EconomicsEconomics

EconomicsEconomics

What is Economics?What is Economics?

is the study of how we produce is the study of how we produce and distribute our wealthand distribute our wealth..

Why do societies have Why do societies have economies?economies?

People have basic needs such as People have basic needs such as food, food, clothing, and shelterclothing, and shelter, and important , and important wants such as education and health wants such as education and health care.care.

Factors of ProductionFactors of Production

A society combines in factors of production – A society combines in factors of production – land, labor, and capitalland, labor, and capital – to produce the – to produce the goods and services its citizens want and goods and services its citizens want and needs.needs.

CapitalCapital

CapitalCapital is anything produced in an economy is anything produced in an economy that is used to produce other goods and that is used to produce other goods and services.services.

Goods and ServicesGoods and Services

A A goodgood is any item is any item that can be bought that can be bought and sold.and sold.

A A serviceservice is any is any action that one action that one person, or group, person, or group, does for another in does for another in exchange for exchange for payment.payment.

Goods and ServicesGoods and Services

After goods are After goods are produced, they are produced, they are distributeddistributed to people to people who want them. who want them.

The purchase or use The purchase or use of these goods is of these goods is called called consumption.consumption.

Opportunity CostOpportunity Cost

Because resources are scarce, people Because resources are scarce, people must consider each option’s opportunity must consider each option’s opportunity cost and benefits as they decide which cost and benefits as they decide which needs to satisfy.needs to satisfy.

Opportunity costOpportunity cost is what you must give is what you must give up to do or consume something else. It up to do or consume something else. It is the most valuable alternative that you is the most valuable alternative that you don’t choose when you make a decision.don’t choose when you make a decision.

ResourcesResources

Scarcity Scarcity exists when a resource valued by exists when a resource valued by a society is not available in quantities high a society is not available in quantities high enough to satisfy the demand.enough to satisfy the demand.

Resources and Resources and ProductionProduction

A A resourceresource is is anything used to anything used to produce a good or produce a good or service.service.

ProductionProduction

ProductionProduction is the is the process of changing process of changing raw materials of the raw materials of the resource into some resource into some economic good or economic good or service.service.

Production Costs for a Pair of $100 shoes made in China and sold in United States

The cost structure of the shoe manufacturing and retailing industry is very revealing. The “China effect” is quite clear as the total manufacturing costs (wages,

materiel, other production costs such as energy, and the manufacturer's profit) account for about 12% of the retail costs. This is roughly equivalent to the research

(design) costs of the shoe product.

ResourcesResources

Some resources are Some resources are plentiful.plentiful.

Some are Some are scarce.scarce. Water is still a scarce Water is still a scarce

resource in major resource in major parts of Africa as this parts of Africa as this picture shows a child picture shows a child washing himself with washing himself with animal urineanimal urine

ResourcesResources

A A renewable renewable resourceresource is one is one that can be that can be replaced.replaced.

A A nonrenewable nonrenewable resourceresource is one is one that cannot be that cannot be replaced.replaced.

Basic Economic DecisionsBasic Economic Decisions

WHOWHO gets what gets what has been has been produced?produced?

WHATWHAT to to produce?produce?

HOWHOW to to produce?produce?

What to produce?What to produce?

A society must decide which goods and A society must decide which goods and services to produce and in what quantity, or services to produce and in what quantity, or amount.amount.

How to produce?How to produce?

People must decide People must decide how to produce how to produce goods and services. goods and services.

The desire to bring The desire to bring down the costs of down the costs of production often production often leads to improved leads to improved production production technology.technology.

Who gets whatWho gets what

Society must decide Society must decide how the goods and how the goods and services will be services will be distributed among distributed among the people.the people.

Specialization and Specialization and InterdependenceInterdependence

Because it is difficult for every society to satisfy Because it is difficult for every society to satisfy all wants and needs, people all wants and needs, people specializespecialize. They . They choose certain kinds of work, products, and choose certain kinds of work, products, and services that they can produce efficiently and services that they can produce efficiently and successfully.successfully.

SpecializationSpecialization

After specializing work – they trade what After specializing work – they trade what they have for what they need. they have for what they need. Specialization happens on both an Specialization happens on both an individualindividual basis and with basis and with countriescountries as a as a whole.whole.

The result of specialization is The result of specialization is interdependenceinterdependence..

InterdependenceInterdependence

InterdependenceInterdependence

InterdependenceInterdependence is is the way production the way production and consumption of and consumption of goods and services goods and services is divided among is divided among many different many different individuals, groups individuals, groups and countries.and countries.

InterdependenceInterdependence

InterdependenceInterdependence occurs when people occurs when people and countries depend on one another to and countries depend on one another to provide goods and services that they provide goods and services that they want and/or need. The more people want and/or need. The more people specialize and trade, the more specialize and trade, the more interdependent they become.interdependent they become.

InterdependenceInterdependence

For example, Japan has very few natural For example, Japan has very few natural resources and little land. As a result, Japan resources and little land. As a result, Japan specializes in technology and manufacturing specializes in technology and manufacturing goods such as electronics and automobiles. goods such as electronics and automobiles. Japan trades these items for the oil and other Japan trades these items for the oil and other goods it needs. goods it needs.

ImportsImports

ImportsImports are goods and services in one country are goods and services in one country but produced in another – things purchased.but produced in another – things purchased.

US Oil Imports

ExportsExports Exports Exports – goods or services produced in one – goods or services produced in one

country and then sold to people of another country and then sold to people of another country.country.

3 Basic Economies3 Basic Economies

Traditional EconomiesTraditional Economies Command EconomiesCommand Economies Market EconomiesMarket Economies

Traditional EconomyTraditional Economy Basic economic decisions are Basic economic decisions are

made according to long-made according to long-established patterns of established patterns of behavior that are unlikely to behavior that are unlikely to change.change. The The FAMILY FAMILY is the basic is the basic

unit of the traditional unit of the traditional economy.economy.

All members work together All members work together to support society – rather to support society – rather than just their familythan just their family

TRADITIONAL ECONOMYTRADITIONAL ECONOMY

What:What: Tradition answers the Tradition answers the question of what and how question of what and how much to produce.much to produce.

How:How: Customs are used to Customs are used to produce (same weapons, produce (same weapons, same methods)same methods)

Who:Who: people usually owns people usually owns their own resources such as their own resources such as land, labor and tools.land, labor and tools.

Traditional EconomiesTraditional Economies

Examples of countries with Examples of countries with traditional economies:traditional economies: Some societies in Central and Some societies in Central and

Southern America, Africa and Southern America, Africa and Asia.Asia.

Command EconomiesCommand Economies Government Government or central authority or central authority owns or owns or

controls the factors of productioncontrols the factors of production and and makes the basic economic decision.makes the basic economic decision. Farms and stores Farms and stores Transportation, communicationTransportation, communication BankingBanking ManufacturingManufacturing

Command EconomyCommand Economy

WhoWho – government – government decidesdecides

What What – government – government decidesdecides

How How – government – government decidesdecides

COMMAND ECONOMYCOMMAND ECONOMY

CUBACUBA North KoreaNorth Korea Former Command Former Command

EconomyEconomy Soviet Union – Russia Soviet Union – Russia

was a command was a command economy under economy under Stalin. Stalin.

Market EconomyMarket Economy

Known as a Known as a FREE FREE ENTERPRISEENTERPRISE or or CAPITALISM.CAPITALISM. Each Each individual individual

decidesdecides what to what to produce, how to produce, how to produce it, to whom to produce it, to whom to sell it, and how to sell it, and how to invest the profits that invest the profits that result from the sale.result from the sale.

Mixed EconomyMixed Economy

Most modern economies are a Most modern economies are a blendblend of of traditional, command, and market traditional, command, and market economieseconomies with the balance between with the balance between the three differing.the three differing.

Market EconomyMarket Economy

A market is a circular flow of goods, A market is a circular flow of goods, services, capital, and payments such as services, capital, and payments such as wages and interest by producers.wages and interest by producers.

The laws of supply and demand work The laws of supply and demand work together to determine the together to determine the market pricemarket price of a product and of a product and the quantitythe quantity offered. offered.

SupplySupply is the amount of something is the amount of something available.available.

Law of SupplyLaw of Supply

The Law of Supply The Law of Supply states that as the states that as the price increases, price increases, the supply the supply increasesincreases. This . This means more means more sellers and fewer sellers and fewer buyers.buyers.

Supply Curve

Price of a song on I-Tunes

Number of SongsSellers Want

to Sell

$1.00 10

$2.00 40

$3.00 70

$4.00 140

Law of SupplyLaw of Supply

The supply curve is The supply curve is upward slopingupward sloping

The supply curve has The supply curve has a a positive slopepositive slope

The supply curve The supply curve shows a shows a directdirect relationship between relationship between price and quantity price and quantity demanded demanded

Law of DemandLaw of Demand

The The Law of DemandLaw of Demand states that as the states that as the price price decreases, the decreases, the demand increasesdemand increases.. This means more This means more buyers and fewer buyers and fewer sellers.sellers.

A Demand Curve

Price ofa Song on I-

Tunes

Number of SongsPeople Want to

Buy

$1.00 100

$2.00 90

$3.00 70

$4.00 40

Law of DemandLaw of Demand The demand curve is The demand curve is

downward slopingdownward sloping The demand curve The demand curve

has a has a negative negative slopeslope

The demand curve The demand curve shows an shows an inverseinverse relationship between relationship between price and quantity price and quantity demanded demanded

Effect of Supply and Demand Effect of Supply and Demand Curve Shifts on EquilibriumCurve Shifts on Equilibrium

Other Factors for Other Factors for Supply & DemandSupply & Demand

Will the change of price for milk or Will the change of price for milk or penicillin change the demand?penicillin change the demand? Why or Why Not?Why or Why Not?

Can Brand name or Advertising change Can Brand name or Advertising change the demand for a product?the demand for a product? Why or Why Not?Why or Why Not?

No, People believe they need milk or medicine at almost any price.No, People believe they need milk or medicine at almost any price.You may pay more for a higher priced item because the brand You may pay more for a higher priced item because the brand name is more popular than a less-expensive item.name is more popular than a less-expensive item.