6Scarcity condition where wants are greater than resources *Because scarcity exists, choices must be made
7Scarcity 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
8ResourcesAnything that helps produce a good or service (factors of production)
9The Four Factors of Production Types of ResourcesLandLaborCapitalEntrepreneurship9
10The Four Factors of Production Land = natural resources (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.)10
11The Four Factors of Production Labor = Workers (manual laborers, lawyers, doctors, teachers, waiters, etc.)1111
12The Four Factors of Production Capital:Resources that are used to create other goods (tools, tractors, machinery, buildings, factories, etc.)12
13The Four Factors of Production Entrepreneurship= Organizesother resourcesUltimate goal: Make profit13
14The 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.
15The 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.
16Resources Resources are interdependent of one another Have to have all resources in order to make a product/service
295. Voluntary trade creates wealth “TRADING UP” VIDEO CLIP
306. The consequences of choices lie in the future Sunk Cost: cost already made; should be ignored when making choices
31Answer the following questions the way an economist would
321. Making a choice means: A. deciding among many possibilities B. being able to get everythingC. not thinking about future consequencesD. considering a daily horoscope
332. People throughout the world usually make decisions: A. impulsively; choosing quickly without much thoughtB. generously; thinking of the needs of othersC. randomly; leaving the outcome up to chanceD. purposefully; considering costs and benefits
343. Which of the following best explains the relationship between choices and incentives? A. incentives motivate people to make certain types of choicesB. incentives rarely influence personal choicesC. incentives make it difficult to predict what choice people will makeD. incentives have nothing to do with choices
35A. 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 snacksB. the chips came in the largest bagC. the chips offer a greater benefit to him than the other snacksD. there are no other choices available
36* In economics, decisions should always be made at the margin a rational person will weigh theadditional benefits (MU) against theadditional costs (MC)* Marginal utility = additional benefit from consuming one more item
41True or False??? Anything worth doing is worth doing well. It is a good idea to make an informed decisionand stick to it.
42How many movies would you see???? Thinking at the Margin# Times Watching MovieMarginal UtilityPrice1st30$102nd153rd5Total50$30How many movies would you see????
43Calculate Marginal Utility # of Slices of PizzaTotal Utility(in utils)Marginal Utility/Benefit1821431942352562672443
44Calculate Marginal Utility # of Slices of PizzaTotal Utility(in dollars)Marginal Utility/Benefit18214631954232526724-2Marginal Cost--$2How many pizzas would you buy if the price per slice was $2?44
45Calculate Marginal Utility # of Slices of PizzaTotal Utility(in dollars)Marginal Utility/Benefit18214631954232526724-2Marginal Cost2You will continue to consume until Marginal utility = Marginal CostHow many pizzas would you buy if the price per slice was $2?45
46Maximizing 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.
47Marginal Utility Per Dollar Maximizing UtilityYou plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose?DestinationMarginal UtilityPriceTahiti3000$3,000Chicago1000$500Marginal Utility Per Dollar1 Util2 Utils4747
48Maximizing 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?DestinationMarginal UtilityPriceTahiti3000$3,000Chicago1000$500MU/P3000/3000= 11000/500= 24848
49Maximizing 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= MU2P P2
50Each slice of pizza costs $2.00 and the MU is 10. Each soft drink is $1.00. If you aremaximizing your utility, what is the MU ofthe soft drink?5
51Utility Maximization with a budget constraint (combinations of items) 1. Figure out the marginal utility per price (MU/P) for each item2. Spend $ on the item with the highest marginal utility per price until $ runs out*The MU/P of each item should be the same!
52Utility Maximization $10 $5 # TimesGoingMarginal Utility(Movies)MU/P(Price =$10)MarginalUtility(Go Carts)(Price =$5)1st30102nd2053rd24th1If you only have $25, what combination of movies and go carts maximizes your utility?
53Utility Maximization $10 $5 # TimesGoingMarginal Utility(Movies)MU/P(Price =$10)MarginalUtility(Go Carts)(Price =$5)1st3031022nd20513rd.404th.50.20If you only have $25, what combination of movies and go carts maximizes your utility?
54Practice: utility max with budget constraint 3 apples and 2 orangesAssume apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the combination that maximizes utility.54
55Apples MU/P Oranges MU/P 0 03 apples and 2 oranges
56Practice: utility maximization Find the Utility-Maximizing Combination ofA and B, if you have an Income of $10(2)Product A:Price = $1(3)Product B:Price = $2(b)MarginalUtilityPer Dollar(MU/Price)(a)MarginalUtility,Utils(1)Unit ofProduct12345671082420181612108765431292
57Purchase 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)MarginalUtilityPer Dollar(MU/Price)(a)MarginalUtility,Utils(1)Unit ofProduct1234FifthSixthSeventh1087652420181612108765431292Purchase 2 of Item A and 4 of B
59microeconomics studies specific segments of the economy Example: profits at McDonalds
60macroeconomics Studies the economy as a whole; more general topic Examples:unemployment rate in the U.S.
61Positive Economics - Collects and presents facts; concerns what the economy is really like Example???
62Normative Economics - Involves value judgments about what the economy should be like Example??
63Topic 4: Production Possibilities Curve/Frontier A production possibilities curve (PPC) is a model that shows alternative ways that an economy can use its scarce resourcesThis model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.63
64Each point represents a specific combination of goods that can be produced given resources available.PPCABCboats974trucks
65PPC 4 Key Assumptions Only two goods can be produced Full employment All resources being utilizedAll technology being utilized
66Each point represents a specific combination of goods that can be produced given resources available.PPCABCboats974trucks
67The Production Possibilities Curve and Efficiency 67
68PPC illustrates two Types of Efficiency 1. Productive EfficiencyProducts are being produced in the least costly way.- any point on curve2. Allocative EfficiencyThe products being produced are the ones most desired by society- Any point on curve68
69PPC Point inside (D) = unemployment Point outside (E) = unattainable given current resourcesPoints on curve (A,B,C) = efficientAll resources being utilizedEconomy at full employment
70Opportunity Cost Example: 1. The opportunity cost of moving from a to b is…2 Bikes2.The opportunity cost of moving from b to d is…7 Bikes3.The opportunity cost of moving from d to b is…4 Computers4.The opportunity cost of moving from c to b is…2 computers70
71Constant opportunity cost: Opportunity cost is always the SAME A B C D EPizzaCalzonesOpportunity Cost of moving from a-b, b-c, c-d, and d-e?7171
72Constant opportunity cost Resources are easily adaptable for producing either goodEx: pizza and calzonesResults in a straight line PPC
73Increasing opportunity cost: Opportunity costs increase as more of a good is produced A B C D EPIZZAROBOTSOpportunity Cost of moving from a-b, b-c, c-d, and d-e?73
74As you produce more of any good, the opportunity cost will increase Why??? Resources are NOT easily adaptable to producing both goodsResults in a BOWED OUT PPC
75Constant vs. Increasing Opportunity Cost CornCactusWheatPineapples
76Per Unit Opportunity Cost GainAssume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt?$10 per shirtTake 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 hatsWhat is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up?1 hat costs ½ of a shirt76
77Ron can produce 20 pizzas or 200 burgers Per Unit Opportunity CostRon can produce 20 pizzas or 200 burgers1. What is Ron’s opportunity cost for one pizza in terms of burgers given up?1 P = _________ B2. What is Ron’s opportunity cost for one burger in terms of pizza given up?1 B = _________ PJohn can produce 100 pizzas or 200 burgersWhat 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 = __________ P77
78PER UNIT Opportunity Cost How much each marginal unit costs GainExample:1. The PER UNIT opportunity cost of moving from a to b is…1 Bike2.The PER UNIT opportunity cost of moving from b to c is…3/2 Bikes3.The PER UNIT opportunity cost of moving from c to d is…2 Bikes4.The PER UNIT opportunity cost of moving from d to e is…5/2 Bikes78
80Practice per unit Opportunity cost BCDEAutos2468missiles302721121.What is the per unit cost of moving from point D to point E?12/2= 6 missilesWhat is the per unit cost of moving from point C to point B? 2/6 = 1/3 autosWhat is the per unit cost of moving from point C to point D? 9/2 missilesWhat is the per unit cost of moving from point B to point A?2/3/ autos
82Production Possibilities 4 Key Assumptions RevisitedOnly two goods can be producedFull employment of resourcesFixed ResourcesFixed Technology3 Shifters of the PPC/PPF1. Change in resource quantity or quality2. Change in Technology3. Change in Trade82
83Shifts in PPC Inward Shift Indicates economic decline Happens due to: - destruction of resourcesLess tradeDecline in quality of resources
84Shifts in PPC Outward Shift Indicates Economic growth Happens due to: -increase in #/quality of resources- Technology- More Trade
85AB is original PPC… What happens??? 1. BP Oil Spill in the Gulf 2. Better technology in producing both items3. Many workers unemployed4. Significant increases in education5. Full employment8585
86Capital Goods and Future Growth Countries that produce more capital goods (as opposed to consumer goodswill have more growth in the future.Panama – Favors Consumer GoodsMexico – Favors Capital GoodsCurrentPPCFuturePPCFuturePPCCapital GoodsCurrentPPCCapital GoodsConsumer goodsConsumer goodsPanamaMexico86
87Topic 5: PPC, trade and opportunity cost 2 types of problems:Output problems - look at total items being producedInput problems - look at resources that go into making a product87
88Input or Output Question? Number caught per dayDeerAntelopeHenry46John241288
89Input or Output Question? Months to produce oneCarPlaneCanada810Japan151289
90Absolute advantageOutput problem: person/country can make more of the item than other countryInput problem: person/country can make item using less resources (time, land etc) than other country90
91Absolute Advantage? Number caught per day Deer Antelope Henry 4 6 John 241291
92Absolute Advantage? Months to produce one Car Plane Canada 8 10 Japan 151292
932. Comparative advantage ** Comparative advantage Is gained through specializationTo figure comparative advantage, must first:Must calculate the PER UNIT opportunity cost* This will be different for INPUT and OUTPUT problemsThe country that can produce the item at a lower opportunity cost should specialize in that item
94Comparative advantage in an output problem To figure opportunity cost - Cost/GainThe following chart illustrates the number of CDs and pounds of beef that Japan and Canada can produce in a day CDs beefJapanCanadaJapan 1 CD = _____1 B = ______ CDCanada 1CD = _____ BJapan should produce __________Canada should produce _________
95Answers: Comparative advantage in an output problem Output Questions:CDs beefJapanCanadaIn Japan, 1 CD = 1/2 B, 1 B = 2 CDIn Canada 1CD = 3/2 B, 1 B = 2/3 CDJapan should produce CDsCanada should produce Beef
96Comparative advantage in an input problem Input Questions:ICU= Input Cost goes UnderThe following chart illustrates the number of hours it takes the U.S. and France to make one loaf of bred and one bushel of cornBread CornU.SFranceIn the U.S. 1 B = _________ C,1C = __________ BIn France 1 B = ________C,1 C = __________BThe U.S. should produce ________________France should produce __________________
97Answers to comparative advantage in input problem Bread CornU.SFranceIn the U.S. 1 B = 2 C, C = 1/2 BIn France 1 B = 2/3 C 1 C = 3/2 BThe U.S. should produce CornFrance should produce Bread
98Practice: Who has the Comparative Advantage? Number caught per dayDeerAntelopeHenry46John2412Henry 1 D = _____ A1A = ______DJohn 1D = ______A98
99Comparative Advantage? Number caught per dayDeerAntelopeHenry46John2412Henry 1D = 3/2 A1 A = 2/3 DJohn 1 D = ½ A1A = 2 D99
100Comparative Advantage? Number caught per dayDeerAntelopeHenry46John2412Henry 1D = 3/2 A1 A = 2/3 DJohn 1 D = ½ A1A = 2 D100
101Practice: Who has the Comparative Advantage? Months to produce oneCarPlaneCanada810Japan1512Canada 1C = _____ P1 P = _____CJapan C = ______P1P = _____C101
102Comparative Advantage? Months to produce oneCarPlaneCanada810Japan1512ICUCanada 1 C = 4/5 P1 P = 5/4 CJapan C = 5/4 P1P = 4/5 C102
103Comparative Advantage? Months to produce oneCarPlaneCanada810Japan1512ICUCanada 1 C = 4/5 P1 P = 5/4 CJapan C = 5/4 P1P = 4/5 C103
104PRACTICE1. 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 BagpipesU.S. 2 hours hoursScotland 5 hours hoursa. 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??
105A. Input problem; looks at TIME making B. Absolute advantage: ICUB. Absolute advantage:Oats = U.S. (takes less time to make)Bagpipes = U.S. (takes less time to make)C. Comparative Advantage:U.S. Scotland1 O = 2/3 BP 1 O = 5/4 BP BP = 3/2 O 1BP = 4/5 OU.S = OATSScotland = BAGPIPES
106PRACTICE 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 YA B C D E F A B C D E FPens PensPaper paperIn other words:Country X: pens paperCountry Y: pens papera. 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???
107A. Output problem B. Absolute advantage: Comparative Advantage: Pens = XPaper = YComparative Advantage:Country X Country Y1 Pen = 2 paper 1 pen =4 paper1 paper = 1/2 pen 1 paper = ¼ pen
108Practice WS“Introduction: absolute and comparative advantage”
109Possible comparative advantage questions * Go to mimio
110Topic 6: Economic Systems All societies must answer 3 economic questions1. what will be produced2. how will it be produced3. who will get what*the way the questions are answered determine a country’s economic system110
111Traditional economies economic questions answered by past111111
112Command Economies economic questions answered by government (communism and socialism)
114Command Economies Advantages Disadvantages 1.Economic equality2.Capable of quick changeDisadvantages1.No incentive to work harder2. No Competition = poor quality, little choices
115Market Economyeconomic questions answered by people
116Market Economies Advantages Disadvantages 1.Economic freedom 2.Competition = better quality, more choices3.Incentive to make a profitDisadvantages1.Unequal distribution of wealth2.Economic loss
117CONSUMER SOVEREIGNTY Consumer “power” Consumers determine the success of a product117
118The 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
119The 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.”
120Mixed Economyelements of the all economic systems together (government and people answer economic questions)
121Circular Flow of a market economy Shows the interdependence between business and households
122The 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