What is Economics? Chapter What is Economics? Chapter 11

EconomicsEconomics: is the commonsense science : is the commonsense science of how and why people, businesses, and of how and why people, businesses, and governments make the choices they do.governments make the choices they do.

Economics is ScientificEconomics is Scientific: : aa. Observation: . Observation: Economists observe how and why choices Economists observe how and why choices are made. are made. bb. Economists use these . Economists use these observations as a basis to predict cause-observations as a basis to predict cause-and-effect relationships. and-effect relationships. cc. Economists . Economists attempt to control future events through attempt to control future events through altering important variable. altering important variable.

Why do we make choices? Why do we make choices?

InsatiabilityInsatiability: refers to the fact that everyone has : refers to the fact that everyone has unlimited “wants” (Prov. 27:20) (Ecc. 5:10) page unlimited “wants” (Prov. 27:20) (Ecc. 5:10) page 4 textbook4 textbook

What does God through the Bible say about our What does God through the Bible say about our choices? (Matt. 6:24), (Matt. 6:33) (Col.3:2) page choices? (Matt. 6:24), (Matt. 6:33) (Col.3:2) page 3 textbook3 textbook

What should we desire to choose (or not to)? What should we desire to choose (or not to)? (Prov. 8:11)- wisdom (Prov. 23:4) labor not to be (Prov. 8:11)- wisdom (Prov. 23:4) labor not to be rich (1 Tim. 6:6-11) page 4 readrich (1 Tim. 6:6-11) page 4 read

ScarcityScarcity: Everything is “finite”, or limited in : Everything is “finite”, or limited in quantity (time, labor, money, and natural quantity (time, labor, money, and natural resources are scarce or limited in quantity)resources are scarce or limited in quantity)

Because of the conflict between insatiability and Because of the conflict between insatiability and scarcity, choices become necessary!!!scarcity, choices become necessary!!!

Contentment and Contentment and StewardshipStewardship

ContentmentContentment: Internal (psychological) : Internal (psychological) Satisfaction with what you have or own Satisfaction with what you have or own and who you are, regardless of the and who you are, regardless of the circumstances. (Heb. 13:5) pg 5 circumstances. (Heb. 13:5) pg 5

StewardshipStewardship: Using wisely and well what : Using wisely and well what God has given you. (Luke 12:48) God will God has given you. (Luke 12:48) God will hold you accountable for what He has hold you accountable for what He has given you. given you.

OikonomosOikonomos: Greek word for Steward and : Greek word for Steward and Economics. (1 Cor. 4:1-2) Economics. (1 Cor. 4:1-2)

The Cost of ChoiceThe Cost of Choice

Economic costEconomic cost: the value people place on a good or : the value people place on a good or serviceservice

GoodsGoods: is any tangible thing that has a measurable life span : is any tangible thing that has a measurable life span (Ex/ shoes, clothing, car, glasses, etc.)(Ex/ shoes, clothing, car, glasses, etc.)

ServicesServices: intangible items (Ex/ labor of an accountant, : intangible items (Ex/ labor of an accountant, singer or teacher)singer or teacher)

Economic goods and servicesEconomic goods and services: goods and services that : goods and services that bear a positive economic cost (a price tag higher than zero)bear a positive economic cost (a price tag higher than zero)

Nuisance goodsNuisance goods: goods that consumers pay to have : goods that consumers pay to have removed and have a negative economic cost (Ex/ trash, removed and have a negative economic cost (Ex/ trash, sewage, toxic waste, etc.)sewage, toxic waste, etc.)

RecyclingRecycling: the service of turning nuisance goods into : the service of turning nuisance goods into economic goods (recycling is an application of the economic goods (recycling is an application of the stewardship principle).stewardship principle).

Free goods and servicesFree goods and services: goods and services with a price : goods and services with a price tag of “zero” (Ex/ wind for a windmill, geothermal steam, tag of “zero” (Ex/ wind for a windmill, geothermal steam, air and water). air and water).

Intrinsic vs. Subjective ValueIntrinsic vs. Subjective ValueOpportunity Benefit vs. Opportunity CostOpportunity Benefit vs. Opportunity Cost

Diamond-Water ParadoxDiamond-Water Paradox: : What has more value a handful of What has more value a handful of diamonds or a single glass of water?diamonds or a single glass of water?

Intrinsic ValueIntrinsic Value: This principle holds that a thing is valuable because : This principle holds that a thing is valuable because of the nature of the product, such as its scarcity or the amount of of the nature of the product, such as its scarcity or the amount of labor and natural resources that goes into its production. labor and natural resources that goes into its production.

Subjective ValueSubjective Value: states that it is an object’s usefulness to the : states that it is an object’s usefulness to the buyer that determines its worth. (Carl Menger proposed this as the buyer that determines its worth. (Carl Menger proposed this as the solution the diamond-water paradox)solution the diamond-water paradox)

UtilityUtility: usefulness. The amount of satisfaction the good or service : usefulness. The amount of satisfaction the good or service provides the buyer. provides the buyer.

Opportunity benefitOpportunity benefit: the satisfaction you receive form the choice : the satisfaction you receive form the choice that you makethat you make

Opportunity costOpportunity cost: the satisfaction that you “give up” or the regret : the satisfaction that you “give up” or the regret you experience for not choosing differently.you experience for not choosing differently.

The Broken Window storyThe Broken Window story: pg 10 read and list what is the one : pg 10 read and list what is the one economic lesson that Hazlitt proposes and what you believe he is economic lesson that Hazlitt proposes and what you believe he is saying?saying?

UtilUtil: is an economic term for an imaginary unit of satisfaction. Fig. : is an economic term for an imaginary unit of satisfaction. Fig. 1.1 pg 11.1.1 pg 11.

The Scope and Purpose of The Scope and Purpose of ChoiceChoice

MicroeconomicsMicroeconomics: deals with the choices made by “individual” : deals with the choices made by “individual” units: individual people, households, or business firms.units: individual people, households, or business firms.

MacroeconomicsMacroeconomics: examines large-scale economic choices and : examines large-scale economic choices and issues (government)issues (government)

Positive EconomicsPositive Economics: observing economic choices and predicting : observing economic choices and predicting economic events. (Ex/ An economist predicts that the stock economic events. (Ex/ An economist predicts that the stock market will rise again this year) market will rise again this year)

Normative EconomicsNormative Economics: refers to making value judgments about : refers to making value judgments about existing or proposed economic policies (Ex/ “Everyone “should” existing or proposed economic policies (Ex/ “Everyone “should” save 10% of their income”, “It is “unpatriotic” to buy foreign made save 10% of their income”, “It is “unpatriotic” to buy foreign made clothing”, “Illegal immigrants are taking all our jobs”clothing”, “Illegal immigrants are taking all our jobs”

Carl MengerCarl Menger: Founder and “Father” of the Austrian School of : Founder and “Father” of the Austrian School of Economics. He advocated personal financial freedom, and that a Economics. He advocated personal financial freedom, and that a person makes his decisions more efficiently than the government person makes his decisions more efficiently than the government because the individual’s decisions are based on personal utility. because the individual’s decisions are based on personal utility. Menger explained that it is “utility” that gives value to anything. Menger explained that it is “utility” that gives value to anything.

Chapter 1 Review pg 15Chapter 1 Review pg 15

Personal Finance: BudgetingPersonal Finance: Budgeting BudgetBudget: is a tabulation of income and planned expenditures: is a tabulation of income and planned expenditures Impulse buyingImpulse buying: purchasing things that we think that we need at the : purchasing things that we think that we need at the

moment or that merely strike a fancymoment or that merely strike a fancy Fixed expensesFixed expenses: expenses that do not rise or fall as the family’s : expenses that do not rise or fall as the family’s

income increases in the short term (Ex/ rent or mortgage payments, income increases in the short term (Ex/ rent or mortgage payments, food expenses, utilities and property taxes).food expenses, utilities and property taxes).

Variable expensesVariable expenses: those costs that rise and fall as the family’s : those costs that rise and fall as the family’s income changes (Ex/ vacations, gifts, entertainment, new clothes and income changes (Ex/ vacations, gifts, entertainment, new clothes and allowances). allowances).

Engel’s LawEngel’s Law: observes that as a family’s income increases: the % of : observes that as a family’s income increases: the % of income spent on food decreases, the % spent on clothing, rent, fuel, income spent on food decreases, the % spent on clothing, rent, fuel, and electricity stays about the same, and the % spent on education and electricity stays about the same, and the % spent on education and recreation increases. and recreation increases.

Budget Categories: pg 18-21Budget Categories: pg 18-21 Escrow AccountEscrow Account: an account set up by the mortgage holding : an account set up by the mortgage holding

company for the home buyer to pay property taxes and property company for the home buyer to pay property taxes and property insurance. insurance.

ContingencyContingency: is an uncertain event (Ex/ loss of a job): is an uncertain event (Ex/ loss of a job)

Economic Models: Chapter 2Economic Models: Chapter 2Circular Flow ModelCircular Flow Model

Tabular model or scheduleTabular model or schedule: explains simple : explains simple relationships between pairs of variables (Figure 2-1) pg relationships between pairs of variables (Figure 2-1) pg 25. The info is limited to a few observations25. The info is limited to a few observations

Line GraphLine Graph: provides significantly more data and can : provides significantly more data and can tell economists approximately how much of a product tell economists approximately how much of a product will be sold at any given price on the graph (Figure 2-2) will be sold at any given price on the graph (Figure 2-2) pg 25pg 25

Production Possibilities Curve (PPCProduction Possibilities Curve (PPC): enables the ): enables the economist to see the “maximum” feasible amounts of economist to see the “maximum” feasible amounts of two commodities that a business can produce when two commodities that a business can produce when those items are competing for that business’s limited those items are competing for that business’s limited resources (Figure 2-3) pg 26 resources (Figure 2-3) pg 26

Circular Flow ModelCircular Flow Model: a visual explanation of how a : a visual explanation of how a complete national economic system functions. (Figure 2-complete national economic system functions. (Figure 2-5 pg 28)5 pg 28)

Consumption ExpendituresConsumption Expenditures: the total amount of : the total amount of money that households spend on goods and servicesmoney that households spend on goods and services

Factors of ProductionFactors of Production Factors of ProductionFactors of Production: The resources that businesses need/use : The resources that businesses need/use

to produce their goods and services. to produce their goods and services. 4 factors of production4 factors of production: Land, Labor, Capital and : Land, Labor, Capital and

Entrepreneurship.Entrepreneurship. LandLand: all of the natural resources that go into the production of : all of the natural resources that go into the production of

goods (animal, vegetable or mineral resource). goods (animal, vegetable or mineral resource). LaborLabor: all of the human “effort” (physical and mental) that goes : all of the human “effort” (physical and mental) that goes

into the creation of goods or services.into the creation of goods or services. CapitalCapital: refers to the goods used to produce other goods. Two : refers to the goods used to produce other goods. Two

categories of Capital: Financial and Real. categories of Capital: Financial and Real. Financial capitalFinancial capital: is all the money the household sector loans to : is all the money the household sector loans to

the business firmsthe business firms Real CapitalReal Capital: Business firms use the financial capital to purchase : Business firms use the financial capital to purchase

real capital: the tools they use to produce their goods and services.real capital: the tools they use to produce their goods and services. EntrepreneurshipEntrepreneurship: the activity of creatively combining natural : the activity of creatively combining natural

resources, human labor, and capital in unique ways to produce new resources, human labor, and capital in unique ways to produce new goods and services. goods and services. Entrepreneurship is the most important factor Entrepreneurship is the most important factor of production of production because it directs, organizes and plans the because it directs, organizes and plans the production process.production process.

Factor CostsFactor Costs 4 Factor Costs4 Factor Costs: Rent, Wages, Interest and Profit : Rent, Wages, Interest and Profit

and are the payments business firms make in and are the payments business firms make in exchange for the four factors of production. exchange for the four factors of production.

RentRent: includes all payments for the use of an : includes all payments for the use of an owner’s property (buildings, land, royalties to an owner’s property (buildings, land, royalties to an author, etc.)author, etc.)

WagesWages: all payments for labor used to produce : all payments for labor used to produce goods or services (salaries, hourly wages, bonuses, goods or services (salaries, hourly wages, bonuses, etc.). Wages make up the largest portion of all the etc.). Wages make up the largest portion of all the factor costs. factor costs.

InterestInterest: the payment business firms make on : the payment business firms make on borrowed money (Ex/ corporate bonds)borrowed money (Ex/ corporate bonds)

ProfitProfit: the difference between the revenue received : the difference between the revenue received from the sale of a product and the cost of the land, from the sale of a product and the cost of the land, labor, and capital that went into its production. labor, and capital that went into its production.

Government as an economic Government as an economic entityentity

Transfer paymentsTransfer payments: payments of money or : payments of money or goods to persons for which the government goods to persons for which the government expects no specific economic repayment (Ex/ expects no specific economic repayment (Ex/ welfare benefits, food stamps, social security, and welfare benefits, food stamps, social security, and unemployment compensation)unemployment compensation)

Budget deficitBudget deficit: when government spending : when government spending exceeds the amount it receives in taxesexceeds the amount it receives in taxes

Budget surplusBudget surplus: the government receives more : the government receives more in taxes than it spendsin taxes than it spends

TaxesTaxes: government imposes taxes to pay for its : government imposes taxes to pay for its spending. Households pay sales, income and spending. Households pay sales, income and property taxes (etc.). Businesses pay corporate, property taxes (etc.). Businesses pay corporate, social security, unemployment, and many other social security, unemployment, and many other taxes. taxes.

Government in the Circular Flow: Figure 2-8 pg 33Government in the Circular Flow: Figure 2-8 pg 33

The Financial Market: The Heart The Financial Market: The Heart of the Economy of the Economy

Financial MarketFinancial Market: the 4: the 4thth player in the circular flow model player in the circular flow model and is the collection of a nation’s financial institutions that and is the collection of a nation’s financial institutions that receive deposits of excess funds from households and lend receive deposits of excess funds from households and lend those funds to business firms. (Ex/ commercial banks, those funds to business firms. (Ex/ commercial banks, insurance companies, finance companies, and stock insurance companies, finance companies, and stock brokerage firms) See Figure 2-9 pg 35. brokerage firms) See Figure 2-9 pg 35.

Principal functionPrincipal function: to circulate money from households to : to circulate money from households to business firms. business firms.

DissavingDissaving: any time households withdraw money form an : any time households withdraw money form an account or borrow it. account or borrow it.

Crowding OutCrowding Out: Our Government borrows money by selling : Our Government borrows money by selling bonds (with very attractive interest rates), treasury bills and bonds (with very attractive interest rates), treasury bills and treasury notes. Crowding out occurs because every dollar treasury notes. Crowding out occurs because every dollar borrowed by the government means one less dollar is borrowed by the government means one less dollar is available to business firms to borrowavailable to business firms to borrow

Ludwig Von MisesLudwig Von Mises: Advocate of Free Markets. Author of : Advocate of Free Markets. Author of “Human Action” the most complete and persuasive “Human Action” the most complete and persuasive exposition and defense of the free market (pg 34).exposition and defense of the free market (pg 34).

Principles of PurchasingPrinciples of Purchasing

Caveat EmptorCaveat Emptor: “let the Buyer : “let the Buyer Beware”Beware”

Bait and SwitchBait and Switch: Ex/ any product : Ex/ any product used to entice you to come to the used to entice you to come to the store to purchase but when you store to purchase but when you arrive…arrive…

Eight principles of purchasingEight principles of purchasing: pg : pg 38-40 textbook. 38-40 textbook.

ConsumerismConsumerism Era of ConsumerismEra of Consumerism: the drive for the enforcement of : the drive for the enforcement of

consumer rights consumer rights RedressRedress: the right to be heard in court and receive : the right to be heard in court and receive

reasonable compensation (Ex/ consumer buys a defective reasonable compensation (Ex/ consumer buys a defective product or service). product or service).

Cease and desist orderCease and desist order: prohibits firms from continuing a : prohibits firms from continuing a deceptive practicedeceptive practice

Counter-advertisingCounter-advertising: advertising that a firm must : advertising that a firm must produce at its own expense to correct any false claims that produce at its own expense to correct any false claims that its earlier advertising promotedits earlier advertising promoted

Ralph NaderRalph Nader: America’s first and most vocal consumer : America’s first and most vocal consumer advocate pg 42advocate pg 42

Federal Agencies that enforce consumer rights: FDA (Food Federal Agencies that enforce consumer rights: FDA (Food and Drug Administration), FTC (Federal Trade Commission), and Drug Administration), FTC (Federal Trade Commission), CPSC (Consumer Product Safety Commission) pg 41 CPSC (Consumer Product Safety Commission) pg 41 textbooktextbook

Value and Demand Chapter 3Value and Demand Chapter 3

Principle of Diminishing Marginal Principle of Diminishing Marginal UtilityUtility: states that people tend to : states that people tend to receive less and less additional receive less and less additional satisfaction from any good or service satisfaction from any good or service as they obtain more and more of it as they obtain more and more of it during a specific period of time.during a specific period of time.

William Stanley JevonsWilliam Stanley Jevons: developer : developer of the Law of Diminishing Marginal of the Law of Diminishing Marginal UtilityUtility

The Function of PricesThe Function of Prices

Marginal Utility Schedule Marginal Utility Schedule Marginal Utility TableMarginal Utility TableScripture and DMU: pg 48 textbook. Scripture and DMU: pg 48 textbook.

Eccles. 5:10-11 and the rich fool Eccles. 5:10-11 and the rich fool (Luke 12:16-21)(Luke 12:16-21)

How Demand Works: Cartoon pg 49 How Demand Works: Cartoon pg 49 textbooktextbook

DemandDemand

The Law of DemandThe Law of Demand: everything else being held : everything else being held constant, the lower the price charged for a good or constant, the lower the price charged for a good or service, the greater the quantity of it people will service, the greater the quantity of it people will demand, and the higher the price, the lower the demand, and the higher the price, the lower the quantity they will demand.quantity they will demand.

Fig 3.3 Subjective Value pg 51Fig 3.3 Subjective Value pg 51 Fig 3.4 Demand Schedule and Fig. 3.5 Demand Curve Fig 3.4 Demand Schedule and Fig. 3.5 Demand Curve

pg 51pg 51 Change in DemandChange in Demand: when a demand curve shifts. A : when a demand curve shifts. A

Rightward shiftRightward shift indicates an indicates an increase in demand . increase in demand . A A Leftward shiftLeftward shift indicates a indicates a decrease in demand. decrease in demand. See Fig. 3-6, 3-7 and 3-8 for examples. See Fig. 3-6, 3-7 and 3-8 for examples.

Change in IncomeChange in Income One of the most important causes of shift in demand is a change in people’s One of the most important causes of shift in demand is a change in people’s

incomes.incomes. Normal goodsNormal goods: goods that experience an increase in demand because of an : goods that experience an increase in demand because of an

increase in consumers’ income. increase in consumers’ income. Inferior goodsInferior goods: goods that experience a decrease in demand due to an : goods that experience a decrease in demand due to an

increase in consumers’ income (Ex/ powdered milk, recapped tires, used cars, increase in consumers’ income (Ex/ powdered milk, recapped tires, used cars, secondhand clothing).secondhand clothing).

Substitute goodsSubstitute goods: goods that households use in place of others. As the price : goods that households use in place of others. As the price of one of the goods rises, consumers tend to buy more of the substitute (Ex/ of one of the goods rises, consumers tend to buy more of the substitute (Ex/ chicken for beef, hot dogs instead of hamburgers, etc) pg 55 Fig. 3-9. chicken for beef, hot dogs instead of hamburgers, etc) pg 55 Fig. 3-9. CategoryCategory: : Change in the price of related goods. Change in the price of related goods.

Complementary goodsComplementary goods: goods that are usually purchased or used together : goods that are usually purchased or used together (Ex/ cameras and memory cards, French fries and ketchup, gas and cars, (Ex/ cameras and memory cards, French fries and ketchup, gas and cars, peanut butter and jelly). Fig. 3-10. peanut butter and jelly). Fig. 3-10. CategoryCategory: Change in tastes and preferences.: Change in tastes and preferences.

Change in expectationsChange in expectations: a shift in the demand curve due to a change in : a shift in the demand curve due to a change in people’s expectations of future prices. If people expect the price of a good to people’s expectations of future prices. If people expect the price of a good to increase they will buy more of it ASAP (Ex/ food, gas, . If people expect the price increase they will buy more of it ASAP (Ex/ food, gas, . If people expect the price to decrease in the future they postpone their purchase until the price has gone to decrease in the future they postpone their purchase until the price has gone down (Ex/ housing market, computer, etc.). down (Ex/ housing market, computer, etc.).

Personal Finance: InsurancePersonal Finance: Insurance

Homeowner’s insuranceHomeowner’s insurance: liability and comprehensive.: liability and comprehensive. Liability insuranceLiability insurance: pays for property damage and : pays for property damage and

bodily injury incurred by any visitor on the insured bodily injury incurred by any visitor on the insured person’s property. person’s property.

Comprehensive insuranceComprehensive insurance: protects the homeowner : protects the homeowner from heavy loss due to misfortunes such as fire, theft, from heavy loss due to misfortunes such as fire, theft, windstorms, hail and lightning damage. windstorms, hail and lightning damage.

Automobile insuranceAutomobile insurance: Collision insurance, deductible.: Collision insurance, deductible. Collision insurance (full coverage)Collision insurance (full coverage): will pay to replace : will pay to replace

or repair the policyholder’s car (medical payments, or repair the policyholder’s car (medical payments, uninsured motorist, no-fault insurance, . uninsured motorist, no-fault insurance, .

DeductibleDeductible: the amount the policyholder must pay : the amount the policyholder must pay before the insurance company will cover the remainder. before the insurance company will cover the remainder.

Insurance: Life and Health Insurance: Life and Health Life insuranceLife insurance: (Cor. 12:14 pg 59) insurance to cover the : (Cor. 12:14 pg 59) insurance to cover the

responsibilities (family, burial, etc.) due to the death of a person. responsibilities (family, burial, etc.) due to the death of a person. Types of Life insuranceTypes of Life insurance: Term, Whole, Universal : Term, Whole, Universal Term life insuranceTerm life insurance: provides only death protection for a specified : provides only death protection for a specified

period of time. period of time. BeneficiaryBeneficiary: the person(s) who receive the proceeds of the insurance: the person(s) who receive the proceeds of the insurance PremiumPremium: a monthly payment given in exchange for a fixed death : a monthly payment given in exchange for a fixed death

benefitbenefit Whole life insuranceWhole life insurance: provides a savings component along with a : provides a savings component along with a

death benefit. Premiums are level over the lifetime and the savings death benefit. Premiums are level over the lifetime and the savings value of a whole life policy are called its “value of a whole life policy are called its “Cash ValueCash Value”. ”.

Universal life insuranceUniversal life insurance: hybrid form that provides policyholders : hybrid form that provides policyholders with a term life insurance but includes a flexible savings plan. with a term life insurance but includes a flexible savings plan. Premiums are called “contributions”Premiums are called “contributions”

Health InsuranceHealth Insurance: disability income insurance, major medical : disability income insurance, major medical insurance, hospitalization, group health insuranceinsurance, hospitalization, group health insurance

Supply and Prices Chapter 4Supply and Prices Chapter 4 Proverbs 11:24-26 and Philippians 4:19Proverbs 11:24-26 and Philippians 4:19 SupplySupply: is the amount of goods and services business firms are : is the amount of goods and services business firms are

willing and able to provide at different prices.willing and able to provide at different prices. Law of SupplyLaw of Supply: holds that the higher the price buyers are willing : holds that the higher the price buyers are willing

to pay, other things being held constant, the greater the quantity to pay, other things being held constant, the greater the quantity of a product a firm will produce and that the lower the price of a product a firm will produce and that the lower the price consumers are willing to pay, the smaller the quantity the supplier consumers are willing to pay, the smaller the quantity the supplier will produce. will produce.

Supply scheduleSupply schedule: Figure 4-1: Figure 4-1 Supply CurveSupply Curve: Figure 4-2 are positively sloped, meaning that if : Figure 4-2 are positively sloped, meaning that if

prices rise producers will increase supply, and vice-versa: prices prices rise producers will increase supply, and vice-versa: prices decrease: supply will decrease.decrease: supply will decrease.

Change in quantity suppliedChange in quantity supplied: Whenever a change in the price : Whenever a change in the price consumers are willing to pay causes a change in the number of consumers are willing to pay causes a change in the number of goods produced and sold. goods produced and sold.

Changes in SupplyChanges in Supply Changes in supplyChanges in supply: Figure 4-3: Figure 4-3 Decrease in supplyDecrease in supply: a leftward shift in the supply curve, a situation in : a leftward shift in the supply curve, a situation in

which suppliers produce less of their product at any given price. Figure 4-4which suppliers produce less of their product at any given price. Figure 4-4 Increase in supplyIncrease in supply: a rightward shift of the supply curve, demonstrates : a rightward shift of the supply curve, demonstrates

the willingness of business firms to produce more of their product at any the willingness of business firms to produce more of their product at any given price. Figure 4-5given price. Figure 4-5

Why a Change in Supply?Why a Change in Supply? Economists have pinpointed three reasons: Economists have pinpointed three reasons: 1. 1. Changes in TechnologyChanges in Technology: advances in the tools used to produce goods : advances in the tools used to produce goods

and services (Ex/ computer, automation) Ex/ calculator: pg 68 Fig. 4-6and services (Ex/ computer, automation) Ex/ calculator: pg 68 Fig. 4-6 2. 2. Changes in Production costsChanges in Production costs: Companies must pay for the natural : Companies must pay for the natural

resources, labor, and capital that goes into their products. If a firm’s costs resources, labor, and capital that goes into their products. If a firm’s costs rise, it must decrease the quantity of what it provides at the same price. rise, it must decrease the quantity of what it provides at the same price. Fig. 4-7Fig. 4-7

3. 3. Changes in the price of related goodsChanges in the price of related goods : as the price people are : as the price people are willing to pay for a substitute rises, business firms naturally become willing willing to pay for a substitute rises, business firms naturally become willing to sell more of that good or service and (normally) decrease their supply of to sell more of that good or service and (normally) decrease their supply of the original good. Fig 4-8the original good. Fig 4-8

Determining Prices Chapter Determining Prices Chapter 4b4b

Market Equilibrium PointMarket Equilibrium Point: it represents the price at which consumers are : it represents the price at which consumers are willing to take from the market the exact quantity of a product that willing to take from the market the exact quantity of a product that suppliers are willing to put into the market. Figure 4-9 pg 71suppliers are willing to put into the market. Figure 4-9 pg 71

Market Equilibrium PriceMarket Equilibrium Price: The price at which supply meets demand.: The price at which supply meets demand. Alfred MarshallAlfred Marshall: Architect of the Demand and Supply Model pg 70: Architect of the Demand and Supply Model pg 70 SurplusSurplus: If a supplier raises the price of his product above the market : If a supplier raises the price of his product above the market

equilibrium price, the law of supply will motivate him to increase the equilibrium price, the law of supply will motivate him to increase the quantity of the product he puts into the market. At the same time, however, quantity of the product he puts into the market. At the same time, however, the law of demand will compel consumers to buy less of his product. The the law of demand will compel consumers to buy less of his product. The combined effect of the two opposite laws will result in a surplus. Figure 4-10 combined effect of the two opposite laws will result in a surplus. Figure 4-10 pg 72. Figure 4-11 and 4-12 pg 73pg 72. Figure 4-11 and 4-12 pg 73

Price FloorPrice Floor: a barrier intended to prevent the prices of those items from : a barrier intended to prevent the prices of those items from falling below the market price. falling below the market price.

Demand solution to a surplus: decrease price increase demandDemand solution to a surplus: decrease price increase demand Supply solution to a surplus: decrease supply Supply solution to a surplus: decrease supply Simplest solution: allow the market to work: supplier will lower price until Simplest solution: allow the market to work: supplier will lower price until

supply meets demand and surplus is gone. Figure 4-13supply meets demand and surplus is gone. Figure 4-13

ShortageShortage ShortageShortage: whenever various factors hold the price of a good : whenever various factors hold the price of a good

lower than its market equilibrium price. Figure 4-14.lower than its market equilibrium price. Figure 4-14. Price CeilingPrice Ceiling: usually a mandate by government that prevent : usually a mandate by government that prevent

prices from rising to the market equilibrium price. Imposing a price prices from rising to the market equilibrium price. Imposing a price ceiling will always cause shortages when the market price is ceiling will always cause shortages when the market price is higher. If the market price is lower then that business will “die” higher. If the market price is lower then that business will “die” because they will not be able to sell their products. because they will not be able to sell their products.

““3” Solutions to a shortage3” Solutions to a shortage: decrease demand Figure 4-15, : decrease demand Figure 4-15, increase supply Figure 4-16, or allow price to rise to the market increase supply Figure 4-16, or allow price to rise to the market equilibrium point Figure 4-17. equilibrium point Figure 4-17.

Seven Good Years Followed by Seven Lean YearsSeven Good Years Followed by Seven Lean Years: : Genesis Genesis 41:46-57 and 47:13-2041:46-57 and 47:13-20. Biblical example of surplus and . Biblical example of surplus and shortage. shortage.

Personal Finance: The Personal Finance: The Christian and DebtChristian and Debt

Christian Debt PhilosophiesChristian Debt Philosophies: Deut: 15:6, Romans 13:8, Lev. : Deut: 15:6, Romans 13:8, Lev. 25:35-36, Matt. 5:42 and Luke 19:23 pg 8025:35-36, Matt. 5:42 and Luke 19:23 pg 80

Scripture associates debt with bondage, and may limit a Scripture associates debt with bondage, and may limit a Christian’s mobility, debt presumes upon an uncertain future or Christian’s mobility, debt presumes upon an uncertain future or seeing the Lord’s provision or protection, or giving to charity or seeing the Lord’s provision or protection, or giving to charity or the Lord, the Lord,

DefaultDefault: fail to pay a loan on time: fail to pay a loan on time GarnishGarnish: when a lender gets permission to take a part of a : when a lender gets permission to take a part of a

borrower’s wagesborrower’s wages