foundations of economics chapter 1 chapter 2 chapter 3 chapter 5 section 2
TRANSCRIPT
Foundations of Economics
Chapter 1Chapter 2Chapter 3
Chapter 5 Section 2
Unit 1 Vocabulary Productive Resources
(Factors of Production) Scarcity Opportunity Costs Tradeoffs Land Labor Capital (Capital Goods) Entrepreneurship Allocate Rational Decision Making
Marginal Benefits Marginal Costs Production Possibilities
Curve Economic System Command Economy Market Economy Mixed Economy Profit Motive Consumer Sovereignty Government Regulation
Public Goods Market Failure Government Regulation Government Deregulation Consumer Producer Specialization Voluntary Exchange Non-Fraudulent Exchange
Productivity Inputs Outputs Standard of Living Household Circular Flow Product Market Resource (Factor) Market
Unit 1 Vocabulary Continued
Standard and EQ
SSEF1: The Student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments.a. Define Scarcity as a basic condition that exists when
unlimited wants exceed limited productive resources.d. Define opportunity cost as the next best alternative
given up when individuals, businesses, and governments confront scarcity by making choices.
Essential Question: How do societies use productive resources to solve the problem of scarcity?
Economics ◦ the study of how people seek to satisfy their needs and wants
by making choices◦ About solving the problem of scarcity◦ Economists study human choices
Need- something like air, food, or shelter that is necessary for survival
Wants- an item that we desire, but that is not essential to survival
Goods- physical objects such as shoes and shirts Services- actions or activities that one person
performs for another
What is Economics?
Scarcity- implies limited quantities of resources to meet unlimited wants◦ Scarcity always exists because our needs and
wants are always greater than our resource supply
◦ Exists when a resource has more than one valuable use
Shortage- occurs when producers will not or can not offer goods or services at their current prices
Scarcity vs. Shortage
Opportunity Cost- the most desirable alternative given up as the result of a decision
Trade Offs- an alternative that we sacrifice when we choose one course of action over another
Opportunity Cost
Standard and EQ
SSEF1: The Student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments.◦ B. Define and give examples of productive resources
(factors of production) (e.g., land (natural), labor (human), capital (capital goods), entrepreneurship).
EQ: How do societies use productive resources to solve the problem of scarcity?
Land Labor Capital Entrepreneurs
Four Factors of Production
Factors of Production- resources that are used to make all goods and services◦ Land- all the natural resources used to produce goods
and services◦ Labor- the effort that a person devotes to a task for
which that person is paid◦ Capital
Physical capital (capital goods)- human made objects used to create other goods and services
Human Capital- the knowledge and skills a worker gains through education and experience
Four Factors of Production
What do these people have in common?
Entrepreneurs- ambitious leaders who decide how to combine land, labor, and capital resources to create new goods and services◦ Take risks to develop original ideas, start
businesses, create new industries, and fuel economic growth
Factors of Production
Standard and EQ
SSEF1: The Student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments.c. List a variety of strategies for allocating scarce resources
Essential Question: How do societies use productive resources to solve the problem of scarcity?
Allocating Scarce Resources
Activity and discussion Handout on allocating scarce resources
Standard and Essential Question
Standard- SSEF2- The student will give examples of how rational decision making entails comparing the marginal benefits and the marginal costs of an action
a. Illustrate by means of a production possibilities curve the trade offs between two options.
b. Explain that rational decisions occur when the marginal benefits of an action equal or exceed the marginal costs.
EQ: Why should people weigh the advantages and disadvantages of different alternatives when making choices?
Rational Decision Making
• Decision making refers to the process by which rational consumers seeking their own happiness or utility will make choices.– Define range of options– Evaluate the costs, benefits, and trade-offs involved in
each choice to reach a decision• Rational decisions occur when the marginal
benefits of an action equal or exceed the marginal costs
Marginal Costs and Benefits
Marginal Cost- the additional cost of producing one more unit of a good
Marginal Benefit- The additional value of consuming one more unit of a good
Benefits Enjoy more sleepHave more energy during the
day
Better grade on testTeacher and parental approvalPersonal satisfaction
Decision Sleep late Wake up early to study for test
Opportunity cost
Extra study time Extra sleep time
Benefits forgone
Better grade on testTeacher and parental
approvalPersonal satisfaction
Enjoy more sleepHave more energy during the
day
Sleep late Wake up early to study
Alternatives
Karen’s Decision-making Grid
Decision Making Grid
With each new situation the opportunity costs and benefits change
Thinking at the margin ◦ deciding whether to do or use one additional unit
of some resource◦ Once opportunity costs outweigh the benefits no
more units should be added
Marginal Thinking
Thinking at the Margin When you decide how much more or less to do.
Look at opportunity cost & compare the benefits. Options: get up 1, 2, or 3 hrs early
AKA Cost Benefit Analysis
Options Benefit Op Cost
1 hr extra study time Grade C 1 hr sleep
2 hrs extra study Grade B 2 hrs sleep
3 hrs extra study Grade A 3 hrs sleep
Guns or Butter- when a country decides to produce more military goods “guns” it has fewer resources to devote to consumer goods “butter”
Practice Question 1
Which of the following is an example of the “all or nothing” approach to decision making?
a. Whether to grow corn or beans on a large farm.b. How many workers to hire at a factory.c. What time to leave for a trip.d. Where to go on vacation.
Practice Question 2
Which of the following decisions can be made at the margin?A. whether or not to hire new employeesB. whether or not to go on vacationC. whether or not to build an extra room on a homeD. whether to have a dog or a cat as a pet
Economists often use graphs to analyze the choices and trade-offs that people make.
A production possibilities curve/graph: shows alternative ways that an economy can use its resources.
The axes of the curve/graph can show categories of good and services.
Graphs show us if an economy is efficient, if it has experienced growth, and opportunity cost.
Production Possibilities Curve/Graph
PRODUCTION POSSIBILITY CURVE
0
2
4
6
8
10
12
14
16
0 5 10 15 20 25
Guns
Butte
r Series1
Guns Butter
0 15
8 14
14 12
18 9
20 5
21 0
Efficiency Growth Costs
We will discuss each of the above at length.
Production Possibilities Graphs/Curves Show
1. Efficiency- using products in a way to maximize output.◦Once we have decided what products we
want to produce then we must think of efficient ways of producing those products.
◦Efficient means being effective without wasting time, effort or expense .
◦ Underutilization- any point inside the line of resources.
Production Possibilities Curves/Graphs Show:
Efficiency increases:◦Division of Labor- small number of tasks
per employee leads to expertise because of repeated practice.
◦Mechanization or automation- allowing machines to replace slower/less efficient humans.
2. Growth- A graph is frozen in time, but in the real world there is a constant shifting of quality and quantity of resources.
Production Possibilities Curves/Graphs Show:
Sh
oes (
million
s o
f p
air
s)
25
20
15
10
5
0 252015105
Watermelons (millions of tons)
Production Possibilities Graph
T
Future productionPossibilities frontier
c (14,12)
d (18,9)
e (20,5)
f (21,0)
a (0,15)b (8,14)
S
If more resources become available, or if technology improves, an economy can increase its level of output and grow.
When this happens, the entire production possibilities curve “shifts to the right.”
The PPF and Growth
Positive Growth- graph shifts to the right Negative Growth- graph shifts to the left.
3. COST Is the alternative we give up when we
choose one option over the other. In Economics cost is not always money,
rather its an opportunity cost.
A production possibilities graph shows the cost of producing more of one item. To move from point c to point d on this graph has a cost of 3 million pairs of shoes.
Production Possibilities Curve
0, 158, 14
14, 12
18, 9
20, 5
21, 00
2
4
6
8
10
12
14
16
0 5 10 15 20 25
Watermelons
Shoes
0 15
8 14
14 12
18 9
20 5
21 0
A B
C
D
E
F
Opportunity Cost◦ Diagonal Line- Opportunity Cost is the same◦ Curve- Opportunity Cost is increasing
Note About Production Possibilities Curves
PPF Draw and Label a PPF where the X axis is Cars Y axis is Bikes Point A 10 C 0 B (End of Axis) Point B 0 20B (End of Axis) Point C 1 C 18 B Point D 3 C 2 B Point E 8 C 8 B
PPF
1. Which point shows a production of 10 Cars?2. Which point is shows under utilization3. Which point shows an opportunity cost of 20
bikes?4. Which points shows an opportunity cost of 2
Bikes?
Standard Standard- SSEF4- The student will compare and
contrast different economic systems and explain how they answer the three basic economic questions of what to produce, how to produce, and for whom to produce.
a. Compare command, market, and mixed economic systems with regard to private ownership, profit motive, consumer sovereignty, competition, and government regulation.
b. Evaluate how well each type of system answers the three economic questions and meets the broad social and economic goals of freedom, security, equity, growth, efficiency, and stability
Essential Question
How do the various market systems answer the three economic questions?
What do these have in common?
Economic System- the method used by a society to produce and distribute goods and services
Societies (countries) must answer 3 questions because resources are limited1. What goods and services should be produced?
Must satisfy needs and wants
2. How should these goods and services be produced?
3. Who consumes these goods and services?This is determined by how a society distributes income
Economic Systems
Factor Payments- the income people receive for supplying factors of production- (land, labor, capital, or entrepreneurship)
Economic Systems
Economic Efficiency- maximize what you can get for the resources you have; an economy that can’t deliver goods isn’t efficient
Economic Freedom- the degree of economic freedom a person has is determined by the economic system of a nation
Economic Goals & Societal Values
Economic Security & Predictability- assurance that goods and services will be available and we can count on receiving expected payments on time
Safety Net- gov’t programs that protect people experiencing unfavorable economic decisions
Economic Equity- Fair distribution of wealth
Economic Growth & Innovation- innovation leads to economic growth and a higher standard of living
Economic Goals & Societal Values
Traditional Market Command (Centrally Planned)
Mixed
Definition
Who answers the basic economic questions?
Characteristics
Types of Economic Systems
The Rise of Mixed Economies
Market economies, with all their advantages, have certain drawbacks.
Limits of Laissez Faire
Laissez faire is the doctrine that
government generally should not
interfere in the marketplace.
Governments create laws
protecting property rights and
enforcing contracts. They also
encourage innovation through
patent laws.
Circular Flow Standard- SSEMI1- The student will describe how
households, businesses, and governments are interdependent and interact through flows of goods, services, and money.
a. Illustrate by means of circular flow diagram, the Product market; the Resource (factor) market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.
EQ: How are households, business, and government interrelated through markets and the flow of money?
In a free market economy, households and business firms use markets to exchange money and products. Households own the factors of production and consume goods and services.
Circular Flow Diagram
monetary flow
physical flow
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households Firms
Product marketHouseholds pay firms for goods and services.
Firms supply households with goods and services.
Factor market
Households supply firms with land, labor, and capital.
Firms pay households for land, labor, and capital.
Household- person or group of people living in the same residence.
Households own the Factors of Production and are the consumers of goods and services.
Firm is an organization that uses resources to produce a product, which it then sells.
Households and Firms
Factor Market: Firms purchase or rent land, hire workers, and borrow money from households to purchase capital, paying households interests or profits in return.
Product Market: Goods and Services that firms produced are purchased by households
Factor Market and Product Market
monetary flow
physical flow
monetary flow
physical flow
Circular Flow Diagram of a Mixed Economy
Households Firms
Product market
Factor market
Government expendituresexpenditures
governm
ent-
owned facto
rstaxes
taxesgovern
ment
purchases
Government’s Role in a Mixed Economy
In a mixed economy,
The government purchases land, labor, and capital from households in the factor market, and
Purchases goods and services in the product market.
What are the basic principles of the U.S. free enterprise system?
What role does the consumer play in the system of free enterprise?
What is the role of the government in the free enterprise system?
Benefits of Free Enterprise
1. Profit Motive
The drive for the improvement of material well-being.
2. Open opportunity
The ability for anyone to compete in the marketplace.
3. Legal equality
Equal rights to all.
4. Private property rights
The right to control your possessions as you wish.
5. Free contract
The right to decide what agreements in which you want to take part.
6. Voluntary exchange
The right to decide what and when you want to buy and sell a product.
7. Competition
The rivalry among sellers to attract consumers.
The Basic Principles of Free Enterprise
A fundamental purpose of the free enterprise system is to give consumers the freedom to make their own economic choices.
The Consumer’s Role
Role of Government in a Market Economy Preserving and fostering competition Regulating Natural Monopolies Providing Information and Services Regulating Externalities Providing certain public goods Offering economic security and income
redistribution to individuals Assuring a sound monetary system
Governments create public policies that aim to stabilize the economy◦ Employment- provide jobs for everyone who is
able to work (unemployment rate between 4% and 6% is desirable)
◦ Growth- economy must continue to increase the goods and services that it provides; GDP is used to measure growth
◦ Stability- gives consumers, producers, and investors confidence in the economy and in financial institutions
Promoting Economic Strength
Federal agencies fund many research and development projects.
Patent- gives the inventor of a new product the exclusive right to produce and sell it for 20 years.
Copyright- grants an author exclusive rights to publish and sell his or her creative works
The Government Encourages Innovation
Public Good- a shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers (ex. Roads)◦ Gov’t collects taxes to fund projects of public
interest◦ Many consumers can use public goods without
reducing the benefits to any single user
Providing Public Goods
Cost is important in determining whether something is produced as a public good◦ The benefit to each individual is less than the cost that
each would have to pay if it were provided privately◦ The total benefits to society are greater than the total
cost◦ Public goods are financed by the public sector
(government)◦ The private sector (transactions of individuals and
businesses) would have little incentive to produce public goods
Providing Public Goods
Free rider – someone who would not choose to pay for a certain good or service, but would get the benefit of it anyway
They consume what they do not pay for.
Free Rider Problem
Market failure – situation in which the market does not distribute resources efficiently◦ Ex: free riders
Externality – an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume
Positive Externalities – public goods generate benefits to many people, not just those who pay for the goods
This can be done by the private sector as well Negative Externalities – unintended costs
◦ They cause part of the cost of producing a good or service to be paid for by someone other than the producer
Externalities are examples of market failure
Market Failures and Externalities
The gov’t encourages the creation of positive externalities. (Education benefits students, yet society as a whole also benefits from and educated population)
The gov’t aims to limits negative externalities such as acid rain◦ Led to damaged trees, lakes and wildlife◦ The government now requires all new cars to
have an expensive antipollution device
Market Failures and Externalities
Government Regulation
Governmental Regulation- the extent to which government intervenes in the decisions of buyers and sellers in a market
Entitlements- social welfare programs that people are “entitled to” if they meet certain eligibility requirements such as being at a certain income level or age
Entitlement Programs
SpecializationSpecialization is the concentration
of the productive efforts of individuals and firms on a limited number of activities.
Leads to efficient use of resources, including capital, land, and labor.
It is easier to learn one task or a few tasks very well than to learn them all.
Specialization leads to efficient use of resources, including capital, land, and labor.
• Division of labor – human specialization• Specializations makes use of differences in ability• Specialization fosters learning by doing• Specialization saves time• Specialization increases productivity
Productivity◦ The problem of scarcity
can never be eliminated but it can be moderated by finding ways to increase productivity.
◦ Productivity is the amount of goods and services produced (or output) per unit of productive resources used (or input) in a specific period of time.
Increasing Productivity Productivity can be increased by producing more
goods and services with the same amount of resources.
It can also be increased by producing the same amount of goods and services with fewer amount of resources.
As productivity increases, production costs for each unit of a good or service decreases.
Productivity can be increased by investing in capital goods such as factories, machines, and tools (new technology)
Individual workers can also increase productivity and enhance their own earning power by investing in their human capital through education and training.
Productivity and Entrepreneurs How does productivity affect entrepreneurs? Greater Productivity = Greater Income! How can an entrepreneur increase the productivity
of their firm? Buy more efficient tools, hire or train the
appropriate number of staff, change production methods to reduce waste, or adjust the mix of resources used.
Marginal Product of Labor
Labor (number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 —
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31 –1
A Firm’s Labor Decisions Business owners
have to consider how the number of workers they hire will affect their total production.
Marginal Product of Labor- the change in output from hiring one additional unit of labor, or worker
Increasing, Diminishing, and Negative Marginal Returns
Labor(number of workers)
Ma
rgin
al
Pro
du
ct
of
lab
or
(be
an
ba
gs
pe
r h
ou
r)
8
7
6
5
4
3
2
1
0
–1
–2
–3
4 5 6 7
Diminishing marginal returns
8 9
Negative marginal returns
Marginal Returns
12 3
Increasing marginal returns
• Increasing Marginal Returns- a level of production in which the marginal product of labor increases as the number of workers increases
• Diminishing Marginal Returns- a level of production in which the marginal product of labor decreases as the number of workers increases
• Negative Marginal Returns- occurs when the marginal product of labor becomes negative
Production Costs Fixed Cost- a cost that does not change, no
matter how much of a good is produced (ex. Rent, property taxes, etc.)
Variable Cost- a cost that rises or falls depending on how much is produced (ex. Costs of raw materials, cost of labor, electricity, etc.)
Total Cost- fixed costs plus variable costs Marginal Cost- the cost of producing one more
unit of a good
Setting Output
Profit- total revenue minus total cost Marginal Revenue- the additional income from
selling one more unit of a good◦ Ideal level of output is where marginal revenue (price) is
equal to marginal cost
Input Costs and Supply Any change in the cost of an input such as the raw
materials, machinery, or labor used to produce a good, will affect supply.
As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply.
Input costs can also decrease. New technology can greatly decrease costs and increase supply.