chapter 1: what is economics?misspressley.weebly.com/uploads/4/1/5/0/41509263/econ._ch1.ppt.p… ·...
TRANSCRIPT
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Chapter 1: What is Economics?
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The Economic Problem
▶ Unlimited Wants▶ Need – A Requirement for
Survival▶ Want – Like to have; Not
necessary for survival▶ Scarce Resources
Scarce=Limited=Not Enough
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Economics: The study of how people try to satisfy seemingly unlimited and competing wants through the careful use of relatively scarce resources
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What Is Scarcity?
▶ The condition that results from society not having enough resources to produce all of the things people would like to have.
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The Economic Problem
1
2
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The Economic Problem● Not everything costs
“money”○ That is not the only
resource that is finite!
● Because we have to make choices, there are issues and we make our judgements based on our values
● What is important and what is less important?
● The government has to do this all of the time!
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The Economic Problem
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The Economic Problem
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Production Possibility Frontiers
▶ Show the different combinations of goods and services that can be produced with a given amount of resources
▶ No ‘ideal’ point on the curve▶ Any point inside the curve – suggests resources are not
being utilised efficiently▶ Any point outside the curve – not attainable with the current
level of resources▶ Useful to demonstrate economic growth and opportunity
cost
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Production Possibility FrontiersCapital Goods
Consumer Goods
Yo
Xo
A
BY1
X1
Assume a country can produce two types of goods with its resources – capital goods and consumer goods
If it devotes all resources to capital goods it could produce a maximum of Ym.
If it devotes all its resources to consumer goods it could produce a maximum of Xm
Ym
Xm
If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods
If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.
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Production Possibility Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
.B
CY1
X1
Production inside the PPF – e.g. point B means the country is not using all its resources
It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.
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PPF as an Economic Model▶ Economic Model – SIMPLIFIED graph, equation, or figure
showing how aspects of the economy work▶ Goal is to reduce complex situations▶ Based on Assumptions (things we take to be true)
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STOP
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Factors of Production
▶ Resources required to produce what we want.
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Land▶ “Gifts of Nature”▶ Resources not created by
Humans
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Labor▶ People; including all of
their efforts, abilities and skills
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Capital▶ Tools used in the
production of goods and services
▶ Includes equipment, machinery, factories, etc…
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Entrepreneurs▶ A risk taker, in search of profits, who does something
new, with existing resources
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Scenario – Identify all of the different factors of production▶ Farmer Joe owns 500 acres of land. On this land he
decides to raise to cattle, as well as grow corn. He hires a construction firm to build a barn to store his cattle. He purchases a grain bin to store the corn after Harvest. Every year in April he loads into his tractor to till the soil. He has hired 3 share-croppers to plant the seeds, take care of the fields, and help with harvest. Every October, Joe and his share-croppers load into his combine and harvest the field. Joe’s son, Dale, is in charge of feeding and milking the cattle daily. In December, Joe takes his top cattle to the slaughter house, to provide what the local news paper calls, “The Best Beef in the State.”
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▶ Farmer Joe (2) owns 500 acres of land (1). On this land he decides to raise to cattle (1), as well as grow corn (1). He hires a construction firm (2) to build a barn (3) to store his cattle. He purchases a grain bin (3) to store the corn after Harvest. Every year in April, he loads into his tractor (3) to till the soil. He has hired 3 share-croppers (2) to plant the seeds (1), take care of the fields (1), and help with harvest. Every October, Joe and his share-croppers load into his combine and harvest the field. Joe’s son, Dale (2), is in charge of feeding and milking the cattle daily. In December, Joe takes his top cattle to the slaughter house (3), to provide what the local news paper calls, “The Best Beef in the State.”
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How is Economics a Social Science?▶ Addresses People’s Behavior in the Market
▶ Market – Where good’s and services are exchanged▶ Good – A Useful, Tangible Item that satisfies a wan▶ Service – Work performed for people
▶ Four Elements of Economics▶ Description – Describe Economic Activity▶ Analysis – Discover how things work and why▶ Explanation – Communication to the Public▶ Prediction – Addresses possible outcomes and prepares for
them
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Value, Utility, and Wealth▶ Paradox of Value – Why are some things considered
valuable by some, and not by others?▶ Value – Worth expressed in dollars and cents▶ Utility – the capacity to be useful and provide satisfaction▶ Wealth – the accumulation of products that are tangible,
scarce, useful, and transferable.
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Wealth of Nations▶ Adam Smith – “Father of Modern Economics”▶ Invisible Hand of the Market Place
▶ The Market is Self Regulating “no government”▶ …As if guided by an invisible hand▶ Everybody acting in their own interests, benefits society
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2 types of Markets▶ Factor Market
▶ Where factors of production are bought and sold▶ Product Market
▶ Where producers sell their goods and services
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Productivity▶ Productivity – The measure of the amount of goods and
services produced in a specific period of time with a given amount of resources.▶ Goes up when more is produced with the same resources▶ Goes down when less is produced with the same resources
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How do we increase productivity?▶ Human Capital – Sum of people’s skills, ability,
knowledge, and motivation.
▶Turn to your neighbor and come up with three ways to increase productivity through the use of Human Capital
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Other ways to increase Productivity▶ Division of Labor – Separate individuals do separate
work▶ Specialization – Performing only those tasks that one
can do better or more efficientlythan others.
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Effect of Education on Income
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Profiles in Economics Pg. 18▶ Read About Adam Smith
▶ Answer the 2 Examining the Profile questions at the bottom of the page
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Trade-offs▶ Alternative Choices
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Opportunity Cost▶ Definition – the cost expressed in terms of the next
best alternative sacrificed▶ Helps us view the true cost of decision making▶ Implies valuing different choices
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Cost-Benefit Analysis▶ Cost – What you give up to achieve something▶ Benefit – Something you desire
▶ In decision making, it is good to weigh the Costs and Benefits of a choice
▶ E.g. Missing curfew to hang out with Friends
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Analyzing
Suppose you live in a small town where all goods are bought and soldby private owners. One day, Wal-mart comes to your city’s chamberOf commerce and asks to break ground on a new building outside oftown
Costs Benefits
Wal-Mart
Local Stores Only
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Positive and Normative Economics▶ Health care can be improved with
more tax funding▶ Pollution control is effective
through a system of fines▶ Society ought to provide homes
for all▶ Any strategy aimed at reducing
factory closures in deprived areas would be helpful
▶ Positive Statements: ▶ Capable of being verified or
refuted by resorting to fact or further investigation
▶ Normative Statements:▶ Contains a value judgement
which cannot be verified by resort to investigation or research