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

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Presentation on theme: "True or False???? The best things in life are free."— Presentation transcript:

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 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 Entrepreneurship Capital Labor Land Types of Resources 9

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

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

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

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

14 The Four Factors of Production 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. Classify the Factors of Production in the following scenario:

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

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 3.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 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 MUMC = Do it MU=MC * Do it and STOP (utility maximized here)

40

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 UtilityPrice 1st30$10 2nd15$10 3rd5$10 Total50$30

43 Calculate Marginal Utility # of Slices of Pizza Total Utility (in utils) Marginal Utility/Benefit

44 Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit How many pizzas would you buy if the price per slice was $2? Marginal Cost -- $2 44

45 Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benef it How many pizzas would you buy if the price per slice was $2? Marginal Cost You will continue to consume until Marginal utility = Marginal Cost 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 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 Tahiti3000$3,000 Chicago1000$500 Marginal Utility Per Dollar 1 Util 2 Utils 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 Tahiti3000$3,000 Chicago1000$500 MU/P 3000/3000= /500= 2 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 = MU 2 P 1 P 2

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 If you only have $25, what combination of movies and go carts maximizes your utility? Utility Maximization # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) MU/P (Price =$5) 1st3010 2nd205 3rd102 4th51 $10$5

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

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

55 Apples MU/P Oranges MU/P apples and 2 oranges

56 Practice: utility maximization Find the Utility-Maximizing Combination of A and B, if you have an Income of $10 (1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $

57 Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $ Fifth Sixth Seventh Purchase 2 of Item A and 4 of B

58 Topic 3 : Types of Economics

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

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

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 PPC Each point represents a specific combination of goods that can be produced given resources available. ABC boats974 trucks479

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

66 PPC Each point represents a specific combination of goods that can be produced given resources available. ABC boats974 trucks479

67 The Production Possibilities Curve and Efficiency 67

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

71 Calzones01234 Pizza43210 Opportunity Cost of moving from a-b, b-c, c-d, and d-e? Constant opportunity cost: Opportunity cost is always the SAME ABC D E 71

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

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

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 Wheat Cactus Pineapples

76 Per Unit Opportunity Cost 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. 1.What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up? 1 shirt costs 2 hats 2.What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up? 1 hat costs ½ of a shirt 76 = Cost Gain Per Unit Opportunity Cost

77 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 1.What is John’s opportunity cost for one pizza in terms of burgers given up? 1 P = _________ B 2. What is John’s opportunity cost for one burger in terms of pizza given up? 1 B = __________ P 77

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

79 Practice WS per unit costs

80 Practice per unit Opportunity cost ABCDE Autos02468 missiles What is the per unit cost of moving from point D to point E? 12/2= 6 missiles 2.What is the per unit cost of moving from point C to point B? 2/6 = 1/3 autos 3.What is the per unit cost of moving from point C to point D? 9/2 missiles 4.What is the per unit cost of moving from point B to point A? 2/3/ autos

81 Shifting the Production Possibilities Curve 81

82 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 Production Possibilities

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 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

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

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

88 Input or Output Question? Number caught per day DeerAntelope Henry46 John

89 Input or Output Question? Months to produce one CarPlane Canada810 Japan

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

91 Absolute Advantage? Number caught per day DeerAntelope Henry46 John

92 Absolute Advantage? Months to produce one CarPlane Canada810 Japan

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 4 2 Canada 4 6 Japan 1 CD = _____ 1 B = ______ CD Canada 1CD = _____ B 1 B = ______ CD Japan should produce __________ Canada should produce _________

95 Answers: Comparative advantage in an output problem Output Questions: CDs beef Japan 4 2 Canada 4 6 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. 4 2 France 4 6 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. 4 2 France 4 6 In the U.S. 1 B = 2 C, 1C = 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 DeerAntelope Henry46 John Henry 1 D = _____ A 1A = ______D John 1D = ______A 1A = ______D

99 Comparative Advantage? Number caught per day DeerAntelope Henry46 John Henry 1D = 3/2 A 1 A = 2/3 D John 1 D = ½ A 1A = 2 D

100 Comparative Advantage? Number caught per day DeerAntelope Henry46 John Henry 1D = 3/2 A 1 A = 2/3 D John 1 D = ½ A 1A = 2 D

101 Practice: Who has the Comparative Advantage? Months to produce one CarPlane Canada810 Japan Canada 1C = _____ P 1 P = _____C Japan 1C = ______P 1P = _____C

102 Comparative Advantage? Months to produce one CarPlane Canada810 Japan1512 ICU 102 Canada 1 C = 4/5 P 1 P = 5/4 C Japan 1 C = 5/4 P 1P = 4/5 C

103 Comparative Advantage? Months to produce one CarPlane Canada810 Japan1512 ICU 103 Canada 1 C = 4/5 P 1 P = 5/4 C Japan 1 C = 5/4 P 1P = 4/5 C

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 3 hours Scotland 5 hours 4 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 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 1 BP = 3/2 O 1BP = 4/5 O U.S = OATS Scotland = BAGPIPES

106 PRACTICE 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: 4 pens 8 paper Country Y: 3 pens 12 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: 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

111 Traditional economies economic questions answered by past 111

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

113 Video clip “command vs market”

114 Command Economies Advantages 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 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

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.

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

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


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