Economics & Finance What is Economics? EconEconomyEconomicsEconometrics Econometric Forecasting Economize Study of how Societies Allocate Scarce Resources

Chapter 1 Section 1 Scarcity and the Science of Economics  TINSTAAFL  There Is No Such Thing AS A Free Lunch OK….. Prove Me Wrong!!

Chapter 1 Section 1Terms:  Economics  Study of How Societies Allocate Scarce Resources  Need  Basic requirement for survival:  Food, Clothing, Shelter  Want  A way of expressing a need:  Pizza or other “favorite food”

Chapter 1 Section 1Terms:  Scarcity  Situation that arises when unlimited wants are met with limited resources  Unlimited Wants  Scarce Resources Scarcity Choices What to Produce How to Produce For Whom to Produce

Chapter 1 Section 1Terms:  Scarcity vs Shortages  Shortages occur when producers won’t or can’t offer goods or services at the current price.  Shortages can be temporary (holiday) or long-term (war or drought).  Scarcity exist when wants/needs are greater than resource supply.  Can change long-term when new resources are discovered or new technologies make greater use of existing resources.

Chapter 1 Terms cont.  Factors of Production  Land, Labor, Capital and Entrepreneurs  Each of these resources are SCARCE!  Land  “Gifts of Nature” or Natural Resources including: fertile soil, forests, mineral deposits, livestock, sunshine etc. In order to satisfy Needs & Wants utilizing Scarce Resources, we must employ the:

Chapter 1 Terms cont.  Labor  People: Physical efforts put forth to produce goods and provide services.  Includes all people who contribute to production except “Entrepreneurs”  Subject to change in supply due to:  Population growth  War  Disease etc.  Capital (or Capital Goods)  Physical Capital : Tools, equipment, machinery, and factories used in production.  Human Capital: Investment in self through education, training, internship/experience.

Chapter 1 Terms cont.  Entrepreneurship  Innovator  Risk Taker  Profit Seeker  Production  When all factors of production: Land, Capital, Labor and Entrepreneurship are present  Production of Goods & Services takes place

End Chpt 1 Section 1

Chapter 1 Section 1 Assessment  1. Describe an Economic:  Good  Service  Combination  2. Why is the idea of Scarcity a starting point for thinking economically?  3. Describe a situation of Scarcity  3b.Describe a situation of Shortage  4. Describe the 3 (4) Factors of Production, explaining the role of the Entrepreneur

Chapter 1 Section 1 Assessment 5. What special advantages does Physical Capital offer? (The book lists three distinct advantages. Come up with a 4 th !!)

Economic Choices and Decision Making:  Trade-Offs & Opportunity Cost  Trade-Offs  Alternative choices forgone in each economic decision (Figure 1.5 in text)  Opportunity Cost  Cost of the next best alternative when one choice is made over another. (See cartoon page 21)  Production Possibilities Frontier  Diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed.

Decision Making Grids

Economic Choices and Decision Making:  Process for designing PPF  Identifying Possible Alternatives  Cost of Idle Resources (point “e”) Guns Butter Alternative Possibilities A a b c d e Production can take place anywhere on or inside the frontier. Fully Employed Resources Economic Growth could take us here

Economic Choices and Decision Making: Guns Butter Economic Growth C a b c d Increased productivity And additional factors of production expand Production possibilities

Economic Choices and Decision Making:  Opportunity Cost Guns Butter Opportunity Cost B a b c The opportunity cost Of producing 100 units Of butter is the 30 guns given up

Economic Choices and Decision Making cont.  Thinking Like an Economist  Build Simple Models  Alternative Possibilities  Opportunity Cost  Economic Growth

Economic Choices and Decision Making cont.  Employ Cost Benefit Analysis  Cost Benefit Analysis  Incremental Steps

Economic Choices and Decision Making cont.  The Road Ahead  Free Enterprise Economy  Topics & Issues  Standard of Living  Economics & Citizenship  Making the Rational Choice

Scope of Economics  Description  Gross Domestic Product (GDP)  Dollar value of all “FINAL” goods and services, structures produced within a country’s borders in one year  Most comprehensive measure of a country’s total output  Key measure of nation’s economic health  Other Key Measurements:  Unemployment rate  Inflation  International trade  Business/Labor relations  Government spending

Scope of Economics cont.  Analysis  Examination of information summarized in studies and presented:  Graphs, Charts, Reports etc.  Explanation  Communication of Information gained through analysis to others so that action can be taken  Prediction  Forecasting economic trends so that action can be taken to avoid excessive unemployment and inflation  Stabilize the economy

Group Activity Pair up with ONE other person

Your Island Team member names

What You’ll Produce (Must be TWO Products or Services)  List……  Quantity ea.

How You’ll Produce it…  Manufacture  Grow  Factory/Handmade  Etc…

Who Gets It??  Rich  Poor  Middle Class

List your Factors of Production  Land - Describe  Labor - Describe  Capital – Describe  Entrepreneurs - Describe

Production Possibilities Curve  Create a curve and animate the following:  Production Possibilities Frontier  Movement along the curve = Change in allocation of resources  Shift in Curve = Change in resources or technology  Show a point of inefficiency  Explain your Graph!

10

% Entrepreneurs by Population

Chapter 1 Terms cont.  Goods  Item that is economically useful or satisfies an economic “want”  Book, CD, Ipod etc.  Consumer Good  Intended for final use by individuals  Capital Goods  Manufactured goods intended to be used to produce other goods

Chapter 1 Terms cont.  Services  Work that is performed for someone to satisfy an economic “need” or “want”  surgery, haircut, home repair etc.  Consumer  Person who uses goods and services to satisfy wants and needs.  Consumption is the process of using up goods to satisfy wants and needs.

Chapter 1 Terms cont.  Value  Worth that can be expressed in dollars and cents  Paradox of Value  Some necessities, such as water, have little monetary value  Some non-necessities, such as diamonds, have great monetary value.  Scarcity is a major factor in determining value  If there was only enough water remaining for a small number of people, then people would pay truck loads of diamonds for a single gallon!  Utility  For a good to have value, it must also have utility  Capacity to be useful and provide satisfaction  Not fixed or measurable, like weight or height  Varies from one person to another  Therefore, In order to have value, a good must both be scarce and have utility

Chapter 1 Terms cont.  Wealth  Accumulation of those products that are tangible, scarce, useful and transferable from one person to another  Nation’s wealth is comprised of all items in the economy: homes, factories, footballs, clothing etc.  Services are not counted as wealth because:  They are intangible

The Circular Flow of Economic Activity Product Markets BusinessesIndividuals Factor Markets GoodsServices GoodsServices BuyProductiveResources Land Land Capital Capital Labor LaborEntrepreneurs Income from Resources ConsumerSpending BusinessIncome Payments for Resources

The Circular Flow of Economic Activity  Factor Markets  Where productive resources are bought and sold  Where individuals earn incomes  Product Markets  Where producers sell their goods and services to consumers  Where people spend their incomes

Productivity & Economic Growth  Economic Growth  Occurs when nation’s total output of goods and services increases over time.  The circular flow of Economic Activity becomes larger  More factors of production, goods, and services flow in one direction  More payments flow in the opposite direction  Productivity  When scarce resources are used efficiently

Productivity & Economic Growth  Division of Labor (Specialization)  When work is arranged so workers do fewer tasks than before  Model T Assembly line production  Specialization:  When factors of production perform tasks that they can do relatively more efficiently than others  Investing in Human Capital  Human Capital  Sum of the skills, abilities, health, and motivation of people.  Investment through: Health care, training, education, motivation

Productivity & Economic Growth  Investing in the Future  Investments in both human and physical capital  Long-term approach to profit making  Economic Interdependence  We rely on each other to produce the goods and services we need/want  Everything is CONNECTED!

Effect of Education on Income Education level Males Females Average Income For   Less Than 9 th Grade$22,746$14,957   9 th to 12 th Grade (no diploma)$27,638$18,594   High School Graduate$32,611$22,656   Some College, no degree$39,367$26,562   Associate Degree$40,465$29,776   Bachelor’s Degree$55,832$37,319   Master’s Degree$71,225$46,072   Professional Degree$120,052$74,077   Doctorate Degree$93,106$60,468

Father of Economic study Adam Smith 1723 – 1790  Kirkcaldy, Scotland  Friend of Benjamin Franklin  Wealth of Nations  The Invisible Hand  Each individual “intends only his own gain, and he is in this…led by an invisible hand…

Three Basic Economic Questions:  What to produce?  Given the limited resources we have, what exactly should we produce?  How should we produce it?  Mass Production?  Hand crafted?  For Whom should we produce?  Professionals? Workers? Government?

On a Piece of Paper…   List some examples from your life that involve Scarcity and the Economic Choices you’re forced to make.   What decisions did you make?   Were they based on Needs, Wants or Both?   What were the deciding factors?   Were the decisions based on Short Term or Long Term Factors?   Were you able to have it all????