Economics Chapter 1Hooray for Notes!

What is Economics?

• Economics is the study of how people seek to satisfy their needs and wants by making choices

Economics• The study of Economics can be broke into two

distinct areas:• MICROeconomics is study of economics which

deals with single businesses, firms and households

Economics• MACROeconomics which deals with

governments, international economic relations, and world wide economic issues

Need

• Something necessary for survival such as Air, Water, or Shelter

Want

• An item we desire but is not essential to survival

Are these items Needs or Wants?

Goods and Services

• Economists refer to the things that individuals and institutions want as either goods or services

• Goods- are tangible items of value, things that we can see or touch.

• Examples- scissors, medicines, textbooks, cars, footballs, make-up/ cosmetics, etc

Goods and Services

• Services are intangible things that have value.

• Intangibles can neither be seen or touched

• Haircuts, medical care, and education are examples of services

Do they make goods or perform services?

Consumers

• As goods and services satisfy our wants, we consume them

• Consumers are people who buy goods and services for personal use

• Consumption is the final act of buying goods and services

Consumption

NO

NO

NO

NO

NO (CREEPY /\)

Almost…

CONSUMPTION!!!!

POST CONSUMPTION (Not consumption though)

Factors of Production

• Factors of production are the ingredients that go into the production of goods and services.

Land

• As a factor of production land is all natural resources used in order to produce other goods and services

• Land can be the actual land where a business can be located

• Land is also anything someone uses that comes from nature to make goods or services

How is land used in these examples?

http://www.youtube.com/watch?v=3GD5EUVIvWo

Standard of Living

• Standard of Living (SOL) refers to the quantity and quality of goods that are available to an individual or a society.

• Some nations have inferior land or natural resources which contribute to their lower standard of living.

Example of Inferior Natural Resources That Contribute to a Lower Standard of Living

http://maps.google.com/maps?ct=reset

Standard of Living

• If land is limited or inferior, regions have to strengthen their other production factors.

• Examples include Japan, Denmark, and Switzerland

• http://maps.google.com/maps?ct=reset

Renewable vs. Non-Renewable Resources • Renewable Resources are natural resources

that can be replaced or renewed.– For example Christmas trees that are replanted

and regrown after being cut down.

Non-Renewable Reasources

• Non-Renewable resources are natural items that once they are used, they are gone forever

– Oil/ Petroleum is the easiest example of a non renewable resource.

Oil as a Non-renewable resource

Scarcity

• Scarcity is the idea in economics that everything has a value and nothing is unlimited

• Regardless if a resource is renewable or non-renewable, the law of scarcity tells us nothing is unlimited.

• From the air we breath, to time itself, there is nothing in our existence that is unlimited

THE START FOR TODAYYYYY

• http://www.youtube.com/watch?v=AiIHvQovKkk

Labor

• Labor is the effort that a person devotes to a task for which that person is paid

• Individual Labor is easy to analyze: What does a Fireman do? What about that Pawn Stars clip?

• Labor on a Macroeconomics level is measured by Labor Productivity

Labor Productivity

• Labor Productivity is defined as the output per worker per time period

• Another way to say it: the amount each worker produces in a specified time

• Countries can effect productivity on the following levels:

3 Factors of Labor Productivity

1) The skill of the labor force

-Countries can invest in a variety of ways to educate, improve, or further the skills of their workers.

-Examples include: trade schools, workshops, classes on new technology, etc

3 Factors of Labor Productivity

2) The quality and quantity of machinery and tool available

-Countries can provide more tools or improve the impact these items have

VS.

Another Way to Put It…

This…

http://www.youtube.com/watch?v=B3vXhLt4bAc&feature=related

Versus…

THIS!

http://www.youtube.com/watch?v=QC8jnSaCqxY

3 Factors of Labor Productivity

3) TECHNOLOGY- society’s knowledge of production or production methods

For example: The United States has twice the population as Bangladesh

Yet the United States produces well over 20 times the amount of goods and services as Bangladesh

Labor Productivity

Capital

• The FINAL factor of production, capital is any human made resource that is used to produce other goods and services

• The two categories of capital are human capital and physical capital

Human Capital

• Human Capital is the knowledge and skills a worker gains through education and experience

• Right now, YOU ARE GAINING HUMAN CAPITAL

Physical Capital

• Capital Goods = Physical Capital

• Physical Capital is human-made objects used to create other goods and services

Physical Capital Continued…

• Physical Capital is easier said to be all buildings and tools used in production of goods and services

Physical Capital Continued…

• Physical Capital is easier said to be all buildings and tools used in production of goods and services

Depreciation

• Depreciation is the accounting term we use to measure the decline in the value of capital goods.

• Tools and buildings that we as being modern today will not be seen that way in 50 years, 100 years, etc.

Easy Examples of Depreciation < “Old”

“New” >

Easy Examples of Depreciation < “Old”

“New” >

Capital Formation

• Capital Formation is the production of capital goods

• Because capital goods are so vital to the production of goods and services, capital formation is an essential economic process in all societies

• “Improve or be left in the dust”

Japan After World War II

• After World War II, the country of Japan was devastated after 4 years of total war.

Japanese City Percentage of city destroyed Size of American City

Yokohama 58 % Cleveland

Tokyo 51 % New York

Toyama 99 % Chattanooga

Nagoya 40 % Los Angeles

Osaka 35.1 % Chicago

Shimonoseki 37.6 % San Diego

Kure 41.9 % Toledo

Kobe 55.7 % Baltimore

Omuta 35.9 % Miami

Wakayama 50 % Salt Lake City

Kawasaki 36.2 % Portland

Okayama 68.9 % Long Beach

Kagoshima 63.4 % Richmond

Japan After World War II

• In the year following the year and their subsequent banning of all armed forces, Japan invested heavily in the production of capital goods instead of consumer goods

• “A factory built instead of products made”

• While this hurt their country in the short run, today Japan is one of the largest exporting countries of goods in the world.

Entrepreneurship

• Entrepreneurship describes the process of individuals called entrepreneurs create new enterprises or improve existing ones.

Famous Entrepreneurs

• John Davison Rockefeller (July 8, 1839 – May 23, 1937) was an American oil magnate and philanthropist. He was the founder of the Standard Oil Company, which dominated the oil industry and was the first great U.S. business trust.

• The first man in history to be worth over a billion dollars in 1916

Net worth$663.4 billion in 2007 dollars, according to List of wealthiest historical figures, based on information from Forbes – February 2008.

NOT So Famous Entrepreneurs…

Hussain "Jeff" Jaffarie

• The innovator of the “Toasted Sandwich” in which he put gas station sandwiches into an oven created by the Tombstone pizza company

• This was the central idea behind a chain of sandwich shops which are now known as Quiznos. In 2004, they made a $104 Million in Sales.

(Picture not found)

Your Turn

• On the index cards handed out:

• Write a job on this card

• (A G rated- PG13 rated occupation please)

• Then write on this card this…

• (The title of the job)

-Land

-Labor

-Human Capital

-Physical Capital

Exchange Cards!

• See if you can figure out all the factors of production of this card

• When your done, switch with someone else

• Which one is the easiest, which is the hardest?

THE THREE FUNDAMENTAL ECONOMIC QUESTIONS

Question 1

• What Goods and Services Should Be Produced?– Unable to have everything, individuals and

institutions need to choose between those goods and services they will buy or produce and those they will forgo.

QUESTION 1 CONTINUED…

• Because we cant have everything, we now need to make choices with what we want.

• For example, If I want to go on vacation and I go to Florida, I cannot go to the Bahamas during the same time

• In this case, The Bahamas is a trade off and an opportunity cost.

My Vacation

If I choose to go to Rome…

Then I can’t go to these places at the same time…

London

Venice

Morocco

Paris

Switzerland

These are all trade offs…

Trade-off

• A trade-off takes place when one thing is given up in order to obtain something else…

Instead of…

Opportunity Cost • Opportunity cost is most optimal alternative

that you DID NOT choose when you made your trade off

• “The Best Trade-off”

• In the previous example just simply pick your favorite fast food alternative to McDonald’s. That is your opportunity cost

• All the rest are referred to as “Trade-offs”

Friday Night Lights

• Friday nights in the Fall mean football games for our players, cheerleaders, game workers, fans, etc.

• However, what would be something else you would do instead?

• What would be the best alterative?

Marginal Cost (Marginalism)

• Marginal Cost, or Marginalism, is when economists refer to the usefulness of adding one more item to the production of a product or service

• An easy way to put it, adding another student to this current class… Could be good, or bad…

Question 2

• How Should Goods and Services Should Be Produced?– There is more then one way to produce a good or

service but what's the optimal way to combine the factors of production to create them?

The Textbook’s 3 Examples

• Example 1: Manufacturing Automobiles-Pros/ Cons of many workers vs less workers and more technology

• Example 2: Building a New School– Pros/ Cons of building a 1 floor school that takes up 3 acres of

land or a 2 story school with higher construction costs.

• Example 3: Mining Companies – Extracting ores from the ground, mining companies can have a high

cost and protect the environment or low cost and heavy environmental damage.

Question 3 • WHO Should Receive the Goods and Services

Produced? – Sub questions in this category can include:• Should everyone have an equal share?• Should some people be allowed to have more than

others?• Should goods and services be awarded according to

people’s contributions to society? • Should we divide goods and services based on need?• How should we measure a person’s contribution on

society?

In the USA…

• Our athletes are some of the highest workers we pay…

Alex Rodriguez- $27 Million Eli Manning- $8.5 Million

http://sports.espn.go.com/espn/thelife/news/story?id=3762727http://sports.espn.go.com/espn/thelife/news/story?id=3762727

However…• Shouldn’t Neurosurgeons, who save people’s

lives every time they perform, be paid more then these guys?

Imagine these two guys as your neurosurgeons…

“Would Doctors Rodriguez and Manning please report to the operating room?” NO THANKS!!!

While in other countries…

• Athletes may be considered just jobs like everyone else in certain countries…– The Cuban National Baseball Team has won the gold

medal 3 times and the silver 2 times the 5 total times they have played in the Olympic Games

– They have won 25 of 35 gold medals at the Baseball World Cup

– Yet because they are a communist country, members of the team are paid on par with everyone else in the country…

Economic Systems

• Economic Systems answer these 3 economic questions…

• There are 3 general Economic Systems to be aware of– Traditional Economy– Command Economy– Market Economy

Traditional Economy

• In this type of Economy, FAMILIES answer WHAT gets produced

• These economies are local to 3rd World countries found in Africa, Asia, and Latin America

• Who receives the goods and services and HOW it is produced are a matter of custom and tradition

Traditional Economy

Who makes our economic decisions?

WE DO!!!

Command Economy

• ALL ECONOMIC QUESTIONS ARE ANSWERED BY THE GOVERNMENT!!!

Command Economy

• In this type of Economy, GOVERNMENTS answer WHAT gets produced

• WHO gets the goods and services- GOVERNMENT

• HOW it is produced- GOVERNMENT

• These countries would include: Cuba, North Korea, China, and, not now, but historically, the Soviet Union.

Command Economy

Who makes our economic decisions?

WE DO!!!

Market Economy

• The WHAT, HOW, and WHO are all made by individuals and businesses (Buyers and sellers)

• With this said these buyers and sellers make up the “Market System”

• In this system, even though it may seem opposite, the government plays a much less role then a Command Economy

Market Economy

Who makes our economic decisions?

Market Economy

WE THE PEOPLE DO!!!

Scales of Economies

Last thing for Chapter 1… Ceteris Paribus

• Ceteris Paribus translates into “Other Things Being Equal” in Latin

• This is an idea where we ignore exceptions and simply say that “People will buy more of an item at a lower price, ‘all other things being equal’”

Ceteris Paribus continued…

• For example… we know that this type of shoe…

• People are willing to buy at $100 plus…

Ceteris Paribus continued…

• But with this type of shoe…

• Are people are willing to buy at $100 plus?

Air Jordan vs. Black Shoe

Now even if the Jordan is $100 and the shoe on the right is just $75, will people buy more of the shoe on the right? NO, BUT IF WE USE CETERIS PARIBUS, WE CAN SAY YES!!!

Ceteris Paribus continued…

• Ceteris Paribus enables observer to focus on one or two variables

• While, at the same time, Recognizing that other variables exist

• In other words, at time in Economics class, THERE ARE NO “WHAT IF’S”!!!!

But Mr. Newman… What if?

NO!

The… FREAKIN…

END