1 Module ½: The First Day of School Module ½: The First Day of School

Course Outline 2 I. Basic Economic Concepts II. Measurement of Economic Performance III. National Income and Price Determination IV. Financial Sector V. Inflation, Unemployment and Stabilization VI. Economic Growth and Productivity VII. International Trade and Finance 8-12% 12-16% 10-15% 15-20% 20-30% 5-10% 10-15%

Staying Connected 3

Staying Connected 4

School Wires

Headlines 6

Understanding Economics…? 7

Homework Sign up for Edmodo, join our group Group code-dvjrd8 Have all class materials and cover your books

Do Now. At many cash registers there is a little basket full of pennies. People are encouraged to use the basket to round their purchases up or down. If an item costs $5.02, you give the cashier $5.00 and take two pennies from the basket to give to the cashier. If an item costs $4.99, you pay $5.00 and the cashier throws a penny into the basket. It makes everyone’s life a bit easier. Of course, it would be easier still if we just abolished the penny, a step that some economists have urged. But why do we have pennies in the first place? If it’s too small a sum to worry about, why calculate prices that precisely?

Unit One Basic Economic Concepts Unit One Basic Economic Concepts AP Macroeconomics Mr. Graham

11 Module 1: The Study of Economics Module 1: The Study of Economics

Individual Choice: The Core of Economics 12 Economics The study of how people allocate their limited resources to satisfy their unlimited wants The study of how people make choices

2-13 Overview of economic “choices” Made by… Consumers and Producers based on… Needs and Wants for… Goods and Services obtained through… Production (i.e. Resources)

2-14 Who makes economic choices? Made by… Consumers The people who decide to buy things. Producers The people who make the things that satisfy consumers’ needs and wants.

2-15 How do consumers and producers make decisions? …based on… Needs To economists, the term need is not objectively definable. Perhaps the best way to view needs is as an absolute necessity to stay alive. Wants (Desired) goods and services on which we place a positive value People have unlimited wants.

2-16 …for… Goods Goods are all things from which individuals derive satisfaction or happiness. Services Tasks that are performed for someone else Can be referred to as intangible goods How do consumers and producers make decisions?

2-17 …obtained through… Production Any activity that results in the conversion of resources into products that can be used in consumption Resources (a.k.a.) Factors of Production Inputs that are used to produce things that people want Although “wants” are unlimited, the four major “resources” are limited… How do consumers and producers make decisions?

2-18 Scarcity, Choice and Opportunity Cost Limited Resources and Unlimited Wants Scarcity Choices Opportunity Cost

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2-20 What resources are used to obtain these things? 1.Land – Land is often called the natural resource and consists of all the gifts of nature. – It is a scarce resource because there is only a limited amount of land available.

Labor (a.k.a. human capital) – Labor is the human resource that includes all productive contributions made by individuals who work involving both mental and physical activities. – It is a scarce resource because there is only a limited amount of people available to work. What resources are used to obtain these things?

Capital – Capital is all manufactured resources that are used for production (i.e. equipment, machinery, factories). – In economics, money is NOT considered capital—it doesn’t produce anything! – It is a scarce resource because there are a limited number of machines, equipment and factories. What resources are used to obtain these things?

Entrepreneurship – An entrepreneur is an individual who is willing to take a risk to start a business. – It is a scarce resource because there is a limited amount of individuals who want to start his or her own business. What resources are used to obtain these things?

2-24 Scarcity Scarcity occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants. “Mathematical” Definition of Economics Economics = Scarcity = Wants > Resources

The Economic Person: Rational Self-Interest 25 Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain. Rationality Assumption The assumption that people do not intentionally make decisions that would leave them worse off

The Economic Person: Rational Self-Interest 26 “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 interest.” — Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776

The Economic Person: Rational Self-Interest 27 Question Does the fact that some people make apparently irrational choices invalidate the rationality assumption in economics?

28 Defining self-interest The pursuit of one’s goals, does not always mean increasing one’s wealth Prestige (conspicuous consumption) Friendship Love The Economic Person: Rational Self-Interest

Positive vs. Normative Economics 29 Positive Economics (most economics focus on this) Purely descriptive statements or scientific predictions; “If A, then B,” a statement of what is (objective policy analysis) Normative Economics (political slant) Analysis involving value judgments; relates to whether things are good or bad, a statement of what ought to be (subjective beliefs of policymakers) Red Flags: good/bad, desirable/undesirable, better/worse

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When and Why Economists Disagree 31 When? Why? Models Values Eventually resolved by research and data, though that has limitations…

Do Now. Define: – Recession – Expansion

33 Module 2: Introduction to Macroeconomics Module 2: Introduction to Macroeconomics

Microeconomics vs. Macroeconomics 34 Microeconomics The study of decision making undertaken by individuals (or households) and by firms Like looking though a microscope to focus on the smaller parts of the economy Macroeconomics The study of the behavior of the economy as whole Deals with economy-wide phenomena

Microeconomics vs. Macroeconomics 35

GDP tends to grow at about 1-2% per year. This does not mean that at every point in time the GDP is increasing at 1-2%. The ups and downs in business activity throughout the economy are called the business cycle. The Business Cycle

1.High Employment (Low Unemployment) 2.Stable Prices (Low Inflation/Deflation) 3.Economic Growth The 3 Goals of the Macroeconomy

7-39 Unemployment The percentage of the measured labor force that is unemployed. – Total number of adults (aged 16 years or older) willing and able to work and who are actively looking for work and have not found a job Remains the most closely watched and highly publicized labor statistic – Increases in times of recession – Decreases in times of expansion

The U.S. Unemployment Rate and the Timing of Business Cycles,

Prices Inflation – The situation in which the average of all prices of goods and services in an economy is rising. Deflation – The situation in which the average of all prices of goods and services in an economy is falling.

Economic Growth? Increase in per capita real GDP measured by its rate of change per year

Economics USA

Do Now. /08/us/sept-11-reckoning/cost- graphic.html?_r=0 /08/us/sept-11-reckoning/cost- graphic.html?_r=0 Identify something that you did not know before reading this article Identify an interesting fact Write down one question about the article

45 Module 3: The Production Possibilities Curve Model Module 3: The Production Possibilities Curve Model

The Use of Models in Economics 46 Simplified representations of the real world used as the basis for predictions or explanations. A good economic model can be a tremendous aid to understanding…

2-47 Helps economists think about the trade-offs every economy faces. Helps us understand 3 aspects of the economy: 1.Efficiency 2.Opportunity cost 3.Economic growth Our First Model: The Production Possibilities Curve Our First Model: Production Possibilities Curve (PPC)

2-48 Production Possibilities Curve (PPC) Represents all possible combinations of two goods or services that can be produced within a stated time period. – Assumes a fixed amount of resources. – Assumes that all resources are being used in the most efficient manner possible A movement from one point to another on the PPC shows that some of one good must be given up to have more of another (See Figure 3-1).

2-49 Our First Model: The Production Possibilities Curve Production Possibilities Curve (PPC)

2-50 The PPC does not in practice have constant trade-offs of one good for another and is typically a curve that is bowed outward. Production Possibilities Curve (PPC) As society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases.

2-51 Activity 1: Scarcity, Opportunity Cost, and Production Possibilities Curves

2-52 Production Possibilities Curve Review Trade-offs are represented graphically by a PPC showing the maximum quantity of one good or service that can be produced, given a specific quantity of another, from a given set of resources over a specific period of time. A PPC is drawn holding the quantity and quality of all resources fixed over the time period under study. Points outside the PPC are unattainable; points inside are attainable but represent an inefficient use or underuse of available resources. Because many resources are better suited for certain productive tasks than for others, society’s PPC is bowed outward, following the law of increasing relative cost.

2-53 Economic Growth Increases the production possibilities of, for example, coconuts and fish. Occurs over a period of time Is illustrated by an outward shift of the production possibilities curve Scarcity still exists, however, no matter how much economic growth there is.

2-54 Economic Growth

Do Now!

56 Module 4: Comparative Advantage and Trade Module 4: Comparative Advantage and Trade

2-57 Trade Each person provides a good or service that other people want in return for different goods or services that he or she wants. – People can get more of what they want than they could get by being self-sufficient. – The increase in output is due to specialization

2-58 Specialization By dividing tasks and trading, two people (or 7 billion people) can each get more of what they want than they could be being self-sufficient. Leads to greater productivity For example… – An individual may specialize in law or medicine – A nation may specialize in the production of coffee, computers, or cameras

2-59 Division of Labor One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a particular business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations.… Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this particular business, they certainly could not each of them have made twenty, perhaps not one pin a day.… --Adam Smith, The Wealth of Nations

2-60 The ability to produce a good or service at a lower opportunity cost compared to other producers (i.e. individuals or nations) Is always a relative concept It allows for specialization. Comparative Advantage

2-61 Activity 56: Comparative Advantage and Trade

Comparative Advantage Is this the best they can do? Given that the two castaways have different opportunity costs, they can strike a deal that makes both better off.

Comparative Advantage

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2-67 Notice that in our example Tom is actually better than Hank at producing both goods. Absolute Advantage: The ability to produce a good or service at an “absolutely” lower cost Measured by – producing more units of a good or service using a given quantity of labor or resource inputs – producing the same quantity of a good or service using fewer labor or resource inputs Absolute Advantage

Specializing in producing goods for which a nation has a comparative advantage allows for greater efficiency Production capabilities increase, making possible greater worldwide consumption through international trade Comparative Advantage and International Trade

2-69 Comparative Advantage and International Trade

2-70 When nations specialize where they have a comparative advantage and then trade with the rest of the world… – Economic efficiency improves – Output increases – Average standard of living rises Comparative Advantage and International Trade

71 Appendix: Graphing in Economics Appendix: Graphing in Economics

Identify the title of the graph and make sure you understand the general purpose or objective of the graph. Graphs in Economics Show the relationship between the given price and how much of the product a consumer would purchase.

Identify each axis and note what is labeled and the measurement/units. Graphs in Economics x-axis is the Quantity Demanded, y-axis is the Price In economics, the y-axis is always price, despite price being the independent variable.

Identify the slope(s) and any points on the graph. Determine whether it is a positive or negative slope. Graphs in Economics The slope goes downwards to the right, reflecting an inverse relationship.

Use the information to establish the economic meaning of the graph. Graphs in Economics There is a negative, relationship between the price of any good or service and the quantity demanded, holding other factors constant (ceteris paribus)