Today’s topics What is “economics”? Economic way of thinking Economic Vocabulary Opportunity costs Factors of Production Entrepreneurship

What is Economics? The science of how people seek to satisfy their needs and wants by making choices based on scarce resources Essentially, how people interact and trade with one another

Mercantilism 1500’s-1700’s An economic theory that the prosperity of a nation depends upon its capital, or wealth, trade among nations was considered bad “Protectionism” –By the state The Enlightenment 1700’s European philosophers began to rethink society, specifically: nature, slavery, religion, trade Adam Smith 1776 publishes “Wealth of Nations” Mercantilism is wrong Government intervention is wrong Trade is good for all parties

Economics as a field Economics Finance Industrial Organization Sociology Marketing Resource Management Cousin to Accounting Combines, history, math, psychology, political science

Economist A person who studies Economics Analyze, explain, predict Ben Stein in Ferris Buhler’s Day Off

Human Capital Skills, experience, education a person has It’s the reason doctors are paid more than sandwich artists

N. Greg Makiw’s Principals of Economics People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another. The Cost of Something is What You Give Up to Get It. Decision-makers have to consider both the obvious and implicit costs of their actions. Rational People Think at the Margin. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. People Respond to Incentives. Behavior changes when costs or benefits change. How the Economy Works as A Whole Trade Can Make Everyone Better Off. Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services. Markets Are Usually a Good Way to Organize Economic Activity. Households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government. Governments Can Sometimes Improve Market Outcomes.

In Economics…. We must build models to explain the world These models rely on assumptions Economists assume people are rational

G.A.T.E. Economic Assumptions 1.People Choose, based on preferences 2.All Choices Involve costs 3.People respond to incentives in predictable ways 4.Economic systems influence individual choices and incentives 5.Voluntary trade creates wealth 6.The results of choices lie in the future

G.A.T.E. Economic Assumptions 1. People Choose, based on preferences

G.A.T.E. Economic Assumptions 2.All Choices Involve costs Harvard vs. Starting Microsoft

G.A.T.E. Economic Assumptions 3. People respond to incentives in predictable ways

G.A.T.E. Economic Assumptions 4. Economic systems influence individual choices and incentives

G.A.T.E. Economic Assumptions 5. Voluntary trade creates wealth You spend $$ at store You enjoy goods or service! for Store profits Increased employment Increased investments

G.A.T.E. Economic Assumptions 6. The results of choices lie in the future OR

Write 3+ examples for each assumption. One paper per group, write your names on it 1.People Choose, based on preferences 2.All Choices Involve costs 3.People respond to incentives in predictable ways 4.Economic systems influence individual choices and incentives 5.Voluntary trade creates wealth 6.The results of choices lie in the future 7.Explain why assumptions are important in economics? 8.Why do economists have a term for “human capital”?

1.What do you think these economic items have in common? 2.What do you think these economic items have in common? A class at:

In Economics A “good” is a physical economic item A “service” is something performed for someone in exchange for something of value, usually money One sheet of paper per each group: Write goods on one side, services on the other Why is this important?

Good or Service? Mark Ecko started selling shirts he designed in the 1980’s BY HIMSELF! Now he’s worth millions of $$. Not bad for a middle class kid from New Jersey. This could be you!! More on that this Friday.

Good or Service?

Needs vs. Wants A want is a good/service you “want” but can live without Most economic items are wants Few goods/services are needs –Food, clothing, shelter (usually in the generic sense) Why is this important?

Need or Want?

Problem for humans People have unlimited wants People have limited resources to get those wants We call this problem: Scarcity

Opportunity Cost What you give up to do something “The next best option” For example: If you have $20 in your pocket and you want to take your BF/GF to the movies, then you won’t have any money left for a new $20 shirt

Opportunity Costs Economists call what we gave up “Trade offs” For Ex: I’m giving up ….

Opportunity Costs of Going to College

Source: US Bureau of Labor Statistics Assuming a person works for 45 years, how much more will the person with a bachelor’s degree make over a person with only a high school diploma? What’s the other problem for people without high school diplomas? 52 weeks in 1 year

Assuming a person works for 45 years, how much more will the person with a bachelor’s degree make over a person with only a high school diploma? Without: $595 X 52 = $30,940/yr X 45 = $1,392,300 With Degree: $962 X 52 = $50,024/yr X 45 = $2,251,080 On average, is it worth it? What’s the other problem for people without high school diplomas? It depends!

In millions of dollars; based on work experience Source: US Bureau of Labor Statistics Why is this important?

Lets analyze a how a business works Economists call a business or non-profit: a “firm”

What economic opportunities do you see in this picture? May 2008

Factors of Production Items we need to be in business 3 categories + 4 th idea

Land Any natural resource –Copper mine example

Labor People working Wages $ Benefits

Capital Goods used to create other goods/services Usually the largest cost for entrepreneurs Explanation for “Capitalism”

Let’s build a new Circle K! Land Labor Capital

New Ideas! Entrepreneur – French word Person who takes a risk and starts a new business –OR comes up with a new idea within a business Empresario

Group Activity “Entrepreneurship” Groups of 3, Design a brand new business On a single sheet of paper with everyone’s name answer there.

Chapter 1 Vocabulary Assignment Write the word, definition, use it in a sentence and draw a small picture Word definitionsentencepicture scarcity society can not provide unlimited human needs and wants. I face the problem of scarcity everyday when I make choices. TIME – THE ULTIMATE SCARCE RESOURCE WHAT DID YOU GIVE UP TO BE HERE? - TRADE-OFF “Jargon”

Word definitionsentencepicture Scarcity, trade off, opportunity cost, thinking at the margin, needs, wants, surplus, shortage, goods, services, factors of production, land, labor, capital, physical capital, human capital, entrepreneur