1. The Principals of Economics By Matt Wagner

2. What is the study of economics? How to meet unlimited wants with scarce resources How to meet unlimited wants with scarce resources Economists study how to meet people’s unlimited wants with scarce, available resources Economists study how to meet people’s unlimited wants with scarce, available resources

3. THE FACT THAT WE MUST DEAL WITH SCARCITY FORCES US TO MAKE CHOICES CONSTANTLY Trade-off: the choice that one makes whenever making economic decisions Trade-off: the choice that one makes whenever making economic decisions Opportunity cost: the cost of the next best alternative when one choice is made, ex) money, time, resources, etc). Opportunity cost: the cost of the next best alternative when one choice is made, ex) money, time, resources, etc).

4. Production Possibilities Frontier A graphical representation of how an economy makes decisions on what to produce. A graphical representation of how an economy makes decisions on what to produce. Production Possibilities Curve shows the choices a country can make with respect to its available resources. Production Possibilities Curve shows the choices a country can make with respect to its available resources.

5. Production Possibility Frontier

6. The PPF shows all efficient combinations of output, when the factors of production are used to their full potential. The PPF shows all efficient combinations of output, when the factors of production are used to their full potential. As more of one product is produced, increasingly larger amounts of the other product must be given up. As more of one product is produced, increasingly larger amounts of the other product must be given up. the opportunity cost increases as one moves toward either extreme on the curve of production possibilities. the opportunity cost increases as one moves toward either extreme on the curve of production possibilities.

7. Tools economists use Economists demonstrate real-world relationships using economic models Economists demonstrate real-world relationships using economic models Economists use the term efficiency to measure marginal costs, and the term productivity to measure production levels. Economists use the term efficiency to measure marginal costs, and the term productivity to measure production levels.

8. Know the different economic systems How do these systems answer the basic economic questions? How do these systems answer the basic economic questions? 1) What to produce 1) What to produce 2) How to produce it? 2) How to produce it? 3) For whom to produce? 3) For whom to produce?

9. Traditional Economies 1) What to produce? Whatever ritual, habit or custom dictates 1) What to produce? Whatever ritual, habit or custom dictates 2) How to produce? However ritual, habit or custom dictate 2) How to produce? However ritual, habit or custom dictate 3) For whom to produce? For whomever ritual, habit or custom dictate 3) For whom to produce? For whomever ritual, habit or custom dictate Examples: Australian aborigines, the Mbuti of Central Africa, The Inuit

10. Command Economies 1) What to produce? Whatever the government says to produce 1) What to produce? Whatever the government says to produce 2) How to produce? However the government tells you to produce 2) How to produce? However the government tells you to produce 3) For whom to produce? For whomever the government tells you to produce (ideally the entire society) 3) For whom to produce? For whomever the government tells you to produce (ideally the entire society) Examples: Cuba, North Korea Examples: Cuba, North Korea

11. Market Economy Basic economic questions answered by consumers Basic economic questions answered by consumers Dollars=Votes Dollars=Votes What to produce? Whatever consumers want (demand) What to produce? Whatever consumers want (demand) How to produce? However business owners want, usually at maximum efficiency (production possibility frontier) in order to maximize profits How to produce? However business owners want, usually at maximum efficiency (production possibility frontier) in order to maximize profits For whom to produce? For whomever will buy it For whom to produce? For whomever will buy it

12. Examples of market economies The U.S. Canada, U.K., France, Germany, etc. The U.S. Canada, U.K., France, Germany, etc. Remember these aren’t completely free market system. There is a level of government control and regulation, therefore: these are MIXED ECONOMIC SYSTEMS. Remember these aren’t completely free market system. There is a level of government control and regulation, therefore: these are MIXED ECONOMIC SYSTEMS.

13. The 4 factors of production Land: Gifts of the earth/Natural resources (oil, diamonds, etc.) Land: Gifts of the earth/Natural resources (oil, diamonds, etc.) Labor: people who work Labor: people who work Capital (goods): The things needed to produce a good or service (sewing machine, oven, etc.) Capital (goods): The things needed to produce a good or service (sewing machine, oven, etc.) Entrepreneur: Risk-taking individual who organizes the other 3 factors of production in order to make a profit Entrepreneur: Risk-taking individual who organizes the other 3 factors of production in order to make a profit

14. Law of Supply As Price goes up, quantity will go up As Price goes up, quantity will go up As Price goes down, quantity goes down As Price goes down, quantity goes down

15. Supply Curve Illustrates the Law of Supply

16. Supply Elasticity Supply can be: Supply can be: 1) Elastic 2) Inelastic 3) Unit Elastic

17. Elasticity of Supply Elastic: When price rises, quantity supplied rises considerably. Ex: price rises 20% quantity supplied rises 50% Elastic: When price rises, quantity supplied rises considerably. Ex: price rises 20% quantity supplied rises 50%

18. Elasticity of Supply Inelastic: When price rises, quantity supplied does not rise considerably. Ex: price rises 20% quantity supplied rises 5% Inelastic: When price rises, quantity supplied does not rise considerably. Ex: price rises 20% quantity supplied rises 5%

19. Elasticity of Supply Unit Elastic : When price rises, quantity supplied rises proportionally. Ex: price rises 20% quantity supplied rises 20% Unit Elastic : When price rises, quantity supplied rises proportionally. Ex: price rises 20% quantity supplied rises 20%

20. Law of Demand As the price of a product decreases, the demand for the product will increase. This is an example of an inverse relationship. As the price of a product decreases, the demand for the product will increase. This is an example of an inverse relationship.

21. Demand Curve

22. Elasticity Elastic: Elastic: –As the price for a product decreases by half, the demand for the product increases 100%. More than proportional!

23. Elasticity Inelastic Inelastic –As the price for a product increases by 25%, the demand for the product decreases by 10%. Less than proportional!

24. Elasticity Unit Elastic Unit Elastic –As the price of the product triples, the demand for the product decreases by 300%. Proportional!

25. If prices were to stay the same, what then could change demand? If prices were to stay the same, what then could change demand?

26. Compliments Compliments are goods that are related. You need to have both in order to use them Compliments are goods that are related. You need to have both in order to use them

27. Compliments If the price of DVD players goes down, then the demand for DVD’s goes up If the price of DVD players goes down, then the demand for DVD’s goes up If the price of Gillette razor handles goes up, then the demand for the razor blades goes down If the price of Gillette razor handles goes up, then the demand for the razor blades goes down

28. Substitutes The demand for a product tends to decrease if the price of its substitute decreases The demand for a product tends to decrease if the price of its substitute decreases What are some substitute products? What are some substitute products?

29. Substitutes If the price of butter goes up, then the demand for margarine will go up. If the price of butter goes up, then the demand for margarine will go up. If the price of sugar goes up, then the demand for Splenda© will go up If the price of sugar goes up, then the demand for Splenda© will go up

30. Utility & Demand Utility: The usefulness or satisfaction one gets from consuming a good or service (one slice of pizza is good) Utility: The usefulness or satisfaction one gets from consuming a good or service (one slice of pizza is good) Marginal utility: The extra usefulness or satisfaction one gets from consuming a good or service (two slices of pizza is better) Marginal utility: The extra usefulness or satisfaction one gets from consuming a good or service (two slices of pizza is better) Diminishing marginal utility: the more we consume of something, the less satisfying or useful it becomes (eating an entire pizza makes one feel sick) Diminishing marginal utility: the more we consume of something, the less satisfying or useful it becomes (eating an entire pizza makes one feel sick)

31. Price Who gets to set prices in a market economy? Who gets to set prices in a market economy? –Consumers AND producers – prices are the result of competition between buyers and sellers

32. Circular Flow of Economic Activity Goods &Services Land Labor Capital Land, Labor, Capital Goods & Services $$$$$$$$$$ $$$$$$$ $$$$$$$$$$ $$$$$$$$$

33. The Role of Government 1) To protect the consumer from dangerous products and unscrupulous businesspeople (USDA, FDA, OSHA, etc.) 1) To protect the consumer from dangerous products and unscrupulous businesspeople (USDA, FDA, OSHA, etc.) 2) To provide the consumer with goods and services and to consume goods and services from producers. 2) To provide the consumer with goods and services and to consume goods and services from producers. Provider: streets, parks, education, buses, garbage pickup, etc. Provider: streets, parks, education, buses, garbage pickup, etc. Consumer: the government is now the second largest consuming sector of society, second only to the actual consumer sector Consumer: the government is now the second largest consuming sector of society, second only to the actual consumer sector

34. Promoter of National Goals The government modifies the economic systems to promote its goals. Social security, child labor laws, minimum wage laws, etc. The government modifies the economic systems to promote its goals. Social security, child labor laws, minimum wage laws, etc.

35. We live in a modified economic system People carry on their economic activity freely, but are subject to some government intervention and regulation People carry on their economic activity freely, but are subject to some government intervention and regulation This is not a laissez-faire economy This is not a laissez-faire economy