unit i: economics and choice (1, 2, 3) choices, choices, choices,

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Unit I: Economics Unit I: Economics and Choice (1, 2, and Choice (1, 2, 3) 3) Choices, Choices, Choices, Choices, Choices, . . . Choices, . . .

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Unit I: Economics and Unit I: Economics and Choice (1, 2, 3)Choice (1, 2, 3)

Choices, Choices, Choices, . . .Choices, Choices, Choices, . . .

Chapter 1: Chapter 1: The The

Economic Economic Way of Way of

ThinkingThinking

In Economics, there is a In Economics, there is a Fundamental Problem:Fundamental Problem:

SCARCITY: Exists when there are not SCARCITY: Exists when there are not enough resources to satisfy human enough resources to satisfy human

wantswants

Choices, ChoicesChoices, Choices

Because ALL resources, goods, Because ALL resources, goods, and services are limited –and services are limited –

WE MUST MAKE CHOICES!!!! WE MUST MAKE CHOICES!!!! And think economically.And think economically.

Why Choices?Why Choices?

We make choices about how we spend our We make choices about how we spend our money, time, and energy so we can fulfill money, time, and energy so we can fulfill our NEEDS and WANTS.our NEEDS and WANTS.

What are NEEDS and WANTS?What are NEEDS and WANTS?

Wants and Needs, Wants and Needs, Needs and WantsNeeds and Wants

NEEDS – “stuff” we must have to survive, NEEDS – “stuff” we must have to survive, generally: food, shelter, clothing generally: food, shelter, clothing

WANTS – “stuff” we would really like to WANTS – “stuff” we would really like to have (Fancy food, shelter, clothing, big have (Fancy food, shelter, clothing, big screen TVs, jewelry, conveniences . . . screen TVs, jewelry, conveniences . . . Also known as LUXURIESAlso known as LUXURIES

VS.

A Few DefinitionsA Few Definitions

Goods- Physical objects that can be Goods- Physical objects that can be purchasedpurchased– Food, Clothing, and furnitureFood, Clothing, and furniture

Services: Work one performs for another Services: Work one performs for another for paymentfor payment– Work of teachers, nurses, doctors, and Work of teachers, nurses, doctors, and

lawyers.lawyers.

Two Guiding Principles with Two Guiding Principles with ScarcityScarcity

1.1. People Have WantsPeople Have Wants– They are also always changing. Ex. PC 25 They are also always changing. Ex. PC 25

years ago. Today is a computer considered years ago. Today is a computer considered a need?a need?

2.2. Scarcity Affects EveryoneScarcity Affects Everyone– If resources are scarce, then scarcity affects If resources are scarce, then scarcity affects

which goods are made and which services which goods are made and which services are providedare provided

Key QuestionKey Question

Q. What is the economic way of thinking?Q. What is the economic way of thinking?

A. All human behavior involves choices, A. All human behavior involves choices, and that choices can be analyzed and and that choices can be analyzed and understood logically.understood logically.

Scarcity Leads to 3 QuestionsScarcity Leads to 3 Questions

1.1. What Will Be ProducedWhat Will Be Produced– Society has to decide, so a country like U.S. Society has to decide, so a country like U.S.

lets producers and consumers decide.lets producers and consumers decide.– A Good Way? A Good Way?

2. How Will It Be Produced2. How Will It Be Produced– Mostly based on how skilled the labor force Mostly based on how skilled the labor force

is? Are we skilled? Yesis? Are we skilled? Yes– Question of Efficiency (Lots of machinery, or Question of Efficiency (Lots of machinery, or

just human labor)just human labor)

Two Guiding Principles with Two Guiding Principles with Scarcity Continued…Scarcity Continued…

3. For Whom Will It Be Produced?3. For Whom Will It Be Produced?– This involves how good and services are This involves how good and services are

distributed to people. 2 schools of thought…distributed to people. 2 schools of thought…

– Should people get = amounts of goods? Or Should people get = amounts of goods? Or should it be based on how much he or she is should it be based on how much he or she is willing to pay?willing to pay?

– Once this is decided, societies develop Once this is decided, societies develop distribution systems (road, rail, air, truck, train, distribution systems (road, rail, air, truck, train, ship, etc.)ship, etc.)

Key QuestionKey Question

Q. Why does the basic problem of scarcity Q. Why does the basic problem of scarcity lead societies to ask the three lead societies to ask the three fundamental economic questions?fundamental economic questions?

A. Because every society faces the A. Because every society faces the problem of having too few resources to problem of having too few resources to meet unlimited wants.meet unlimited wants.

ProductionProduction

So how do we get all So how do we get all this “stuff” that we this “stuff” that we have to decide about?have to decide about?

Decisions, decisions Decisions, decisions ……

PRODUCTION, cont.PRODUCTION, cont.

Production is how Production is how much stuff an much stuff an individual, business, individual, business, country, even the country, even the WORLD makes.WORLD makes.

But what is “STUFF”?But what is “STUFF”?

STUFF – Goods and STUFF – Goods and Services.Services.

Goods – tangible (you Goods – tangible (you can touch it) products can touch it) products we can buywe can buy

Services – work that Services – work that is performed for is performed for othersothers

Factors of ProductionFactors of Production

So, what do we need to make all of this Stuff?So, what do we need to make all of this Stuff?

4 Factors of Production4 Factors of Production

LAND – Natural ResourcesLAND – Natural Resources– Water, natural gas, oil, trees (all the stuff we find on, Water, natural gas, oil, trees (all the stuff we find on,

in, and under the land)in, and under the land)

LABOR – Physical and IntellectualLABOR – Physical and Intellectual– Labor is manpower Labor is manpower

CAPITAL - Tools, Machinery, FactoriesCAPITAL - Tools, Machinery, Factories– The things we use to make thingsThe things we use to make things– Human capital is brainpower, ideas, innovationHuman capital is brainpower, ideas, innovation

ENTREPRENEURSHIP – Investment $$$ENTREPRENEURSHIP – Investment $$$– Investing time, natural resources, labor and capital Investing time, natural resources, labor and capital

are all risks associated with productionare all risks associated with production

Which Factor of Production?Which Factor of Production?

Which Factor of Production?Which Factor of Production?

Which Factor of Production?Which Factor of Production?

Which Factor of production?Which Factor of production?

THREE parts to the Production THREE parts to the Production ProcessProcess

Factors of Production – what we need to make Factors of Production – what we need to make goods and servicesgoods and services

Producer – company that makes goods and/or Producer – company that makes goods and/or delivers servicesdelivers services

Consumer – people who buy goods and services Consumer – people who buy goods and services (formerly known as “stuff”)(formerly known as “stuff”)

Which Came First?

Production ProcessProduction Process

Capital

Labor

Land

Entrepreneurship

Production/Manufacturing“Factory”

Goods

Services

Consumers

Capital Goods and Consumer Capital Goods and Consumer GoodsGoods

Capital GoodsCapital Goods: are : are used to make other used to make other goodsgoods

Consumer Goods: Consumer Goods: final products that are final products that are purchased directly by purchased directly by the consumerthe consumer

CHANGES IN PRODUCTIONCHANGES IN PRODUCTION

SpecializationSpecialization – – dividing up production dividing up production so that Goods are so that Goods are produced efficiently. produced efficiently. It’s It’s what they do well!what they do well!

Nike makes shoes, not hamburgers

Five Guys’ makes cheeseburgers, not shoes!!

CHANGES IN PRODUCTIONCHANGES IN PRODUCTION

Division of LaborDivision of Labor – – different people different people perform different jobs perform different jobs to achieve greater to achieve greater efficiency (assembly efficiency (assembly line).line). You do your

job, and I will do my Job and we will be more

EFFICIENT

Legendary Ford Rouge Assembly Plant Smoke Stacks

CHANGES IN PRODUCTIONCHANGES IN PRODUCTIONConsumptionConsumption – how – how much we buy much we buy (Consumer (Consumer Sovereignty)Sovereignty)

The DELL store is empty because….

Everyone is at the APPLE STORE!!!

Section 2: Economic Choice Section 2: Economic Choice Today: Opportunity CostToday: Opportunity Cost

Influence of ActionInfluence of Action

If scarcity drives us to choose, but what If scarcity drives us to choose, but what shapes the choices we make?shapes the choices we make?– Incentives: Benefits offered to encourage Incentives: Benefits offered to encourage

people to act in certain wayspeople to act in certain waysGrades, Wages, Praise, Recognition in Personal Grades, Wages, Praise, Recognition in Personal and Public Lifeand Public Life

Also influenced by UtilityAlso influenced by Utility– Benefit or satisfaction gained from the use of a Benefit or satisfaction gained from the use of a

product (Gatorade to quench thirst after product (Gatorade to quench thirst after practice)practice)

Everything Costs SomethingEverything Costs SomethingScenario 1Scenario 1

Think about it….Think about it….

You have a hot first date You have a hot first date with your dream girl or, you with your dream girl or, you can go to the Superbowl with can go to the Superbowl with your three best friends and your three best friends and the Lions are playing…at the Lions are playing…at Ford Field.Ford Field.

What do you do?What do you do?

You go on the date MAN!You go on the date MAN!

What did it cost you? The What did it cost you? The Superbowl!Superbowl!

Scenario 2Scenario 2

•Free pizza is given across the street. Is it really free?•No, it cost something…Time

TRADE-OFFSTRADE-OFFS

You can’t have it all (SCARCITY – You can’t have it all (SCARCITY – remember?) so you have to remember?) so you have to choose how to spend your choose how to spend your

money, time, and energy. These money, time, and energy. These decisions involve picking one decisions involve picking one

thing over all the other thing over all the other possibilities – a TRADE-OFF!possibilities – a TRADE-OFF!

Trade-Offs, cont.Trade-Offs, cont.

Reflect in your Notes: What COULD you have Reflect in your Notes: What COULD you have done instead of come to school today?done instead of come to school today?

These are all Trade-Offs! Thanks for being These are all Trade-Offs! Thanks for being here!here!

A special kind of Trade-Off is anA special kind of Trade-Off is an

OPPORTUNITY COST =OPPORTUNITY COST =

The Value of the Next Best ChoiceThe Value of the Next Best Choice

(Ex: Sleeping is the opportunity cost of studying for a test)(Ex: Sleeping is the opportunity cost of studying for a test)

Opportunity CostsOpportunity Costs

This is really IMPORTANT – when you choose to do This is really IMPORTANT – when you choose to do ONE thing, its value (how much it is worth) is ONE thing, its value (how much it is worth) is measured by the value of the NEXT BEST CHOICE.measured by the value of the NEXT BEST CHOICE.

– This can be in time, energy, or even MONEYThis can be in time, energy, or even MONEY

If I buy a pizza…

Then I can’t afford the movies…

Q: What is the opportunity cost of buying pizza?

Cost-Benefit AnalysisCost-Benefit Analysis

Immediate or short term satisfaction can Immediate or short term satisfaction can lead to missing the long-term benefits.#7 lead to missing the long-term benefits.#7

For ExampleFor Example

Immediate spending on cheap stuff Immediate spending on cheap stuff instead of long-term savings will lead to instead of long-term savings will lead to lower economic prosperity. lower economic prosperity.

Costs and Revenues - ChartCosts and Revenues - Chart

Marginal CostsMarginal Costs – the – the additional Cost of the additional Cost of the NEXT UNIT produced.NEXT UNIT produced.– Example Gatorade. What Example Gatorade. What

satisfied your thirst after satisfied your thirst after practice? 1, 2, 3,practice? 1, 2, 3,

– Is it worth cost of one Is it worth cost of one additional Gatorade?additional Gatorade?

Marginal Benefits Marginal Benefits – – Benefit from using one Benefit from using one more unit of a good or more unit of a good or service service

Part 3: Comparative Part 3: Comparative EconomicsEconomics

Traditional EconomiesTraditional EconomiesDef: Economic Def: Economic Questions answered by Questions answered by customcustom

Predominately Predominately AgriculturalAgricultural

Developing or “3Developing or “3rdrd World”World”

Trade and barter Trade and barter orientedoriented

Low GDP & PCI (per Low GDP & PCI (per capita income = avg. capita income = avg. inc.)inc.)

Command EconomiesCommand Economies

Def: Economic Def: Economic questions answered by questions answered by the governmentthe governmentVery little economic Very little economic choicechoiceNo private ownership No private ownership CommunismCommunismOld Soviet Union, old Old Soviet Union, old Communist China, Communist China, Cuba and North KoreaCuba and North Korea

Karl MarxKarl Marx1919thth century German century German economisteconomistAuthor of “Communist Author of “Communist Manifesto” and “ Das Manifesto” and “ Das Kapital” Kapital” – Government should Government should

control economy and control economy and distribute goods and distribute goods and services to the peopleservices to the people

Founder of Founder of revolutionary revolutionary socialism and socialism and communismcommunism

Communism FallsCommunism Falls

Fall of the Berlin Wall in Fall of the Berlin Wall in 1989.1989.

Collapse of the Soviet Collapse of the Soviet Union 1991.Union 1991.

Free Market Capitalism Free Market Capitalism (w/ some Mixed (w/ some Mixed Economies) the only Economies) the only show in town.show in town.

Free Market (Capitalist) EconomiesFree Market (Capitalist) Economies

Economic questions Economic questions answered by answered by producers and producers and consumersconsumersLimited government Limited government involvementinvolvementPrivate property rightsPrivate property rightsWide variety of Wide variety of choices and productschoices and productsU.S., JapanU.S., Japan

Adam SmithAdam Smith

1818thth century Scottish century Scottish economisteconomist

Published “The Wealth of Published “The Wealth of Nations” in 1776Nations” in 1776

Explained the workings of Explained the workings of the free market within the free market within capitalist economiescapitalist economies

Invisible hand of the Invisible hand of the marketmarket

Adam Smith (cont.)Adam Smith (cont.)

Laissez-faire - Government stays out of Laissez-faire - Government stays out of business practices “hands off” to let the business practices “hands off” to let the market place determine production, market place determine production, consumption and distribution.consumption and distribution.

Individual freedom and choice Individual freedom and choice emphasized.emphasized.

Principles of CapitalismPrinciples of Capitalism

CompetitionCompetition – more – more businesses means lower businesses means lower prices and higher quality prices and higher quality products for consumers products for consumers (US!) to buy.(US!) to buy.

Voluntary Exchange Voluntary Exchange – – businesses and businesses and consumers MUST be free consumers MUST be free to buy or sell what and to buy or sell what and when they want.when they want.

Principles of CapitalismPrinciples of Capitalism

Private Property – Private Property – Individuals and Individuals and businesses MUST be businesses MUST be able to get the able to get the benefits of owning benefits of owning their OWN property. their OWN property. Government doesn’t Government doesn’t control it.control it.

Principles of CapitalismPrinciples of Capitalism

Consumer Consumer Sovereignty – Sovereignty – consumers get to consumers get to make free choices make free choices about what to buy about what to buy and this helps drive and this helps drive production production (Demand drives (Demand drives Supply).Supply).

Mixed Economy/SocialismMixed Economy/Socialism

Government involvement Government involvement and ownership and control and ownership and control of property, of decision of property, of decision making, and companies.making, and companies.Government control of Government control of businessbusinessSocial “safety net” for Social “safety net” for peoplepeopleSocialismSocialismCommon in Europe, Latin Common in Europe, Latin America, and AfricaAmerica, and Africa

John Maynard KeynesJohn Maynard Keynes

The Invisible Hand The Invisible Hand doesn’t always work.doesn’t always work.

““The long run is a The long run is a misleading guide to misleading guide to current affairs. In the current affairs. In the long run we are all long run we are all dead.” or . . . the dead.” or . . . the trouble is people eat trouble is people eat in the short run.in the short run.

Keynesian Economics (cont.)Keynesian Economics (cont.)

Government should Government should interveneintervene in economic in economic emergencies through tax and spending emergencies through tax and spending (Fiscal Policy) and changing the money (Fiscal Policy) and changing the money supply (Monetary Policy).supply (Monetary Policy).

This is done to smooth out the business This is done to smooth out the business cycle (expansion and recession) and keep cycle (expansion and recession) and keep inflationinflation low. low.

Chapter 3Chapter 3

Advantages of a Advantages of a Free Enterprise Free Enterprise

SystemSystem

What is Free-Enterprise?What is Free-Enterprise?

Answer: Same thing as a Capitalist system Answer: Same thing as a Capitalist system because anyone is free to start a business or because anyone is free to start a business or enterprise.enterprise.

Open OpportunityOpen Opportunity is a freedom in this type of is a freedom in this type of economy because everyone has the ability to economy because everyone has the ability to enter and compete in a market place of his or enter and compete in a market place of his or her own free choice. her own free choice.

Profit in Rocks: The Pet RockProfit in Rocks: The Pet Rock

In 1975, Gary Dahl joked that In 1975, Gary Dahl joked that regular pets were too much regular pets were too much work. work.

By the end of the year, he sold By the end of the year, he sold two tons of Pet Rocks and two tons of Pet Rocks and became a millionaire. became a millionaire.

Interest began to fade. Dahl Interest began to fade. Dahl decided to get out of the pet decided to get out of the pet rock business, guided by the rock business, guided by the same market forces that had same market forces that had brought him into the business brought him into the business and made him rich.and made him rich.

Modified Free Enterprise Modified Free Enterprise EconomyEconomy

Def: Free enterprise economic system with Def: Free enterprise economic system with some government involvementsome government involvement

Ex: United StatesEx: United States

Some government involvement is Some government involvement is necessary for consumer protection, necessary for consumer protection, provisions, regulation of products, etc.provisions, regulation of products, etc.

Ex. Breaking up monopolies, unfair Ex. Breaking up monopolies, unfair practices in work place, medicare, welfare, practices in work place, medicare, welfare, taxes, warning labels for drugstaxes, warning labels for drugs

Public GoodsPublic GoodsDef: Products provided by Def: Products provided by federal, state, and local federal, state, and local governments and governments and consumed by the publicconsumed by the public

People cannot be excluded People cannot be excluded from the benefits of the from the benefits of the product even thoughproduct even though– they do not pay for itthey do not pay for it– and one person’s use of it and one person’s use of it

does not reduce its does not reduce its usefulness to othersusefulness to others

Ex. Street lighting, national Ex. Street lighting, national defensedefense

Free RidersFree RidersPerson who avoids paying Person who avoids paying for a good or service but for a good or service but who benefits from that who benefits from that good or service anywaygood or service anyway

Detroit Fireworks Detroit Fireworks ($300,000)($300,000)

Because people could see Because people could see the fireworks from many the fireworks from many different locations without different locations without paying, businesses would paying, businesses would be reluctant to pay for itbe reluctant to pay for it

So, typically government So, typically government pays for itpays for it

ExternalitiesExternalitiesDef: A side effect of a transaction that affects Def: A side effect of a transaction that affects someone other than the producer or the buyer. someone other than the producer or the buyer.

A A negative externality negative externality is a negative effect or is a negative effect or cost, for people who were not involved in the cost, for people who were not involved in the original economic activity. original economic activity.

Ex. Ford Motor discharges pollution into the Detroit River – Ex. Ford Motor discharges pollution into the Detroit River – people who live by river sufferpeople who live by river suffer

A A positive externality positive externality is one that has a positive is one that has a positive effect or benefit to people not involved in the effect or benefit to people not involved in the original activity. original activity.

Ex. Neighbors plant beautiful gardens or have great home Ex. Neighbors plant beautiful gardens or have great home values. All the surrounding homes benefit. values. All the surrounding homes benefit.