What is Economics?  The study of scarcity, or how society tries to satisfy unlimited wants through the use of limited resources.

The essential economic problem:  SCARCITY: There are UNLIMITED wants/needs but LIMITED resources

Need vs. Want DISCUSS: What is the difference between a need and a want?  Need: something essential for survival  Ex: air, shelter, food, clothes  Want: something a person desires to have  Ex: Cadillac, Playstation3, New Bedroom set

DISCUSS: When you hear “ECONOMICS,” what comes to mind? What we want to come to your mind… CHOICES

Words to Know:  Scarcity: the gap between what the consumers would like (UNLIMITED) and what the consumers can get (LIMITED).  Trade Off: the process of giving up one desire in order to satisfy another desire  Opportunity Cost: the value of what we give up in order to get or do something else. (LOST)  Monetary cost: price you paid for a decision

Trade Offs &Opportunity Costs  Three totally awesome men want to marry Ms. Nall. She really likes them ALL. Since she can only have one husband, she must choose:  She decides to marry Justin, leaving Kevin and Luke all alone.  What was the trade off?  What is the opportunity cost?

 Need: something that is required  Examples:  Want: something that is desired  Examples:  Good: a tangible product  Examples:  Service: a treatment (you cannot touch it!)  Examples:

 Consumer: a buyer  Examples:  Producer: The seller  Examples:  Production: the process of making goods or services.  Examples:

3 Basic Economic Questions  What to produce?  How to produce?  For whom to produce?

Scenario #1  Melissa is going to buy a new IPOD for $70, instead of a new pair of running shoes. She could also have bought her sister a birthday present or her boyfriend a new watch.  Tradeoffs – running shoes, birthday gift, watch  Opportunity Cost – running shoes  Monetary Cost - $70

Scenario #2  The Adams family decides to go on a family vacation that costs $1,899 instead of buying a new car. They also could have put the money in Wendy’s college fund or bought a new TV.  Tradeoffs – new car, college fund, TV  Opportunity Cost – new car  Monetary Cost - $1,899

Scenario #3  Mr. S bought a new Wii for $500 instead of going for a weekend trip to the beach. He could have also used that money to buy a flat screen TV.  Tradeoffs – trip to the beach or TV  Opportunity Cost – beach trip  Monetary Cost - $500

Scenario #4  Matt decided to study Friday night for his exam on Monday rather than go out with his friends to the movies. He could have also gone to the basketball game or stayed home and play board games with his family.  Tradeoffs – movies, basketball game, board games  Opportunity Costs – movies  Monetary Cost - none

(Write this to the side)  Marginal Costs  The extra or additional cost of producing one additional unit of an output  Ex: 30 bike helmets= $1500, 31 bike helmets= $1550  marginal cost= $50

(Side)  Marginal Revenue  the extra revenue that results from selling one more unit of an output

(Side)  Cost-Benefit Analysis  - an economic decision making technique that tells us to choose an action or make a decision when the benefits are greater than the costs

What is Economics?  Economics: the study of how people seek to satisfy their needs and wants by making choices

Classifications Economists also have created categories for the resources necessary to produce goods and services. In economics, factors of production are the resources used to produce.

THE FACTORS OF PRODUCTION What to produce?

There are 4 Factors of Production:  Land or Natural Resources  Capital Goods  Labor  Entrepreneurship

Land or Natural Resources  Materials that are NATURALLY MADE and transformed into something else  Examples:  Oil  Timber  Land  Crops  Natural gas  Milk

2 Types of Natural Resources  RENEWABLE  Can be replaced or renewed or recycled  ex: wood, water, crops  NON-RENEWABLE  Once used, resource is gone  Ex: Oil, Natural Gas, Gold

LABOR  PEOPLE who work to produce a good or service  Example:  Construction worker  Teacher  Line cook

ALWAYS a PERSON!

Types of Labor #11  Blue Collar: typically performs “manual” labor (uniform)  White Collar: typically performs more “business” like labor  Professional: most advanced type of labor- highest educational degrees.  Skilled: typically knows a craft

Capital  PHYSICAL  Man-made instruments that assist in making something else  Examples:  Hammer  Robot  Book  Computer

ALWAYS a THING!

Capital  HUMAN  Investment in knowledge or training for a laborer to become more productive  Examples:  Training programs  Skills development  Advanced degrees

Entrepreneurs  People who RISK time and money ($) to start their own business and organize the other factors of production.  Examples:  Diddy  Ben & Jerry’s  Donald Trump

Capital

Land/Resource

Capital

Labor

Entrepreneurship

Land/Resource

Labor

Land/Resource

Entrepreneurship

Review

Production and Productivity

Grasping Productivity Simulation Assembly Line Labor Technology Automation

 Automation Automation

Productivity - Vocabulary  How well resources are being used to produce a good or service.

Division of Labor  Breaking up the steps of production among many workers

Specialization  Workers are experts at only one task and do that task efficiently

Ways to increase productivity  1790  Total population = 4 million  Farmer population = 3.6 million (90%)  1840  Total population = 17 million  Farmer population = 9 million (53%)  1940  Total population = 132 million  Farmer population = 30 million (23%)  1990  Total population = 246 million  Farmer population = 4 million (1%) SO…why haven’t we all died of starvation if there are less farmers today than before?

An assembly line  Increases productivity by having workers stand still and have output come to them to work on.

Technology  Increases productivity by improving the tools used to produce goods (robots, computers)

Human Capital  Increases productivity by making the worker smarter.

Automation  Increases productivity by using machines instead of humans (machines don’t get tired or take breaks)

Automation

Comparative Advantage  When a country produces a good that is easy to make instead of a good that is hard to make.  Ex:  Saudi Arabia produces Oil  U.S. produces Wheat

How does it affect global markets?  Comparative advantage leads to interdependence between countries.  Ex: U.S. sends extra wheat to Saudi Arabia for oil.

DISCUSS:  When you go into Subway, is it faster if there is 1 worker behind the counter or 2?  What do the 2 workers do that makes it faster?

Law of Diminishing Returns  Productivity will increase to a point, then begin to decrease as you add one factor of production. Most productive at this point

Cracker Challenge

Law of Diminishing Returns  By adding more factors of production (i.e. technology, better trained workers, better entrepreneurship) it leads to greater efficiency.  But ONLY to a certain point and then you begin to lose efficiency.

Productivity – What is it?  The measure of the efficient use of an economy’s resources.  Making the MOST of the resources you have.  Utilizing resources to 100% of their capacity.  UNDERUTILIZATION: not using resources efficiently  Production Possibilities Curve: graphic representation of an economies productivity potential

Units of clothing (millions ) Units of food (millions) Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m A Production Possibilities Curve

UNIT 7b

Discuss  What is a market?  In a market who is the consumer?  How does the price of a good affect the consumer?

Market  An arrangement that allows buyers and sellers to exchange things  Markets exist because no one is self sufficient and no one produces all we require to satisfy all our needs and wants.

Discuss  Can a market exist on the internet?  Can a market exist on the phone?  A market exists anywhere and anytime people make exchanges with one another.

Demand  Description  The quantities of a particular good or service consumers are willing and able to buy at different possible prices at a particular time

Demand Illustration p.1 sec. 1 Price Quantity As price goes up, quantity goes down D1

Discuss  How does demand and “want” or “need” differ?  You may want or desire a new car or a closet full of clothes, but you demand these things only when you are willing and able to buy them.

Quantity Demand  The quantities of a particular good or service consumers are willing and able to buy at set prices at a particular time

Quantity Demand Illustration D2 Price Quantity

Demand Schedule  How much people are going to buy at the various prices.  Ex. The price of pizza Price Quantity $.50 $1.00 $1.50 $2.00 $2.50

Law of Demand  As price goes up quantity goes down  As price goes down quantity goes up  People buy less of something at higher prices then they do at lower prices.

Discuss  Are there certain items you have to buy even if the price increases?  Medicine, Electricity, Gas

Elasticity of Demand  While all demand curves slope downward and to the right, their shape and steepness can be quite different.  ELASTICITY of DEMAND: How much the quantity demanded will change if the price rises or falls.

Elastic Demand  demand that is very sensitive to a change in price because…  Many substitutes  Expensive (requires high % of budget)  Time to plan or adjust  goods that one might stop buying or cut back on as price increased (SUVs, Luxury items)**on a graph this demand curve will be FLAT

Inelastic Demand  demand that is not very sensitive to a change in price  goods that you would buy at any price; there are few if any substitutes, inexpensive, must buy now  (milk, gas, prescription drugs) **on a graph this demand curve would be very steep.

Price Elasticity of Demand for Milk and Cola Drinks

Illustration of Decrease and Increase in Demand  Decrease in Price  Increase in Price Price Quantity D1 D2 Quantity Price D1 D2 The less you buy the more you will move to the left!

The Demand Curve  The Demand Curve slopes downward to the right because the consumer is willing and able to buy more gasoline at lower prices than at higher prices.

Can YOU tell the difference????

What is the difference?  Complementary Good: Two goods that are usually consumed together (Hot Dogs & buns)  Substitute Good: An acceptable replacement for a good (Playstation & Xbox)

Reasons Demand can change  People’s Income  Weather  Complementary Goods  Substitute Goods

People’s Income Increases Effect on Demand  Demand Increases  (shift right) P Q D1D2

Bad Weather (for product) Effect on Demand  Demand Decreases  (shift left) P Q D1 D2

Price of Complementary Good Decreases (ex: peanut butter & jelly) Effect on Demand  Demand Increases  (shift right) P Q D1 D2

Price of Substitute Good Decreases (ex: Pepsi & Coca-Cola) Effect on Demand  Demand Decreases  (shift left) P Q D1 D2