in using the land for construction of a school.

Activity 2 Which examples show people treating scarce resources as not scarce and which examples who people treating scarce resources as scarce? Water fountains in Rome flow continuously with water carried by viaducts from the Italian mountains. People walking in Rome quench their thirst by drinking from these fountains. But most of the water flows into the street and down the drains to a river that passes through the city.

Water fountains in Rome flow continuously with water carried by viaducts from the Italian mountains. People walking in Rome quench their thirst by drinking from these fountains. But most of the water flows into the street and down the drains to a river that passes through the city. Scarce resource treated as not scarce. The water has other valuable uses, such as irrigation or sewer treatment.

At closing time, restaurants in the United States are required to throw away all uneaten food. To meet health standards for food preparation and the safety of consumers, the food cannot be stored for use the next day. Also, the law prohibits restaurant employees form giving the food to the poor or dispersing it to local food banks. Scarce resource treated as not scarce. The food could feed hungry people; it could be stored for future consumption; or it could be used as compost to improve soil conditions in gardens.

Oxygen is taken from the air and stored in containers Oxygen is taken from the air and stored in containers. When divers wish to stay underwater for long periods of time, they purchase container-stored oxygen and breathe from it during their underwater activities. A difficult example. Oxygen in the air around us is not scarce. People routinely acquire it at no cost. There is more of it than individuals can use. But oxygen underwater is scarce, as are the resources needed to capture oxygen and store it in containers for underwater use. So container-stored oxygen is scarce.

Pebbles are taken from a beach to build a walkway in a homeowner’s lawn. No one else wants the pebbles. The pebbles are not necessary for the lake’s ecosystem or animal habitat. Not scarce. The pebbles have no valuable alternative use. The resources necessary to move the pebbles (time and effort) are scarce. They could be used for other valuable purposes.

A farmer has a water irrigation contract that requires the water user to use the entire allocation of water to water crops, whether or not all the water is needed for crop irrigation. If the farmer does not use all the water, he or she will receive a smaller allocation next year. Scarce resource treated as not scarce. The Farmer is prohibited from considering other valuable uses for the water.

What is a Good? Good – Physical objects such as clothes or shoes. Goods do not just come about though, there is something needed to make sure that these goods can be made.

What do you use to make goods? Resources Resources are needed to make goods. Resources are usually separated into three categories called the Factors of Production.

Factors of Production Are land, labor, capital and entrepreneurship; the four groups of resources that are used to make all goods and services

Land Includes all natural resources, such as minerals timber and water.

Labor Refers to the physical and intellectual services of people, including the training, education and abilities of the individuals in a society

Capital Refers to products such as machinery and equipment that are used in production. Physical Capital – All Human-made goods that are used to produce other goods and services Human Capital – The skills and knowledge gained by a worker through education and experience Financial Capital - Money

Entrepreneurs/ Entrepreneurship Are ambitious leaders who decide how to combine land, labor, and capital resources to create new goods and services These are the people who make business possible. They are the one’s who have the ambition to risk a lot to try and make a profit. Some Famous Entrepreneurs Ray Kroc-McDonald’s Colonel Saunders-KFC Bill Gates-Microsoft J.Z.-Rockafella Records

Economists say that all goods and services are scarce because the land, labor and capital used to create them are scarce. Consider French Fries. Started off as a potato in Idaho in a field 7.5 gallons of water irrigated the plot where it grew. Nurtured with fertilizers and protected by pesticides The potato was harvested, processed, frozen, and then transported to Seattle. In Seattle it was fried in corn oil from Nebraska sprinkled with salt from Louisiana and eaten in a restaurant. All of the resources used to make the French fries are scarce. And this is just an example from a simple good such as a French fry.

Economic Magic: Creating Something from Nothing Capstone Unit 1 lesson 3 Picture yourself on vacation in spectacular Southeast Alaska, kayaking with a group of friends. You can’t believe you are there. You have never kayaked before in you life, but the school had a special deal enabling students to spend a few says sea kayaking and whale watching. It sounded greet, so you went along. It’s the end of July. The weather is warm and the scenery is spectacular. You’ve had good times and easy paddling so far, but today you’ve noticed clouds gathering and a chill in the air. Still, you an your friends climb into the kayaks and get started, thinking tha tif it does rain you will be able to dry off later, after you travel the day’s course and make camp. Just as you expected, rain begins to fall, and it shows no sign of stopping soon. The clouds get darker, the rain pours down harder and harder, and the wind comes up! It becomes difficult to paddle in the waves. You might be in trouble. Then a huge wave hits the kayak and very quickly you capsize. But you and your friends remember your safety training. You grab hold of the kayaks and paddles and swim for the shore. Thank goodness you were careful to travel near land at all times. Gasping for breath and shivering from exposure to the cold water, you eventually drag yourself up onto the shore. Now you have a new problem. You and your friends are stranded on a small, deserted island and you don’t know how long you will have to be there. The nearest settlement is over 75 miles away. Your task: Survive!

Activity 1 Which of the resources listed there are scarce (have more than one valuable use) which are not scarce Visual 1 ..\Capstone\Capstone Visuals\capstone_lesson3_visual.pdf Use your imagination to solve the problem, but remember to consider the opportunity cost of each of your choices Get into groups Review the island’s environment and the equipment you have left. Figure out how to survive.

What general type of behavior seems to be the same among groups of people trying to keep themselves alive? What choices are they making Creating a survival plan forced the members of each group to decided which items were scarce resources and to make choices about alternative ways to use those resources. What opportunity costs did people encounter in making their decisions? Many items can be used in different ways, and the alternatives may be mutually exclusive.

People in all economies must decide what to produce, how to produce it and for whom it will be produced. How did your decisions relate to these three questions? What did you make to eat or for shelter? How did you make it? Who made it? What natural resources were used? What tools were used? Did everyone get a share of what was produced? Did the goods produced go only to those who helped produce them? Did a leader decide who got what? Did those who did no work get any of the goods produced?

Were your choices made randomly (by chance) or purposefully (considering alternatives)? What alternatives did you consider before you made your choices about production and consumption? How do anticipated costs and benefits explain the choices you made to survive? Gain survival related benefits at the lowest possible costs.

Economic Approach Two different football teams take different approaches to the game. The Ravens take a defensive approach. The Colts take an offensive approach. In economics, economists take a different approach at real world issues and problems. They take what is called the Economic Approach.

Economic Approach (or economic way of thinking) which means that the principles of scarcity and rational self-interest are used in a specific way to search out answers to questions about the real world

Positive Analysis In economics and rational self interest you try to keep your opinions and heart out of the game. You try to make decisions based on what the most readily available and accurate information is trying to portray to you. When you do this you make what is called positive analysis. Positive analysis – Analysis that does not impose the value judgments of one individual on the decisions of others

Normative Analysis We are all humans, and we do have our own opinions, that is what separates us from computers or robots. And because of this, we do have a tendency to let our opinions get in the way. This is called normative analysis. Normative Analysis – You are imposing your value judgments on the decision and desires of others

Fallacy of Composition If I see that the school is burning down and I run out as fast as I can this is in my best interest. I will probably get out before everyone else, and will not get hurt. If everyone in the school were to do the same thing, there would be chaos and nobody would be guaranteed safety. This is why we practice fire drills. This situation happens in economics too and is called the fallacy of composition Fallacy of Composition – The mistaken assumption that what applies in the case of one applies to the case of many

Association as Causation What if I were to tell you that every time we have a sunny day in September, my dog behaves better. This may be the case that every time there was a sunny day my dog behaved better, but he has also behaved good on non-sunny days in September and throughout the whole year. This is called association as causation Association as Causation – The mistaken assumption that because two events seem to occur together, one causes the other

Micro v. Macro Microeconomics-The Study of economics at the level of the individual. Macroeconomics- The study of economics as a whole. Example Micro takes a look at the activity of the individual consumer, whereas macro looks at the whole system.

To choose or not to choose. That is not the question To choose or not to choose? That is not the question? Capstone Unit 1 lesson 4 People often think they have no choice. Todd recently purchased his own car on credit. He works at a part time job at an auto wrecking firm to earn the money he needs to make payments on his new car. Lately, his work in school has declined. When his teacher asked him if he was studying for the tests, he replied, “Not really. I’d like to study more, but I have no choice. I’ve got to keep working to pay off my car loan.”

Did Todd have alternatives in his situation Did Todd have alternatives in his situation? What Alternatives does Todd have in addition to reducing his study time? Activity 1 What was Ashley’s problem? What alternatives did Ashley have? What wee the costs of each alternative? What were the benefits? Complete the grids in activity 1

Rules Incentives Choices Rules influence incentives, and incentives influence choices

All countries establish rules for their economies, and these rules influence behavior. Some rules encourage people to use resources and exchange goods and services. Some rules discourage people from using resources and exchanging goods and services.

Activity 4 Do the rules encourage or discourage economic activity. A. D This policy prohibited 50 percent of the population from providing goods and services to their people (except family members) In that respect it reduced the society’s capacity to provide goods and services. B. E This policy encouraged economic behavior, but it was wasteful. The managers made many small nails which were not useful to people who wanted nails in other sizes. C. E The cost of saving endangered species in this manner is the value of other economic activity, associated with other uses of water, prohibited by the rule. D. D This religious belief obviously discourages the use of cows as a food source. It has also encouraged people in India to concentrate on providing alternative food sources. E. E The high value attached to eating beef encourages the use of cows as a food source. Large ranches produce cows in large numbers. Vegetarians observe that the emphasis on beef ranching discourages efforts to develop other, non-meat food sources in Argentina.

Opportunity Cost The highest valued alternative that must be forgone when a choice is made College is a perfect example. Say you go to college for four years. We could figure out the dollar amount of the opportunity cost for going to college. If you did not go to college you probably would go out and get a job. The job you get we will say will pay $20,000 a year. So you take that X 4 years and you get $80,000. Plus you must pay tuition and other expenses for 4 years. So say they amount to $12,000 a year X 4 years = $48,000. You add the two and you get $128,000 opportunity cost to go to college and pursue a better career.

Tradeoff In decisions that require a choice we choose what we think will benefit us the most with the information we have available which is called rational self-interest. When we choose we often choose one thing over another. This is called a tradeoff. Tradeoff- The giving up of one good or activity in order to obtain some other good or activity

Marginal Marginal cost- additional cost Marginal Benefit- additional benefit

Efficiency The case in which a given level of inputs is used to produce the maximum output is produced at minimum cost

Trade If countries of the world specialize and trade their goods to each other each country will end up with more than if they all tried to produce their own of everything. What are some things the US trades for and trades with other countries? Oil, Rice, Coffee, Etc. Food, Steel, Coal Etc.

Comparative Advantage When we talk about trade, we are always looking to see who has the best suited environment to produce a good or service. In economics if a country is better suited to produce a good than another country, we give a name to the type of situation created. Comparative Advantage – The ability to produce a good or service at a lower opportunity cost than someone else

Example: If you and your friend are putting together a band or group in music. You both look at your talents. You realize that you are better at marketing and booking gigs and your fried is really better at the musical aspect of the group. You have a comparative advantage in the business realm of the band whereas your friend has a comparative advantage in the musical realm. You would use your skills and trade (or partner) with your friend to capture their musical abilities.

Division of Labor When you think of specialization, another concept in the business world comes to mind. There was an innovation in the production process that happened early in the 20th century. Does anyone know what production innovation helped change the consumer market and turn it into a place where things can be produced more easily? Division of Labor- The segregation of a resource into different specific tasks for example, one automobile worker puts on bumpers, another doors and so on