1. UNIT 1 CHAPTERS 1,2,3 MODULES 1-9 The Economic Way of Thinking

2. CONCEPTS  Economics — study of how people use resources to satisfy wants – using choice as a result of scarcity  how individuals/societies choose to use resources  organizes, analyzes, interprets data about economic behaviors  develops theories, economic laws to explain the economy, predict future (as much as we can) Scarcity: The Basic Economic Problem

3. Scarcity  is the economic problem of having seemingly unlimited human needs and wants, in a world of limited resources. Why does it exist?  It exists because wants are unlimited and resources are limited

4. SCARCITY FORCES CHOICE Trade-off When making a choice something must be given up Can be all or nothing Can be done on margin Opportunity Cost The value of the next best thing you could have chosen (trade- off) NOT EVERYTHING YOU GAVE UP!

5. Basic Economic Principles People Have Wants  Wants — desires that can be met by consuming products  Needs — things necessary for survival  Scarcity — lack of resources available to meet all human wants, not a temporary shortage  People make choices about all their needs and wants  Wants are unlimited, ever changing

6. Basic Economic Principles Scarcity Affects Everyone Scarcity affects which goods and services are provided  Goods — physical objects that can be bought  Services — work one person does for another for pay  Consumer — person who buys good or service for personal use  Producer — person who makes a good or provides a service

7. Scarce Economic Resources: AKA The Factors of Production Factors of production resources needed to produce goods and services 1. land 2. labor 3. Capital 4. entrepreneurship supply is limited

8. The Factors of Production Factor 1: Land  Land means all natural resources on or under the ground  includes water, forests, wildlife, mineral deposits

9. The Factors of Production Factor 2: Labor  Labor is all the human time, effort, talent used to make products  physical and mental effort used to make a good or provide a service

10. The Factors of Production Factor 3: Capital  Capital is a producer’s physical resources  includes tools, machines, offices, stores, roads, vehicles  sometimes called physical capital or real capital  Workers invest in human capital — knowledge and skills  workers with more human capital are more productive

11. The Factors of Production Factor 4: Entrepreneurship  Entrepreneurship — vision, skill, ingenuity, willingness to take risks  Entrepreneurs anticipate consumer wants, satisfy these in new ways  develop new products, methods of production, marketing or distributing  risk time, energy, creativity, money to make a profit

12. Analyzing Production Possibilities CONCEPTS  Production possibilities frontier (PPF) is one model (graph)  PPC shows the maximum goods or services that can be produced from limited resources  also called production possibilities curve PPF  PPF based on assumptions:  resources are fixed  all resources are fully employed  only two things can be produced  technology is fixed

13. Graphing the Possibilities Production Possibilities Frontier  PPF runs between extremes of producing only one item or the other  Data is plotted on a graph; lines joining points is PPF  shows maximum number of one item relative to other item  PPF shows opportunity cost of each choice  more of one product means less of the other

14. PPF—THE CURVE What Does Guns And Butter Curve Mean?  In a theoretical economy with only two goods, a choice must be made between how much of each good to produce.  As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa.

15. What We Learn from PPFs  Efficiency — producing the maximum amount of goods and services possible (no opportunity cost to make someone better off without making someone else worse off  Underutilization — producing fewer goods and services than possible

16. Why is the PPF a Curve? Law of increasing opportunity costs  as production switches from one product to another, more resources needed to increase production of second product  Reasons for increasing cost of making more of one product  need new resources, machines, factories  must retrain workers  Costs paid by making less and less of other product

17. Changing Production Possibilities A country’s supply of resources changes over time  Example: U.S. in 1800s grew, gained resources, workers, new technology  new resources mean new production possibilities beyond frontier Increased production shown on PPF as shift of curve outward Increase in total output called economic growth

18. Microeconomics and Macroeconomics Microeconomics  Microeconomics examines specific, individual elements in an economy  prices, costs, profits, competition, consumer and producer behavior  Some Topics of Interest: business organization, labor markets, environmental issues

19. Microeconomics and Macroeconomics Macroeconomics  Macroeconomics studies sectors — combination of all individual units  Includes consumer, business, public or government sectors  Macroeconomics studies national or global topics:  monetary system, business cycle, tax policies, international trade

20. Examples of Macro and Micro Which is it? 1. National Unemployment Figures Rise 2. World Trade Organization Meets 3. Shipbuilder Wins Navy Contract 4. Cab Drivers on Strike! 5. Gasoline Prices Jump 25 Cents

21. Positive vs. Normative Economics Positive Economics : Statements or questions about the world as it actually IS. - these are generally objective in nature - they can be measured Normative Economics : Statements or questions about the world as it SHOULD BE. - these are generally subjective in nature - they are value statement or judgments

22. Examples: Positive or Normative The U.S. government should raise the tax rate in order to pay off the national debt. Do people think our government is fair? There are too many students receiving reduced or free lunches in our public schools. The Republican Party is better at making economic policy. The minimum wage rate should be raised in 2016.

23. ADAM SMITH Considered the father of modern economic study Classical economist Self-interest is the “invisible hand” that guides an economy (people make decisions that are best for themselves) Believed in “laissez-faire” economy

24. Economic Systems CHAPTER 2

25. Three Basic Economic Questions Every society must answer three basic economic questions because of scarcity. Societies answer these questions differently, leading to a variety of economic systems.

26. Three Basic Economics Questions Question 1: What Will Be Produced?  Societies must decide on mix of goods to produce  depends on their natural resources  Some countries allow producers and consumers to decide  In other countries, governments decide  Must also decide how much to produce; choice depends on societies’ wants

27. Three Basic Economics Questions Question 2: How Will It Be Produced?  Production decisions involve using resources efficiently  Influenced natural resources  Societies adopt different approaches  labor-intensive methods versus capital-intensive methods depends on availability

28. Three Basic Economics Questions Question 3: For Whom Will It Be Produced?  How goods and services are distributed involves two questions  how should each person’s share be determined?  how will goods and services be delivered to people?

29. Types of Economic Systems Economic system:  how society uses resources to satisfy people’s wants Three basic systems:  Traditional  Command  Market economies

30. Types of Economic Systems Traditional Economy  centers on families, clans, or tribes  decisions are based on customs and beliefs  Good of the group always comes before individual desires

31. Characteristics of Traditional Economies Advantages and Disadvantages  Advantages: little disagreement over goals, roles  methods of production, distribution determined by custom  Disadvantages: as result of resistance to change, less productive  do not use new methods; people not in jobs they are best suited for  low productivity results in low standard of living

32. Types of Economic Systems cont. Command Economy  (centrally planned economy) government makes economic decisions  determines what to produce; how to produce; who gets products  determines who is employed, work hours, pay scales  Wants of individual consumers rarely considered  Government owns factors of production: resources and factories

33. Government Controls EXAMPLE: Socialism and Communism  Karl Marx influenced some societies to adopt command economies  socialism—government owns some of the factors of production  communism—no private property; little political freedom  Authoritarian system requires total obedience to government  communism is authoritarian socialism

34. Karl Marx: Economic Revolutionary A New View of Economics  Marx lived during Industrial Revolution  Argued factory owners used workers as resource  exploited workers by keeping wages low to increase profits  workers would rebel, establish classless society  Wrote The Communist Manifesto  Utopian Society

35. Government Controls Socialism and Communism  Democratic socialism established under democratic political process  government owns basic industries  other industries private  central planners make decisions for government- owned industries  central planners might control other sectors, such as health care

36. Command Economies Today No pure command economies today  modern telecommunication s bringing about change  Some economies still have mostly command elements

37. Command Economies Today North Korea  Communist North Korea used resources for military, not necessities  built large army; nuclear weapons program  In 1990s and early 2000s, millions died of hunger, malnutrition  In 1990s, production decreased and economy shrank  Since 2003, some market activity allowed

38. Command Economies Today Impact of Command Economies  In theory, command systems fair to everyone; In practice, many disadvantages  central planners do not understand local conditions  workers have little motivation to be productive or conserve resources  artificially low prices lead to shortages  people sacrificed to carry out centrally planned policies

39. Types of Economic Systems cont. Market Economy  driven by choices of consumers and producers  consumers spend money, go into business, sell their labor as they wish  producers decide how to use their resources to make the most money  Consumers, producers benefit each other when they act in self-interest

40. Fundamentals of a Market Economy 1: Private Property and Markets 2:Limited Government Involvement  Laissez faire—government should not interfere in economy  Capitalism—system having private ownership of factors of production  says producers will create products consumers demand  Actual market economies all have some government involvement

41. Fundamentals of a Market Economy 3: Voluntary Exchange in Markets  Voluntary exchange—traders believe they get more than they give up 4: Competition and Consumer Sovereignty  Consumer sovereignty—buyers choose products, control what is produced  Competition controls self-interested behavior  sellers offer low price or high value to please consumers, make profit

42. Fundamentals of a Market Economy 5: Specialization and Markets  Specialization—people concentrate their efforts in the activities they do best  encourages efficient use of resources  leads to higher-quality, lower-priced products

43. Circular Flow in Market Economies WHAT IS IT?  Circular flow model illustrates how interactions occur in a market  Represents the two key decision makers: households, businesses  Shows the two markets where households and businesses meet  goods and services  resources

44. Circular Flow in Market Economies Factor Markets  Factor market—market for the factors of production  land, labor, capital, entrepreneurship Product Markets  Product market—market where goods and services bought and sold  includes all purchases by individuals from businesses

45. Circular Flow in Market Economies Circular Flow  Circular flow model shows how market economies operate  outside arrow shows flow of money  inside arrow shows flow of resources and products

47. Impact of Market Economies Advantages  Individuals free to make economic choices, pursue own work interests  Less government control means political freedom  Locally made decisions mean better use of resources, productivity  Profit motive ensures resources used efficiently, rewards hard work  resulting competition leads to higher-quality, more diverse products

48. Impact of Market Economies Disadvantages  Pure market economy has no way to provide public goods and services  Does not give security to sick or aged  Businesses did not address problems caused by industrialization  Industrialized societies adopt some government control of economy

49. Today’s Mixed Economies Mixed economy  has elements of traditional, command, market systems  most common type of economic system  Traditional, command, market economies adopt elements from others

50. Today’s Mixed Economies Types of Mixed Economies  U.S. basically has market system  European countries greater mix of market and command elements  France—government controls some industries; provides social services  Sweden—state owns part of all companies; lifelong benefits, high taxes  Namibia—traditional; state supports market, foreign investment

51. Trends in Modern Economies Changes in Ownership  Nationalize is to change from private to government ownership  Privatize is to change from government to private ownership

52. CHAPTER 3 Making Economic Decisions

53. Two factors affect economic decisions: 1. Incentives — benefits that encourage people to act in certain ways 2. Utility — benefit or satisfaction gained from using a good or service Choices vary between individuals based on what is best for him / her Making Economic Choices

54. Factor 1: Motivations for Choice People motivated by incentives, expected utility, desire to economize They weigh costs against benefits to make purposeful choices Motivated by self-interest

55. Making Economic Choices Factor 2: No Free Lunch TINSTAAFL All choices have a cost choosing one thing means giving up another, or paying a cost cost can take form of money, time, other thing of value

56. Trade-Offs and Opportunity Cost Trade-off  is alternative people give up when they make a choice  usually means giving up some, not all, of a thing to get more of another

57. Trade-Offs and Opportunity Cost Example of a Trade Off  Anna wants to go to college  Money spent on tuition, room, board, books etc.  Forgone income

58. Trade-Offs and Opportunity Cost Opportunity cost is value of next-best alternative a person gives up  not the value of all possible alternativ es  Example of Opportunity Cost  Jack chooses to work for six months so he can travel for six months  opportunity cost = six months of salary

59. Analyzing Economic Choices Cost-benefit analysis:  examines the costs and expected benefits of choices  one of most useful tools for evaluating relative worth of economic choices

60. Types of Decision Making WHICH ONE – Involves all or nothing choice HOW MUCH –  Requires choosing on the margin

61. Analyzing Economic Choices Marginal Costs and Benefits  Marginal cost  additional cost of using one more unit of a good or service  Marginal benefit  additional benefit of using one more unit of a good or service

62. BEHAVIORAL ECONOMICS Are all decisions rational? Common mistakes:  Framing  Sunk costs  Being too impatient  Errors due to overconfidence  Avoiding change