2. Basic Ideas of Economics

3. Study Questions 1. How do individuals make decisions? 2. Why does the existence of scarcity force us to make decisions? 3. How are goods and services produced? 4. Why is there always a cost in making decisions, even if no money changes hands?

4. Study Questions 5. What are the alternative organizing mechanisms a society can choose? 6. How do these alternative organizing mechanisms differ in answering vital economic questions? 7. What is the payoff when there is state protection of property rights?

5. Study Questions 8. What does the production possibilities curve show us? 9. Why do we want economic growth?

6. What do you think of when you think of ECONOMICS?

7. Definition of Economics The study of how people, both individually and in groups, deal with the problem of scarcity. Why is economics considered a social science? Scarcity forces human beings to make choices Why has there always been an economic problem? man’s wants are virtually unlimited scarcity of resources *Have to prioritize

8. All resources regardless where they are located are scarce. The scarcity causes most to have a cost because the demand does not go away…. Supply is limited The scarcity of resources causes most things to have a cost.

9. Remember**** Society has virtually unlimited wants BUT limited resources This means prioritization! When did you last have to prioritize? Companies? Are you seeing them prioritize? Where What about government?

10. Principal Assumption People act rationally.  Plan ahead.  Think things through.  Gather information.  Recall past experiences.

11. Economics is a Social Science What does that mean?

12. Why Act Rationally? People want to better themselves.  Improve their net worth.  Obtain satisfaction.  Obtain happiness.

13. Satisfying Unfilled Wants and Needs Rational people set priorities.  Satisfy the highest priority first. What satisfies?  Goods things produced  Services actions produced

14. Resources What are the factors of production? Inputs into a production process.  Land  Labor  Capital  Entrepreneurship

15. Putting it together Make sure you have the right mix Resources Inputs Process OUTPUT

16. Figure 1-1.Transformation Process INPUTSPROCESSOUTPUTS Resources Goods and services that satisfy wants and needs Technology can improve the process or the capital goods

17. The Production Process Inputs are processed into outputs.  Inputs = resources  Outputs = goods and services  Process = how the transformation is done

18. Efficiency Defined:  get the maximum salable output  from the lowest possible cost of inputs  while minimizing the waste.

19. Technology Defined:  the application of knowledge  to improve the process, or  to improve the capital input

20. Scarcity Unlimited wants and needs Limited resources  which leads to limited amount of satisfying goods and services Anything is scarce if it is useful and there is a limited amount of it. Economic vs non-economic wants

21. Decision Making Since everyone’s wants and needs cannot be satisfied, decisions have to be made to determine which will be satisfied now … and which will be put off until later … or never satisfied. ………………..Trade Off ………………………opportunity cost

22. Scarcity forces individuals and groups to do what? All economies evolve around a basic conflict.. Want more than we can have.

23. What is a Trade-off Giving up one thing to get something else. Thing you give up is called “opportunity cost.” So if resources are limited and wants are unlimited…. Makes for an interesting “trade-off.”

24. Reality of Trade-offs Just a few of the products getting a start from a barrel of oil: Aspirinfurniture not to mention gasoline Candleshair dryerscarpets CD playerslipstickpaints Clothingluggagefertilizer Compact discsperfumesoils of all kinds Computersphotographs Credit cardspiano keys Deodorantroller blades Diapersshampoo Dinnerwaresoft contact lenses DVDstoothpaste Eyeglass framesvitamin capsules

25. Decision Making Cost-benefit analysis:  weigh the value of what will be obtained (the benefit) and  …the value of what must be given up (the cost), and  …then decide whether or not to take the next step.

26. Marginal Analysis This cost-benefit analysis takes one step at a time:  compare the marginal benefit (MB) to the marginal cost (MC).  use your unique valuation system to do this.  keep the steps small, so a mistake won’t hurt too much.

27. Decision Matrix If MB > MC, taking the next step is worthwhile.  do it! and your net worth goes up. If MB < MC, taking the next step is not worthwhile.  don’t do it! because, if you do, your net worth goes down.

28. Opportunity Cost When you commit a resource to satisfying one want or need, it is no longer available to be used for another want or need.  You satisfy the most valued need first.  The value you place on the foregone alternative need (second best choice) is your opportunity cost of making the decision.

29. Trade-Off You must always give up one thing to get another thing. This is the trade-off.  If MB (what you get) > MC (what you give up), then the trade-off is worth making.  Included in MC above is the opportunity cost of making the decision.

30. Basic Economic Questions All societies must answer the following:  What to produce?  How to produce?  For whom to produce?

31. Invisible Hand- apolitical Individuals rather than government should answer the 3 basic questions.  What to produce  How to produce  For Whom to produce But not just carte’ blanche  Smith distinguished between self-interest and greed!  It is in our self-interest to have Rule of Law in place – (property rights, patents, copyright, protection of workers, regulations, etc.)

32. Three basic economies Market capitalist (capitalism) Command dictatorship (communism) socialism

33. Traditional Society What? – exactly what our ancestors produced How? – in the time-honored, old-fashioned way For whom? – in the way they always have been distributed

34. Rationing: distribution method Not everyone can have a good (scarcity)  The market society uses purchasing power to ration out available goods  The command society uses political favor to ration out available goods Whatever the rationing device, people will compete to obtain it.

35. Private Property Rights Enlightened government should protect the rights of its citizens to earn, own, and keep private property.  protect from government confiscation  provides incentive to accumulate goods  provides incentive to improve their lot People move out of poverty and into the “middle class”

36. Private and Public Property Owners care for their own goods Owners put their own goods to their best use. Publicly owned property is abused and overused. Most pollution problems deal with publicly owned goods, not privately owned goods:  the atmosphere  the lakes and rivers  the oceans

37. Adam Smith Wrote “The Wealth of Nations” in 1776 The Wealth of a Nation is “not in the king’s treasury, but in the capability of its people to create and produce.” “Invisible hand” causes us to operate for the betterment of society (even when we do not intentionally intend to do so).

38. Two things that allow economies to progress This is an Adam Smith concept: Division of labor Specialization of labor

39. Recipe For Success Select the option that is best in your own self interest.  Make a good that satisfies the customer.  Pay enough to cover the seller’s costs.  Both become better off. Self interest (both become better off) is not selfish (just me becomes better off)

40. What is Standard of Living? How can you calculate it? How well off people are! How well off are you? Divide total production by population… If production is high and population is low…. “get more stuff.” 3 rd world countries… high population/low production Per capital income China = $8,500 Per capita income U.S.= $41,663

41. Social Examples U.S. Households 90% have microwave ovens 88% have television in living room 87% subscribe to cable or satellite TV 77% own personal computer 72% have flat screen TV 68% have broadband Internet service 68% have television in their bedrooms.

42. Market or Command? Market -each individual:  decides for himself  owns and controls resources and property Command - the ruler:  makes all decisions  controls the use of resources and property, no matter who owns them

43. PPC illustrates 4 concepts 1. Scarcity 2. Choice 3. Opportunity Cost 4. Law of Increasing cost THE WAY EACH COUNTRY ANSWERS THESE 3 QUESTIONS… INDICATES THE TYPE OF ECONOMY THEY HAVE

44. Figure 1-2. PPC: data and graph Data: Cake Cookies 3 0 2 30 1 50 0 60

45. Production Possibilities Curve PPC A B C D E F OUTPUT OF SHOES 5 4 3 2 1 012345 OUTPUT OF TELEVISIONS

46. Note Difference in Shape of Curve Direct Correlation … Two items produced… 1 to 1 ratio. Can Relinquish one part of resources and not have to give up More of another. No law of increasing cost. Economics English

47. Increasing Opportunity Costs Step 1: give up one shoe Step 2: get two TVs Step 4: get one more TV A B C D E F 5 4 3 2 1 012345 OUTPUT OF TELEVISIONS

49. At any point in time, a full-employment, full- production economy must sacrifice some of product X to obtain more of product Y. Do you know why? Limited Resources means a limited output...

50. Production Possibility Q Q Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 A B C D E W Attainable but Inefficient Unattainable

51. Law of Increasing Opportunity Costs The amount of other products that must be forgone or sacrificed to obtain 1 unit of a specific product is called the opportunity cost of that good. A graph of the production possibilities curve will be CONCAVE - bowed out from the origin. Economic resources are not completely adapt- able to other uses. Crude Oil is not adaptable to making bread.

52. Figure 1-3. PPC: Trade-Off Data: Cake Cookies 3 0 2 30 1 50 0 60 +30 +20 +10

53. The Trade Off Gets Worse More and more cake must be given up to get another increase in cookies.  Resources are usually specialized to do one job better than another.  Shifting them between jobs causes the trade off to get worse.  The PPC gets bowed outward because of this.

54. Q Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 U Unemployment & Underemployment Shown by Point U More of either or both is possible

55. Economic Growth The ability to produce a larger total output - OR a rightward shift of the production possibilities curve caused by... ????????

56. Figure 1-5. PPC: Economic Growth z

57. PPF and Economic Growth

58. Research and Development R&D 1 – Increase in resource supplies 2 - New Resources 3 – Better resource quality 4 – Technological advances Where does the impetus of this R & D come from? More from private or public?

59. PPC: Trade-Off Data: Cake Cookies 3 0 2 30 1 50 0 60 +30

60. PPC: Trade-Off Data: Cake Cookies 3 0 2 30 1 50 0 60 +30 +20

61. Inefficient, Efficient, and Unattainable Points Any point inside the PPC is inefficient.  Produce more by moving out to the PPC. Any point on the PPC is efficient.  All resources and technology are being used. Any point outside the PPC is unattainable.  Not enough resources and technology exist to make these combinations of goods.

62. Figure 1-5. PPC: Economic Growth z

63. Any Questions? Are you learning to think in Economic Terms????? When you drive by a strip mall – What do you see? What do you think? Does the economy come to mind? How did McDonald’s get so popular back in 60”s

64. QUESTIONS?