Unit 1 Basic Economic Concepts 3/8/2016

Scarcity & Opportunity Costs People have unlimited wants Resources to fulfill these wants are limited. Resources are land, labor, capital and entrepreneurship (factors of production) “Economizing Problem” 3/8/2016

Example of scarcity A teenager wants to go to a soccer game on Saturday night but also wants to catch up on late school assignments. The teenager encounters the scarcity of what???? TIME 3/8/2016

Example of scarcity A family wants to take a vacation to Mexico and build an addition on the house. They experience scarcity because of what??? What will not permit both to occur? FAMILY INCOME 3/8/2016

Opportunity Costs Individuals and society must choose between competing wants. They must make decisions Opportunity cost emphasizes that people are making choices. People choose to do one activity and the cost is giving up another activity 3/8/2016

Production Possibilities Curve (PPC) The PPC is drawn assuming that 1. Economy is operating efficiently 2. All resources (land, labor, capital, entrepreneurship) are fixed in quantity and quality as well as fully employed. 3. The technology is constant 4. Economy produces only two types of products 3/8/2016

Visual 1.1 3/8/2016

Production Possibilities Curve (PPC) The shape of the PPC (bowed out or concave to the origin) determines the trade-off in the production of the two commodities What other shapes could the PPC take, and what do the shapes imply about the trade- off? If the factors of production were not fully utilized, where on the graph would an economy be? 3/8/2016

Visual 1.2 3/8/2016

Activity 1 3/8/2016

4 Fundamental Questions Answered by Every Economy 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will get the goods and services? 4. How will the system accommodate change? 3/8/2016

Trade What would life be like if we could only consume the goods produced by the state we live in? How would production in the state change if each state had to be self- sufficient? It is individuals, not nations or states, that trade 3/8/2016

Absolute and Comparative Advantage Absolute advantage One individual or nation can produce more output with the same resources as another individual or nation Comparative advantage One individual or nation can produce a good at a lower opportunity cost than another 3/8/2016

Examples of Comparative Advantage Economics professor and secretary Auto mechanic and medical doctor 3/8/2016

Visual 1.4 3/8/2016

Comparative Advantage Output Method – examples Tons per acre Miles per gallon Words per minute Apples per tree Input Method – examples Number of hours to do a job Number of gallons of paint 3/8/2016

Activity 2 3/8/2016

Demand in Markets Demand schedule Represents the quantities that people are willing and able to buy at alternative prices Demand curve Graphical representation of the demand schedule 3/8/2016

Visual 1.5 3/8/2016

Demand Curves Movement along a Demand Curve As price declines, the quantity increases As price rises, the quantity decreases “Inverse relationship” between price and quantity demand Shift in Demand Increase in demand is a shift to the right Decrease in demand is a shift to the left 3/8/2016

Visual 1.6 3/8/2016

Factors that shift Demand S S ubstitute good’s price P P opulation A A dvertising C C omplementary good’s price E E xpectations about income or prices I I ncome T T astes Page 46 Textbook 3/8/2016

Activities 3 and 4 3/8/2016

Supply in Markets Supply schedule Represents the quantities that firms are willing and able to supply at alternative prices Supply curve Graphical representation of the supply schedule 3/8/2016

Visual 1.7 3/8/2016

Supply Curves Movement along a Supply Curve As price declines, the quantity decreases As price rises, the quantity increases “Direct relationship” between price and the quantity supplied Shift in Supply Increase in supply is a shift to the right Decrease in supply is a shift to the left 3/8/2016

Visual 1.8 3/8/2016

Factors that shift Supply T T echnology R R egulations I I nput costs S S ubsidies T T axes E E xpectations of Suppliers N N umber of Suppliers Page 49 Textbook 3/8/2016

Activities 5 and 6 3/8/2016

Bringing Demand and Supply together Equilibrium price The price in a competitive market at which the quantity demanded and the quantity supplied are equal Equilibrium quantity The quantity demand and supplied at the equilibrium price in a competitive market 3/8/2016

Visual 1.9 3/8/2016

What happens if prices are above or below the equilibrium price? Shortage Excess demand; the amount by which the quantity demanded of a product exceeds the quantity supplied at a particular price Surplus Excess supply; the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific price 3/8/2016

Activity 7 3/8/2016

Elasticity A measurement of how much one variable will change if another variable changes Price elasticity of demand Always negative Price elasticity of supply Always positive ***But, we look at the absolute value of the coefficient of elasticity and always talk about positive values*** 3/8/2016

Visuals 1.10, 1.11, /8/2016

Activity 8 3/8/2016