2. What is Economics? Economics is the social science that studies how societies (individuals, businesses, and Government) allocate their scarce resources to satisfy unlimited wants. Three IMPORTANT words –Allocate – to assign, allot, distribute –Scarce – insufficient to meet demand, not enough to go around for all –Resources – “things” available to a society that are used to attempt to satisfy unlimited wants.

3. The principal problem of Economics is… Scarcity

4. 3/20/2016Lesson 1: Scarcity3 SCARCITY YOU CAN’T HAVE EVERYTHING YOU WANT! The inability of limited resources limited resources to satisfy people’s wants

5. Scarcity It’s about RESOURCES and WANTS.

6. You can’t eliminate scarcity

7. But you can learn to deal with it!

8. When faced with SCARCITY of resources, decisions have to be made about how to use those resources Trade-offs Opportunity Costs

10. …are all the alternatives in making a decision …the cost of the next best use of money, time, or resources (you’re 2 nd Choice)

11. … Are all of the alternatives that go into making a decision…. In this case let’s say you have many different choices of what you want to do on Saturday night.

12. Here are all of your Choices on Saturday night…which are… Go on a Date Hang out with friends Watch TV Read a good book Hang out with parents Go to bed early Opportunity Cost is different, though… These are all of your trade-offs

13. Remember… Opportunity Cost is the next highest valued alternative. (The 2 nd Best Choice)

14. 1.Macro 1.Macro [national] economics – concerned economy as a whole with the economy as a whole Macro “forest, not the trees, examines the “forest, not the trees, leaves, or specific pieces of bark.” leaves, or specific pieces of bark.”. Micro specific 2. Micro [details of the big picture] – concerned with specific economic units economic units or individual markets under a microscope. Emphasis is on individual households, industries, or firms [like the # of workers employed by Ford] [Concerns the components of the economy] “trees, leaves, & pieces of bark, Micro examines the “trees, leaves, & pieces of bark, rather than the forest.” rather than the forest.” Great Forest! Nice bark!

15. . Production Production MicroeconomicsMacroeconomics How much steelTotal industrial output How much office spaceGross Domestic P roduct Prices Prices Price of individual goodsPrice of medical care Rate of inflation Employment Employment Jobs in the steel industryTotal number of jobs Economy’s unemployment “Check out those pieces of bark!. “Beautiful, beautiful forest!” Macro Micro Macro [large ](telescope) “whole economy” [economy-wide issues] Micro [ small ]( microscope ] “segment of the economy” [issues in the economy]

16. Two fields of Economic study: Micro and Macro Economics is divided into two main fields of study Microeconomics: Studies the behaviors of INDIVIDUALS within an economy: Consumers and producers in particular markets. Examples: The Automobile market in Switzerland, the market for movie tickets in Zurich, the market for airline tickets between the US and Europe, the market for vacations to Spain, the market for international school teachers. Macroeconomics: Studies the total effect on a nation's people of all the microeconomic activity within that nation. The four main concerns of macroeconomics are: 1) total output of a nation, 2) the average price level of a nation, 3) the level of employment (or unemployment) in the nation and 4) distribution of income in the nation Examples: Unemployment in Canada, inflation in Zimbabwe, economic growth in China, the gap between the rich and the poor in America Introduction to Economics W hat is Economics?

17. Resources or “Factors of Production” Land – Natural Resources Acreage, rivers, lakes, ports, natural resource (oil, precious metals, minerals) Labor – Human Resources Physical and Mental talents that produce goods and services Capital – “stuff you use to make other stuff” All manufactured goods and services used in producing consumer goods. Examples: Tools, machinery, equipment, trucks to carry goods, airplanes, etc. Entrepreneurship – 1.Someone who takes the initiative in using or combining the above Resources to produce a good or service. 2. Someone who is innovative, a risk taker, and makes basic business decisions. Remember -- ALL THESE RESOURCES ARE IN LIMITED SUPPLY THEY ARE SCARCE!!!!

18. Land natural resourcesNature’s items“gifts of nature 1. Land [natural resources] – Nature’s items [“gifts of nature”] In the earth A. In the earth - coal, oil, water, fossil fuels, etc. On the earth B. On the earth – vegetation and water In the atmosphere C. In the atmosphere – sun, wind, and rain starting point [Land is the starting point of all production. “Stuff” “Stuff” from which everything is made.. The Four Factors of Production Resources beget production, which beget income, which beget wealth. “ Gifts of Nature ” Water Wind Sun Fossil fuels

19. . Labor human resources“effort” 2. Labor [human resources] {“effort”} “paid work” anyone who works [“paid work”] “brain-power” [Labor is the “brain-power” and “muscle-power” “muscle-power” of human beings] Physical A. Physical – pro athletes & lumberjacks Intellectual B. Intellectual – ministers, doctors & lawyers “ Hired Help ” *Most important resource – 70% of input cost

20. . Real Capital v. Financial Capital FINANCIAL CAPITAL [stocks, bonds, and money] REAL CAPITAL [tools, machinery, & factories] Can produce something directly with these Can’t produce anything directly with these

21. . “Real Capital” [machinery, physical plants & tools] [capital is a factor of production] v. “Financial Capital” [stocks, bonds, & $] [not factors of production] A product can be both a consumer good & a capital good –depends on its use. Ex: Jet aircraft used by a movie star to visit friends (consumer good). The same aircraft used by a business manager to serve customers [capital good]. Ex: F150 pick-up to deliver produce [capital good] or take family to church [consumer good] Capital Resources “man-made inputs” 3. Capital Resources – all “man-made inputs” used in the (tools, machinery, and physical plants) production process (tools, machinery, and physical plants). Capital goods A. Capital goods – goods [machinery, buildings, & tools] used to produce other goods produce other goods. [crane, Ford plant, hammer] “future consumption” [products meant for “future consumption”] Consumer goods“immediate consumption” B. Consumer goods – products meant for “immediate consumption”. “man-made inputs”

22. Entrepreneurship starting a new businessintroducing a new 4. Entrepreneurship – starting a new business or introducing a new product“Sparkplugs” product. “Sparkplugs” who introduce the product or start the new combines land, labor, & capital to produce products business. He combines land, labor, & capital to produce products. Resource paymentsrent Resource payments. The resource owners receive rent [for wagesinterest the use of their land; wages [for their labor]; interest [payment profits for financial capital], and profits [for their entrepreneurial ability]. Rent Wages Interest Profits Land Labor Capital Entrepreneur.

23. Introduction to Economics T he productive Resources Payments for resources: Since resources are scarce, there is a cost associated with their use. Firms (resource demanders) must provide households (resource suppliers) with a payment for their resources. For LAND: Firms pay households RENT. Landowners have the option to use their land for their own use or to rent it to firms for their use. If the landowner uses his land for his own use, the opportunity cost of doing so is the rent she could have earned by providing it to a firm. For LABOR: Firms pay households WAGES. To employ workers, firms must pay workers money wages. If a worker is self employed, the opportunity cost of self-employment is the wages he could have earned working for another firm. For CAPITAL: Firms pay households INTEREST. Most firms will take out loans to acquire capital equipment. The money they borrow comes mostly from households' savings. Households put their money in banks because they earn interest on it. Banks pay interest on loans, which becomes the payment to households. If a household chooses to spend its extra income rather than save it, the opportunity cost of doing so is the interest it could earn in a bank. For ENTREPRENEURSHIP: Households earn PROFIT for their entrepreneurial skills. An entrepreneur who takes a risk by putting his creative skills to the test in the market expects to earn a normal profit for his efforts.

24. What is a Market? A place where buyers and sellers come together In economics, we will study two types of market Product Markets Households buy goods and services produced by firms Resource Markets Firms buy productive resources from households Introduction to Economics P roduct and Resource Markets

25. Resource Markets Product Markets Who are the buyers? Who are the sellers? What is bought and sold? Which way does money flow? What are the goals of firms and households? Why does everyone benefit? Who are the buyers? Who are the sellers? What is bought and sold? Which way does money flow? What are the goals of firms and households? Why does everyone benefit? Households firms goods and services from households to firms Maximize profit (firms) and utility (households) firms households Capital, land, labor From firms to households Maximize income (households), minimize costs (firms) Because exchanges are mutual and voluntary Introduction to Economics P roduct and Resource Markets

26. Product Market: Resource Market: ·Consumers buy goods and services from firms ·Households use their money incomes earned in the resource market to buy goods and services ·Expenditures by households become revenues for firms ·Firms seek to maximize their profits ·Households seek to maximize their utility (happiness) ·Households supply productive resources (land, labor, capital) ·Firms buy productive resources from households. In exchange for their productive resource, firms pay households: -Wages: payment for labor -Rent: payment for land -Interest: payment for capital -Profit: payment for entrepreneurship ·Firms seek to minimize their costs in the resource market ·Firms employ productive resources to make products, which they sell back to households in the product market Notice the CIRCULAR FLOW of resources and money between these two markets! Introduction to Economics P roduct and Resource Markets

27. Firms Households Income: W I R P Expenditures / revenue Factors of production Goods/Services Product market Resource market Questions: ·Give three examples of resource owners. ·Give three examples of transactions you made this week in the product market. ·Give an example of a transaction you or your family made this month in a factor market. ·What resources or "input factors" do households provide in the resource market? ·What determines the prices of land, labor, capital and entrepreneurship in a factor market? ·Where do households get the money to buy goods and services in the product market? ·Where do business firms get the money to pay households for their resources? ·How does the circular flow diagram illustrate interdependence in a market economy? Introduction to Economics T he Circular Flow of Resources

28. Product Market Productive resources: Households provide firms with the productive resources they need to produce goods and services -Land -Labor -Capital -Entrepreneurship Resource payments: Firms pay households for their resources, using revenue from the sale of their goods and services, which creates income for households -Rent -Wages -Interest -Profit Resource Market Firms employ productive resources to make finished goods and services. They sell their products to households in exchange for money. Households spend their income from the sale of their resources. ·Households make expenditures on goods and services ·Firms earn revenue, which is needed to cover their costs. Any revenue earned beyond all costs is considered economic profit. ·The goal of households is to maximize happiness (utility) ·The goal of firms is to maximize profits (TR-TC) Mutual benefits and voluntary exchange NCEE Workbook Activity 5: The Circular Flow Introduction to Economics T he Circular Flow of Resources

29. [“LAISSEZ-FAIRE” – “HANDS OFF”] The “role of government” [“LAISSEZ-FAIRE” – “HANDS OFF”] is limited to national defense, public education, maintaining the infrastructure, and enforcing contracts. Smith said the market system was best because it encouraged specialization, resulting in increased output & more economic growth. “INVISIBLE FOOT” Government was like an “INVISIBLE FOOT” – government action to benefit particular groups. Keynes will say the G can act as a pressure gauge, letting off excess steam or building it up as needed. [ active -not all inclusive role] ADAM SMITH WEALTH OF NATIONS – 1776 [explained the free market concept] ADAM SMITH WEALTH OF NATIONS – 1776 [explained the free market concept] “INVISIBLE HAND” The “INVISIBLE HAND” – when individual consumers/ producers compete to achieve their own private self-interest. attack on mercantilism Smith’s book was an attack on mercantilism. Wealth doesn’t come from an accumulation of gold and silver but from more productive people. A nation is wealthier if its citizens Are more productive. It is the ability of people to produce products and trade in free markets that creates a nation’s wealth. Mercantilism So mercantilism died as economic theory as economic theory. My name is mercantilism. No “G” In loving memory of mercantilism

30. Adam Smith’s famous Pin Factory Example [1 man = 1 pin] One man could do maybe 1 pin per day [1 man = 1 pin] Now if there is specialization 1 man draws the wire out 1 man straightens the wire 1 man cuts the wire 1 man sharpens the point 1 man flattens the head There are 18 distinct operations - some perform 2 or 3 operations 10 people do 48,000 pins per day 1 man = 4,800 pins per day Three circumstances come from this specialization Three circumstances come from this specialization. dexterity 1.Increased dexterity (learning by doing) 2.Saving time 2.Saving time (lose time when you move to different operations) inventiveness 1.Invention of machines (fosters inventiveness)

31. What is the PPC? The PPC illustrates the possible combinations of goods or services that can be produced by a single nation, firm, or individual using resources efficiently What does it show? That nothing is free and that everything has an opportunity cost. If society wants more pizzas, it must give up robots. What basic economic concepts can it be used to model? ·Scarcity, tradeoffs, opportunity cost, economic growth, efficiency, unemployment. Robots Pizzas 10 200 Italy's PPC A B C D Introduction to Economics T he Production Possibilities Curve Understanding the PPC: The graph above shows that Italy can produce EITHER 10 robots OR 200 pizzas, or some combination of the two products, as long as it remains on or within its PPC. A point inside the PPC is attainable but not desirable. A point outside the PPC is desirable but unattainable.

32. 1) Which point(s) are attainable and desirable? WHY? 2) Which point(s) are attainable but not desirable? WHY? 3) Which point(s) are unattainable? Is this point desirable? Explain. 4) Which point will mean more consumption in the future? Explain. 5) Which point means more consumption now? Explain. 6) Why is the PPC bowed outwards? 7) How does the PPC illustrate opportunity cost? Tradeoff? Scarcity? Assumptions about the PPC: ·The PPC is attainable only if a nation achieves full-employment of its productive resources ·The nation's resources are fixed in quantity ·Assumes the nation must chose between only two goods ·The economy is closed, i.e. does not trade with other countries ·Represents only one country's economy Questions to consider about the PPC: Introduction to Economics T he Production Possibilities Curve Pizzas Robots A B C D 65130 195 E 2 7 9 Italy's PPC 10

33. Pizzas Robots A B C D 65130 195 E 2 7 9 Italy's PPC 10 Introduction to Economics T he Production Possibilities Curve 1) Which point(s) are attainable and desirable? ·Points on the PPC (A, B and C) are attainable through full employment, and thus desirable because they represent efficient use of Italy's resources. 2) Which point(s) are attainable but not desirable? ·Point D is inside the PPC, thus represents inefficient use of resources, and most likely high unemployment, and is thus undesirable. 3) Which point(s) are unattainable? Is this point desirable? ·Point E is beyond Italy's production possibilities and is thus unattainable. It is desirable because it represents greater consumption of both pizzas and robots. 4 ) Which point will mean more consumption in the future? ·Point A represents more consumption in the future, because Robots are a capital good, used to make other products for consumption. If Italy produces more robots now, it may mean more consumer goos in the future. 5) Which point means more consumption now? ·Point C because pizza is a consumer good. Households don't buy and use robots, but they do like to eat pizzas. 6) Why is the PPC bowed outwards? ·The Law of Increasing Opportunity Cost

34. Law of increasing opportunity cost: As the production of a particular good increases, the opportunity cost of producing an additional unit rises. Rationale: Economic resources are not completely adaptable to alternative uses. Many resources are better at producing one type of good than at producing others. Pizzas Robots A B C D Italy's PPC 10 9 8 7 6 5 4 3 2 1 0 20 40 60 80 100 120 140 160 180 200 increasing opportunity cost Pizzas Robots Italy's PPC 10 9 8 7 6 5 4 3 2 1 0 20 40 60 80 100 120 140 160 180 200 A B C D constant opportunity cost Introduction to Economics T he Production Possibilities Curve Pizzas and Robots: A ssume Italy was producing 200 pizzas and 0 robots. Surely, many of the resources (land, labor and capital) being used to make pizzas would be better suited to making robots. As Italy starts making its first two robots it has to give up very few pizzas, since only those resources that are suited for robot production will be used. At first, 2 robots "cost" Italy only 5 pizzas. But as the country makes more and more robots, the opportunity cost increases, because at some point pizza makers will have to build robots. As Italy approaches 10 robots, the opportunity cost of the last two robots is 130 pizzas, as resources better suited for pizza production are employed in robot factories.

35. Pizzas Robots A B C D 65130 195 E 2 7 9 Italy's PPC How does the PPC illustrate: ·Scarcity? ·Tradeoffs? ·Decisions? ·Resources? ·Opportunity costs? ·Actual output? ·Potential output? And some more challenging ones: ·Unemployment? ·Economic growth? ·Economic development? Introduction to Economics T he Production Possibilities Curve

36. Pizzas Robots A B C D 65130 195 E 2 7 9 Italy's PPC How does the PPC illustrate: ·Scarcity? ·Tradeoffs? ·Decisions? ·Resources? ·Opportunity costs? ·Actual output? ·Potential output? And some more challenging ones: ·Unemployment? ·Economic growth? ·Economic development? Introduction to Economics T he Production Possibilities Curve

37. Q Q Robots Robots (thousands) Pizzas Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 U U nemployment & U nderemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES

38. Q Q Robots Robots (thousands) Pizzas Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 PRODUCTION POSSIBILITIES Notes... Economic Growth The ability to produce a larger total output - a rightward shift of the production possibilities curve caused by...

39. Q Q Robots Robots (thousands) Pizzas Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 More of either or both is possible PRODUCTION POSSIBILITIES Notes... Economic Growth 1. Increase in resources - 2. Better resource quality - 3. Technological advances -

40. unemploymentrecession 40. At what letter is there unemployment [recession]? 41. What letters represent resources being used in their most productive manner most productive manner? [full employment, full production, and best available technology] improvement in technology 42. What letter represents an improvement in technology, new PPC therefore a new PPC frontier line? “line of increasing cost”? 43. The (straight line/curve) illustrates the “line of increasing cost”? “law of constant cost.” 44. The (straight line/curve) illustrates the “law of constant cost.” most economic growth in 45. At what letter would there be the most economic growth in the future the future if a country were producing there now? opportunity cost“C” to “D”; 46. What is the opportunity cost when moving from “C” to “D”; E to BF to D E to B; & do we have to give anything up when moving from F to D? F A,B,C,D,E G A Capital Consumer no A B C G D E CAPITALGOODS Consumer Goods FPPC

41. FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY ROLE OF SELF-INTEREST COMPETITION

42. MARKETS & PRICES FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY ACTIVE, BUT LIMITED,GOVERNMENT ROLE OF SELF-INTEREST COMPETITION

43. Freedom of Enterprise (business) & Choice 2. Freedom of Enterprise (business) & Choice Can move within the economy to any job, to buy or sell property, or start a business. consumer is “sovereign”king The consumer is “sovereign” (king) in the economy. His dollars vote as it is he who decides what gets produced. 100,000 business failures The U.S. has over 100,000 business failures each year. Private Property 1. Private Property – the right of individuals to exercise control over things owned. Freedom to negotiate binding legal contracts. legally bindingoral or written Contracts are legally binding in oral or written form. [A verbal agreement is binding only if it involves a small sum of money over a short period of time and does not involve real estate purchases.] Role of Self-Interest 3. Role of Self-Interest – each producer or consumer best for themselves tries to do what is best for themselves. Self interest is the main force driving the economy. Producersmaximum profits Producers aim for maximum profits. Consumerslowest prices & highest quality Consumers seek the lowest prices & highest quality. K-Mart?

44. Markets & prices 5. Markets & prices. Markets bring the buyers and sellers into contact. High pricesincrease Prices send signals. High prices send signals to increase production enter the market production and for other producers to enter the market. Low pricesdecrease production Low prices send signals to decrease production exit the market and for producers to exit the market. Limited Government Intervention 6. Limited Government Intervention in the economy. “laissez faire.”“hands off” The role of government was one of “laissez faire.” [“hands off”] government should not interfere with In the words of Adam Smith, the government should not interfere with the operation of the economy except serve as an arbitrator in settling disputes disputes. government’s role The government’s role: (according to Smith) a. provide defense, b. administer justice, and c. maintain certain public institutions. Arbitrator [settling disputes]

45. The Three Fundamental Questions... 2. How will the goods be produced? 1. What will be produced? 3. Who will get the goods and services?

46. The Case for the Market System Efficiency, Incentives, and Freedom “invisible hand” Adam Smith said the “invisible hand” determines what gets produced, how, & for whom. It is the invisible hand that moves us along the PPC. The invisible hand is now market mechanism called the market mechanism. Its essential feature is price signal the price signal.

47. Most needy or most money Scarcity LimitedResources UnlimitedWants Choices WHAT G/S to produce? WHO will receive the G/S produced? Answers to the above determine: ECONOMIC SYSTEMS BASICECONOMICPROBLEMS TRADITIONAL FREE MARKET COMMAND HOW will the G/S be produced?

48. 1.Traditional 2.Pure Command 3.Pure Market 4.Mixed a. Capitalism b. Democratic Socialism c. Authoritarian Socialism [Communism] The way the 3 basic questions are answered Determines an economic system. 1.Traditional-[where “CUSTOM RULES”] I. Used to be Economic Systems the way society produces products Economic Systems – the way society produces products

49. PURE COMMAND “GOVERNMENT RULES”. 2. PURE COMMAND - where the “GOVERNMENT RULES”. The government controls all resources. What, How, and For Whom answered by the government. PURE MARKET 3. PURE MARKET – where “INDIVIDUALS RULE”. “INDIVIDUALS RULE”. Individuals and firms control all resources. The government has no say. WHAT, HOW & FOR WHOM are decided by individuals. MIXED MIXED – all countries have mixed economic systems How are these words used in everyday life? 1.Traditional 2. Command 3. Market Karl Marx Adam Smith

50. mixed economy both market signals and government directivesA mixed economy is one that uses both market signals and government directives to allocate goods & resources. combination market signals and governmentMost economies use a combination of market signals and government directives to select economic outcomes.

51. "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 interest. We address ourselves, not to their humanity but to their self- love, and never talk to them of our necessities but of their advantages" - Adam Smith "The Wealth of Nations" Introduction to Economics I ntroduction to Trade What is trade? T rade is one of the concepts fundamental to the field of economics. Voluntary exchanges between individuals and firms in resource and product markets involving the exchange of goods, services, land, labor and capital is a type of trade. International trade involves the exchange of resources, goods, services, assets (both real and financial) across national boundaries. Tr ade makes everyone better off, and leads to a more efficient allocation of society's scarce resources. Discuss...

52. 51 Section 2-5 Click the mouse button or press the Space Bar to display the information. Economic and Social Goals Economic freedom, or the freedom for people to make their own economic decisions, is a goal highly valued in the United States.  Economic efficiency means that resources are used wisely and that the benefits gained are greater than the costs incurred.  Economic equity is the social goal that explains why so many people support laws against wage and job discrimination.

53. 52 Section 2-5 Click the mouse button or press the Space Bar to display the information. Economic and Social Goals (cont.) Economic security is a social goal that results in programs to help support the ill, the elderly, and workers who have lost their jobs.  Most economic systems strive for full employment, or providing as many jobs as possible.  Price stability, or freedom from inflation, is important to anyone trying to provide basic necessities on a limited income and for anyone planning their economic future.

54. 53 Section 2-5 Click the mouse button or press the Space Bar to display the information. Economic and Social Goals (cont.) Economic growth is an important goal because populations tend to increase and existing populations tend to want more goods and services.

55. Economic growth: An increase in total output (and income) or per capita output (and income) of a nation over a period of time. Can be illustrated by an outward shift of the PPC Economic development: a sustained increase in the standard of living of the people of a nation. Characterized by improvements in health, education, life expectancy, and per capita income. Positive and normative concepts: ·Positive concepts are those rooted in fact. They are observable and definitive. Example: The average income of Americans HAS increased by 2.5% per year since 1970. ·Normative concepts are those rooted in opinion. They are statements of what should be rather than what is. Example: American incomes should be higher given the increases in productivity since the 1970s. Introduction to Economics U nit 1 Definitions

56. 55 Models in Economics A model is a simplified representation of a real situation that is used to better understand real- life situations. Ceteris Paribus The “other things equal” assumption means that all other relevant factors remain unchanged.