1. True or False????
The best things in life are free.

2. AP economics
Introduction

3. Topic 1: Definition of Economics

4. Economics
studies how scarce resources are used to fulfill society’s needs and wants

5. Scarcity

6. Scarcity condition where wants are greater than resources
*Because scarcity exists, choices must be made

7. Scarcity vs. Shortages Scarcity occurs at all times for all goods
Shortages occur when producers will not or cannot offer goods or services at current prices. Shortages are temporary.
Scarcity NOT the same as a shortage

8. Resources
Anything that helps produce a good or service (factors of production)

9. The Four Factors of Production
Types of Resources
Land
Labor
Capital
Entrepreneurship 9

10. The Four Factors of Production
Land = natural resources (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.) 10

11. The Four Factors of Production
Labor = Workers (manual laborers, lawyers, doctors, teachers, waiters, etc.) 11 11

12. The Four Factors of Production
Capital:
Resources that are used to create other goods (tools, tractors, machinery, buildings, factories, etc.) 12

13. The Four Factors of Production
Entrepreneurship= Organizes
other resources
Ultimate goal: Make profit 13

14. The Four Factors of Production
Classify the Factors of Production in the following scenario:
You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk.
The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

15. The Four Factors of Production
Classify the Factors of Production in the following scenario:
You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk.
The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

16. Resources Resources are interdependent of one another
Have to have all resources in order to make a product/service

17. Needs
Necessary for survival

18. Wants
Not necessary for survival

19. Types of wants
Consumer Good - goods purchased for direct consumption

20. Capital goods Goods purchased for indirect consumption
(used to make other things)

21. In order for a product to have value, it must be scarce and provide utility (usefulness)

22. Conspicuous Consumption
Purchase of items to impress others

23. Topic 2: principles of economics

24. 1. People Economize
People make decisions based on what THEY think will benefit them the most

25. 2. All choices involve a cost
Opportunity Cost – highest valued alternative given up when a choice is made
There is no such thing as a free lunch

26. Nothing is Free!!!

27. Incentives influence people’s decisions

28. 4. Rules influence individual choices

29. 5. Voluntary trade creates wealth
“TRADING UP” VIDEO CLIP

30. 6. The consequences of choices lie in the future
Sunk Cost: cost already made; should be ignored when making choices

31. Answer the following questions the way an economist would

32. 1. Making a choice means: A. deciding among many possibilities
B. being able to get everything
C. not thinking about future consequences
D. considering a daily horoscope

33. 2. People throughout the world usually make decisions:
A. impulsively; choosing quickly without much thought
B. generously; thinking of the needs of others
C. randomly; leaving the outcome up to chance
D. purposefully; considering costs and benefits

34. 3. Which of the following best explains the relationship between choices and incentives?
A. incentives motivate people to make certain types of choices
B. incentives rarely influence personal choices
C. incentives make it difficult to predict what choice people will make
D. incentives have nothing to do with choices

35. A. the chips cost less than the other snacks
4. A hungry economist decides to buy a bag of potato chips; which of the following would best explain his decision? explain his decision?
A. the chips cost less than the other snacks
B. the chips came in the largest bag
C. the chips offer a greater benefit to him than the other snacks
D. there are no other choices available

36. * In economics, decisions should always be made at the margin
a rational person will weigh the
additional benefits (MU) against the
additional costs (MC)
* Marginal utility = additional benefit from consuming one more item

37. Stop watch

38. Diminishing Marginal Utility
Squidward - too many krabby patties
When a person acquires more units of an item, ADDITIONAL UTILITY will go down

39. Maximizing utility Rule
MU<MC = Don’t do it
MU>MC = Do it
MU=MC * Do it and STOP (utility maximized here)

41. True or False??? Anything worth doing is worth doing well.
It is a good idea to make an informed decision
and stick to it.

42. How many movies would you see????
Thinking at the Margin
# Times Watching Movie
Marginal Utility
Price
1st 30
$10
2nd 15
3rd 5
Total 50
$30
How many movies would you see????

43. Calculate Marginal Utility
# of Slices of Pizza
Total Utility
(in utils)
Marginal Utility/Benefit 1 8 2 14 3 19 4 23 5 25 6 26 7 24 43

44. Calculate Marginal Utility
# of Slices of Pizza
Total Utility
(in dollars)
Marginal Utility/Benefit 1 8 2 14 6 3 19 5 4 23 25 26 7 24 -2
Marginal Cost -- $2
How many pizzas would you buy if the price per slice was $2? 44

45. Calculate Marginal Utility
# of Slices of Pizza
Total Utility
(in dollars)
Marginal Utility/Benefit 1 8 2 14 6 3 19 5 4 23 25 26 7 24 -2
Marginal Cost 2
You will continue to consume until Marginal utility = Marginal Cost
How many pizzas would you buy if the price per slice was $2? 45

46. Maximizing utility if choosing between 2 items
Must calculate the MU/P of each item.
“Bang for your Buck”
Calculating Marginal Utility Per Dollar allows you to compare products with different prices.

47. Marginal Utility Per Dollar
Maximizing Utility
You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose?
Destination
Marginal Utility
Price
Tahiti
3000
$3,000
Chicago
1000
$500
Marginal Utility Per Dollar
1 Util
2 Utils 47 47

48. Maximizing Utility if CHOOSING between items
You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose?
Destination
Marginal Utility
Price
Tahiti
3000
$3,000
Chicago
1000
$500
MU/P
3000/3000= 1
1000/500= 2 48 48

49. Maximizing utility if buying combinations of items:
If purchasing combinations of goods. The consumer’s money should be spent so that the marginal utility per dollar of each good equals each other.
MU 1= MU2
P P2

50. Each slice of pizza costs $2.00 and the MU
is 10. Each soft drink is $1.00. If you are
maximizing your utility, what is the MU of
the soft drink? 5

51. Utility Maximization with a budget constraint (combinations of items)
1. Figure out the marginal utility per price (MU/P) for each item
2. Spend $ on the item with the highest marginal utility per price until $ runs out
*The MU/P of each item should be the same!

52. Utility Maximization $10 $5
# Times
Going
Marginal Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
1st 30 10
2nd 20 5
3rd 2
4th 1
If you only have $25, what combination of movies and go carts maximizes your utility?

53. Utility Maximization $10 $5
# Times
Going
Marginal Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
1st 30 3 10 2
2nd 20 5 1
3rd
.40
4th
.50
.20
If you only have $25, what combination of movies and go carts maximizes your utility?

54. Practice: utility max with budget constraint
3 apples and 2 oranges
Assume apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the combination that maximizes utility. 54

55. Apples MU/P Oranges MU/P
0 0
3 apples and 2 oranges

56. Practice: utility maximization
Find the Utility-Maximizing Combination of
A and B, if you have an Income of $10
(2)
Product A:
Price = $1
(3)
Product B:
Price = $2
(b)
Marginal
Utility
Per Dollar
(MU/Price)
(a)
Marginal
Utility,
Utils
(1)
Unit of
Product 1 2 3 4 5 6 7 10 8 24 20 18 16 12 10 8 7 6 5 4 3 12 9 2

57. Purchase 2 of Item A and 4 of B
Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10
(2)
Product A:
Price = $1
(3)
Product B:
Price = $2
(b)
Marginal
Utility
Per Dollar
(MU/Price)
(a)
Marginal
Utility,
Utils
(1)
Unit of
Product 1 2 3 4
Fifth
Sixth
Seventh 10 8 7 6 5 24 20 18 16 12 10 8 7 6 5 4 3 12 9 2
Purchase 2 of Item A and 4 of B

58. Topic 3 : Types of Economics

59. microeconomics studies specific segments of the economy
Example: profits at McDonalds

60. macroeconomics Studies the economy as a whole; more general topic
Examples:
unemployment rate in the U.S.

61. Positive Economics - Collects and presents facts; concerns what the economy is really like
Example???

62. Normative Economics - Involves value judgments about what the economy should be like
Example??

63. Topic 4: Production Possibilities Curve/Frontier
A production possibilities curve (PPC) is a model that shows alternative ways that an economy can use its scarce resources
This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 63

64. Each point represents a specific combination of goods that can be produced given resources available.
PPC A B C
boats 9 7 4
trucks

65. PPC 4 Key Assumptions Only two goods can be produced Full employment
All resources being utilized
All technology being utilized

66. Each point represents a specific combination of goods that can be produced given resources available.
PPC A B C
boats 9 7 4
trucks

67. The Production Possibilities Curve and Efficiency67

68. PPC illustrates two Types of Efficiency
1. Productive Efficiency
Products are being produced in the least costly way.
- any point on curve
2. Allocative Efficiency
The products being produced are the ones most desired by society
- Any point on curve 68

69. PPC Point inside (D) = unemployment
Point outside (E) = unattainable given current resources
Points on curve (A,B,C) = efficient
All resources being utilized
Economy at full employment

70. Opportunity Cost Example:
1. The opportunity cost of moving from a to b is…
2 Bikes
2.The opportunity cost of moving from b to d is…
7 Bikes
3.The opportunity cost of moving from d to b is…
4 Computers
4.The opportunity cost of moving from c to b is…
2 computers 70

71. Constant opportunity cost: Opportunity cost is always the SAME
A B C D E
Pizza
Calzones
Opportunity Cost of moving from a-b, b-c, c-d, and d-e? 71 71

72. Constant opportunity cost
Resources are easily adaptable for producing either good
Ex: pizza and calzones
Results in a straight line PPC

73. Increasing opportunity cost: Opportunity costs increase as more of a good is produced
A B C D E
PIZZA
ROBOTS
Opportunity Cost of moving from a-b, b-c, c-d, and d-e? 73

74. As you produce more of any good, the opportunity cost will increase
Why??? Resources are NOT easily adaptable to producing both goods
Results in a BOWED OUT PPC

75. Constant vs. Increasing Opportunity Cost
Corn
Cactus
Wheat
Pineapples

76. Per Unit Opportunity Cost
Gain
Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt?
$10 per shirt
Take money out of the equation. Instead of producing 5 shirts you could have made 10 hats.
What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up?
1 shirt costs 2 hats
What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up?
1 hat costs ½ of a shirt 76

77. Ron can produce 20 pizzas or 200 burgers
Per Unit Opportunity Cost
Ron can produce 20 pizzas or 200 burgers
1. What is Ron’s opportunity cost for one pizza in terms of burgers given up?
1 P = _________ B
2. What is Ron’s opportunity cost for one burger in terms of pizza given up?
1 B = _________ P
John can produce 100 pizzas or 200 burgers
What is John’s opportunity cost for one pizza in terms of burgers given up?
What is John’s opportunity cost for one burger in terms of pizza given up?
1 B = __________ P 77

78. PER UNIT Opportunity Cost How much each marginal unit costs
Gain
Example:
1. The PER UNIT opportunity cost of moving from a to b is…
1 Bike
2.The PER UNIT opportunity cost of moving from b to c is…
3/2 Bikes
3.The PER UNIT opportunity cost of moving from c to d is…
2 Bikes
4.The PER UNIT opportunity cost of moving from d to e is…
5/2 Bikes 78

79. Practice WS per unit costs

80. Practice per unit Opportunity costB C D E
Autos 2 4 6 8
missiles 30 27 21 12
1.What is the per unit cost of moving from point D to point E?
12/2= 6 missiles
What is the per unit cost of moving from point C to point B?
 2/6 = 1/3 autos
What is the per unit cost of moving from point C to point D?
 9/2 missiles
What is the per unit cost of moving from point B to point A?
2/3/ autos

81. Shifting the Production Possibilities Curve81

82. Production Possibilities
4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources
Fixed Technology
3 Shifters of the PPC/PPF
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade 82

83. Shifts in PPC Inward Shift Indicates economic decline Happens due to:
- destruction of resources
Less trade
Decline in quality of resources

84. Shifts in PPC Outward Shift Indicates Economic growth Happens due to:
-increase in #/quality of resources
- Technology
- More Trade

85. AB is original PPC… What happens??? 1. BP Oil Spill in the Gulf
2. Better technology in producing both items
3. Many workers unemployed
4. Significant increases in education
5. Full employment 85 85

86. Capital Goods and Future Growth
Countries that produce more capital goods (as opposed to consumer goodswill have more growth in the future.
Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Current
PPC
Future
PPC
Future
PPC
Capital Goods
Current
PPC
Capital Goods
Consumer goods
Consumer goods
Panama
Mexico 86

87. Topic 5: PPC, trade and opportunity cost
2 types of problems:
Output problems - look at total items being produced
Input problems - look at resources that go into making a product 87

88. Input or Output Question?
Number caught per day
Deer
Antelope
Henry 4 6
John 24 12 88

89. Input or Output Question?
Months to produce one
Car
Plane
Canada 8 10
Japan 15 12 89

90. Absolute advantage
Output problem: person/country can make more of the item than other country
Input problem: person/country can make item using less resources (time, land etc) than other country 90

91. Absolute Advantage? Number caught per day Deer Antelope Henry 4 6 John24 12 91

92. Absolute Advantage? Months to produce one Car Plane Canada 8 10 Japan15 12 92

93. 2. Comparative advantage
** Comparative advantage Is gained through specialization
To figure comparative advantage, must first:
Must calculate the PER UNIT opportunity cost
* This will be different for INPUT and OUTPUT problems
The country that can produce the item at a lower opportunity cost should specialize in that item

94. Comparative advantage in an output problem
To figure opportunity cost - Cost/Gain
The following chart illustrates the number of CDs and pounds of beef that Japan and Canada can produce in a day CDs beef
Japan
Canada
Japan 1 CD = _____
1 B = ______ CD
Canada 1CD = _____ B
Japan should produce __________
Canada should produce _________

95. Answers: Comparative advantage in an output problem
Output Questions:
CDs beef
Japan
Canada
In Japan, 1 CD = 1/2 B, 1 B = 2 CD
In Canada 1CD = 3/2 B, 1 B = 2/3 CD
Japan should produce CDs
Canada should produce Beef

96. Comparative advantage in an input problem
Input Questions:
ICU= Input Cost goes Under
The following chart illustrates the number of hours it takes the U.S. and France to make one loaf of bred and one bushel of corn
Bread Corn
U.S
France
In the U.S. 1 B = _________ C,
1C = __________ B
In France 1 B = ________C,
1 C = __________B
The U.S. should produce ________________
France should produce __________________

97. Answers to comparative advantage in input problem
Bread Corn
U.S
France
In the U.S. 1 B = 2 C, C = 1/2 B
In France 1 B = 2/3 C 1 C = 3/2 B
The U.S. should produce Corn
France should produce Bread

98. Practice: Who has the Comparative Advantage?
Number caught per day
Deer
Antelope
Henry 4 6
John 24 12
Henry 1 D = _____ A
1A = ______D
John 1D = ______A 98

99. Comparative Advantage?
Number caught per day
Deer
Antelope
Henry 4 6
John 24 12
Henry 1D = 3/2 A
1 A = 2/3 D
John 1 D = ½ A
1A = 2 D 99

100. Comparative Advantage?
Number caught per day
Deer
Antelope
Henry 4 6
John 24 12
Henry 1D = 3/2 A
1 A = 2/3 D
John 1 D = ½ A
1A = 2 D
100

101. Practice: Who has the Comparative Advantage?
Months to produce one
Car
Plane
Canada 8 10
Japan 15 12
Canada 1C = _____ P
1 P = _____C
Japan C = ______P
1P = _____C
101

102. Comparative Advantage?
Months to produce one
Car
Plane
Canada 8 10
Japan 15 12
ICU
Canada 1 C = 4/5 P
1 P = 5/4 C
Japan C = 5/4 P
1P = 4/5 C
102

103. Comparative Advantage?
Months to produce one
Car
Plane
Canada 8 10
Japan 15 12
ICU
Canada 1 C = 4/5 P
1 P = 5/4 C
Japan C = 5/4 P
1P = 4/5 C
103

104. PRACTICE
1. The following table gives the number of hours it takes in the United States and Scotland, using the same amount of resource, to produce a ton of oats or one bagpipe.
Oats Bagpipes
U.S. 2 hours hours
Scotland 5 hours hours
a. Output or input problem?? WHY??
b. Who has the absolute advantage in oats? Bagpipes? WHY??
c. Who has the comparative advantage in Oats? Bagpipes? WHY??

105. A. Input problem; looks at TIME making B. Absolute advantage:
ICU
B. Absolute advantage:
Oats = U.S. (takes less time to make)
Bagpipes = U.S. (takes less time to make)
C. Comparative Advantage:
U.S. Scotland
1 O = 2/3 BP 1 O = 5/4 BP BP = 3/2 O 1BP = 4/5 O
U.S = OATS
Scotland = BAGPIPES

106. PRACTICE In other words: Country X: 4 pens 8 paper
2. The table below gives the total number of pens and paper that country X and country Y can produce.
Country X Country Y
A B C D E F A B C D E F
Pens Pens
Paper paper
In other words:
Country X: pens paper
Country Y: pens paper
a. Output or input problem???WHY???
b. Who has the absolute advantage in producing pens? paper ? WHY???
c. Who has the comparative advantage in producing pens? paper? WHY???

107. A. Output problem B. Absolute advantage: Comparative Advantage:
Pens = X
Paper = Y
Comparative Advantage:
Country X Country Y
1 Pen = 2 paper 1 pen =4 paper
1 paper = 1/2 pen 1 paper = ¼ pen

108. Practice WS
“Introduction: absolute and comparative advantage”

109. Possible comparative advantage questions
* Go to mimio

110. Topic 6: Economic Systems
All societies must answer 3 economic questions
1. what will be produced
2. how will it be produced
3. who will get what
*the way the questions are answered determine a country’s economic system
110

111. Traditional economies
economic questions answered by past
111
111

112. Command Economies economic questions answered by government
(communism and socialism)

113. Video clip
“command vs market”

114. Command Economies Advantages Disadvantages
1.Economic equality
2.Capable of quick change
Disadvantages
1.No incentive to work harder
2. No Competition = poor quality, little choices

115. Market Economy
economic questions answered by people

116. Market Economies Advantages Disadvantages 1.Economic freedom
2.Competition = better quality, more choices
3.Incentive to make a profit
Disadvantages
1.Unequal distribution of wealth
2.Economic loss

117. CONSUMER SOVEREIGNTY Consumer “power”
Consumers determine the success of a product
117

118. The Invisible hand - Adam Smith
The concept that society’s goals will be met as individuals seek their own self-interest.
Example: Society wants fuel efficient cars…
Profit seeking producers will make more.
Competition between firms results in low prices, high quality, and greater efficiency.
The government doesn’t need to get involved since the needs of society are automatically met.
Competition and self-interest act as an invisible hand that regulates the free market.
118

119. The invisible hand: Adam Smith
Video clip:
“I, Pencil”
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

120. Mixed Economy
elements of the all economic systems together (government and people answer economic questions)

121. Circular Flow of a market economy
Shows the interdependence between business and households

122. The Circular Flow Model
The Product Market-
“place” where goods are produced by businesses and sold to households.
The Resource (Factor) Market-
“place” where resources are sold to businesses.
122

123. Individuals Businesses Resource Market Product Market $$$ Costs $$$
$$$ Income $$$
Resources
Resources
(Factors of
Production)
Individuals
Businesses
Goods and
Services
Goods and
Services
$$$ Spending $$$
$$$ Revenue $$$
Product Market
123