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Economics Chapter 1: What is Economics?

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1 Economics Chapter 1: What is Economics?

2 Table of Contents  Economics? Economics?  Factors of Production Factors of Production  Outputs Outputs  Scarcity Scarcity  Production Possibilities Graph Production Possibilities Graph  Trade-offs Trade-offs  Other Vocabulary Other Vocabulary

3 1. Define Economics and explain the difference between Macroeconomics and Microeconomics.

4 Economics:  The study of how people seek to satisfy their needs and wants by making choices  The study of scarcity

5 Economics “’[E]conomy is the art of making the most of life.’ Economics is the study of how we do that. There is finite supply of everything worth having: oil, coconut milk, perfect bodies, clean water, people who can fix jammed photocopy machines, etc. How do we allocated these things?” --Naked Economics, page 5

6 What are the 2 different types of Economics? Macroeconomics  Entire economics  A “Bird’s eye-view”  Examples: overall prices, national income  THINK BIG!!!Microeconomics  Small units  A “Worm’s eye-view”  Examples: individuals, families, businesses  Think small.

7 2. List the five Factors of Production (inputs)

8 What are the Factors of Production? Resources that are used in the production of ALL goods and services. AKA: INPUTS  Land  Labor  Capital  Entrepreneurs  Technology

9 Land Natural Resources Examples: fertile agricultural land, ore deposits, tuna fish, corn seeds

10 Labor Effort that people devote to a task

11 Capital Physical Capital  Tangible (can be touched)  Examples: tools, Factories Human Capital  Skills & knowledge gained by education & experience Human-made goods used in the production of other goods and services

12 Entrepreneurs Leaders who combine the Land, Labor, and Capital to make new goods and services Example: Running a service that hires people to install a sprinkler system in lawns

13 Entrepreneur Joke “Why did the entrepreneur cross the road? Because he could make more money on the other side. --Naked Economics, page 11

14 Technology Makes Factors of Production more productive

15 What happens when you have all of your Factors of Production?

16 You can make new products… INPUTS OUTPUTS

17 What are some examples of Outputs?  Needs and Wants  Goods and Services

18 3. What is the difference between… Need  Necessary for survival  Examples: Air, water, food, shelterWant  We desire, NOT really essential to survive  Examples: specific type of food

19 4. What is the difference between… Goods  Physical objects  Tangible (can be touched)  Examples: shoes, clothingServices  Actions / Activities that one person performs for another  Intangible  Examples: Education, healthcare, leisure

20 5. What is scarcity and why is it so important in society?

21 Scarcity  Limited quantities to meet unlimited wants  ALL RESOURCES ARE SCARCE!!!  Examples: Lack of workers, water, time

22 6. What is the difference between scarcity and a shortage:

23 Shortages A good or service is unavailable A) Temporary – example: holiday season B) Long-term – example: wars & droughts

24 10. What is a trade-off and what is meant by the phrase Guns or Butter?

25 Trade-off  An alternative we sacrifice when we make a decision

26 Trade-offs “ We may pay a few cents extra for dolphin-safe tuna or send money to a favorite charity. Both of these things can give us utility; neither could be selfish. Americans give over $200 billion to assorted charities every year. We hold doors open for strangers. We practice remarkable acts of altruism.” -- Naked Economics, page 8

27 Trade-offs “None of this is incompatible with the basic assumption that individuals seek to make themselves as well off as possible, however they happen to define that. Nor does this assumption imply that we always make perfect—or even good—decisions. We don’t.” -- Naked Economics, page 8

28 Trade-offs “But each of us does try to make the best possible decision whenever information is available at the time.” -- Naked Economics, page 8

29 Trade-offs “[W]e may use a credit card to purchase a big-screen television today even though the interest on the credit card debt will lessen the amount we can consume in the future.” --Naked Economics, page 8 Example: Credit Cards

30 12. What is meant by the term, Thinking at the Margin. Provide an example.

31 Thinking at the Margin  Deciding whether to do or use ONE ADDITIONAL UNIT of some resource  Uses the Factors of Production  Examples: Hire another worker Grow beans or corn on a large farm?

32 Thinking at the Margin  You should ONLY go to another year of college if the benefits from the additional year of schooling exceeds the cost of attending that year  Weigh: does marginal benefit exceed marginal cost? If so, its worth it!!! Example: Going to College

33 Thinking at the Margin  In 1998, President Clinton vowed to end “drive-by deliveries”—he wanted Congress to consider a mandate that “insurance companies cover the cost of two nights in the hospital for women who have delivered babies, rather than just one.” --Naked Economics, page xvii Example: An end to “drive-by deliveries”

34 Thinking at the Margin  “An extra night in the hospital is not medically necessary in most cases, but it is expensive, which is why new parents don’t pay for it themselves and insurance companies don’t want to pay for it either.” --Naked Economics, page xvii Example: An end to “drive-by deliveries”

35 Thinking at the Margin  “If insurance companies are forced to offer this benefit (or any other new benefit mandated by law), then they will recover their extra costs by raising premiums. And when premiums go up, some people on the margin will no longer be able to afford any health insurance at all.” --Naked Economics, page xvii Example: An end to “drive-by deliveries”

36 Thinking at the Margin  “So the real policy question is: Are we willing to pass a law that will make many women more comfortable if it means that a smaller number of men and women will lose coverage for basic care?” --Naked Economics, page xvii Example: An end to “drive-by deliveries”

37 7. What does the Production Possibilities Graph show?

38 Production Possibilities Graph A graph that shows the alternative / possible ways to use an economy’s resources

39 8. What is the significance of the Production Possibilities Frontier?

40 Production Possibilities Frontier  A line that usually curves on a Production Possibilities Graph  Shows the Maximum possible output amount that an economy can produce  Represented by Line B

41 9. What is the difference between efficiency, growth, and underutilization on a Production Possibilities graph and how is shown on the graph?

42 Efficiency  Using all resources to Maximize the production of goods and services  Normally, is located on the PPF  Represented by “Z”

43 Underutilization  Using FEWER resources than an economy is capable of using  Represented by “X” and “Y”

44 Growth  Entire PPF “shifts to the RIGHT”  Caused by a change in quantity or quality of Factors of Production available  Represented by “C”

45 What happens when an economy grows?  It gains more of the Factors of Production, such as more workers, factories, technology.  Result: Efficiency also changes  Efficiency now indicated by “W”  Underutilization now indicated by X, Y, & Z.

46 Side note:  If an economy loses Factors of Production, this is called Shrinkage.  If PPF was originally Line B, and shrinkage occurs, the new PPF becomes Line A

47 Guns or Butter  A country must decide how much MILITARY (guns) or CONSUMER (butter) to produce  Shown on a PPF

48 Guns or Butter  If EFFICIENCY is closer to Guns, it means the economy is able to produce more MILITARY  Represented by “G”

49 Guns or Butter  If EFFICIENCY is closer to BUTTER, it means the economy is able to produce more CONSUMER  Represented by “B”

50 11. Explain Opportunity cost (cost), including a good example.

51 If you were NOT at school, what would you rather be doing?

52  Sleeping  Playing video games  Swimming  Playing a sport  “Chasing boys” or “Chasing girls”  Hanging out with friends  Eating

53 Opportunity Cost  AKA: Cost desirable GIVEN UP  The most desirable (attractive) alternative GIVEN UP as a result of a decision  Examine by looking at a PPG

54 Opportunity Cost  Includes: Tuition payments, Time you could have spent working, potential wages  Excludes: Room and board payment (would have had to pay even if were not in college) Example: Going to College

55 Opportunity Cost “[Y]ou make derive some satisfaction from whacking your boss on the head with a canoe paddle at the annual company picnic. But the momentary burst of utility would presumably be more than offset by the disutility of spending many years in federal prison.” --Naked Economics, page 8 Example: Your Boss

56 Opportunity Costs “We may spend years in [college] eating ramen noodles because it dramatically boosts our standard of living later in life.” --Naked Economics, page 8 Example: College

57 Production Possibilities Graph A graph that shows the alternative / possible ways to use an economy’s resources

58 13. Explain the Law of Increasing Costs. Provide an example.

59 Law of Increasing Costs As we shift the Factors of Production from making 1 good or service to another, the cost of producing the second item increases

60 Law of Increasing Costs For example, if we move from point O to point C, we are not able to produce as many Peas because we can now produce more Corn

61 Law of Increasing Costs COST Therefore, when we produce more Corn, our COST is not producing as many Peas

62 Cost-Benefit Analysis “Consider a well-intentioned proposal to require that all infants and small children be restrained in car seats while flying on commercial airlines. During the Clinton administration, FAA administrator Jane Garvey told a safety conference that her agency was committed to ensuring that children are accorded the the same level of safety in aircrafts as are adults.”

63 Cost-Benefit Analysis “Using a car seat requires that a family buy an extra seat on the plane, which dramatically increases the cost of flying. Airlines no longer offer significant children’s discounts; a seat is a seat, and it is likely to cost at least several hundred dollars. As a result, some families will choose to drive rather than fly.”

64 Cost-Benefit Analysis “Yet driving—even with a car seat—is dramatically more dangerous than flying. As a result, requiring car seats on planes might result in more injuries and deaths to children (and adults), not fewer --Naked Economics, p. 29

65 Other Vocabulary…

66 14. What is the difference between Demand and Supply? Demand Consumers are willing and able to purchaseSupply Businesses are willing and able to sell

67  Demand is defined as the amount of goods or services a person is willing and able to purchase at a given price. For example, Jane really wants a car. In order to create demand, Jane needs to be able to purchase the car. The amount of cars Jane demands depends on the price the cars are being sold at.

68  For example, if the car that Jane wants is really cheap ($10,000), Jane could possibly demand three cars (perhaps she wants one for the weekend, one for the weekday, and one to show off to her friends). If, on the other hand, the price of the car is really expensive ($50,000), Jane only demands one car because that is all she can afford (hence the willing and able part). Usually with demand, price and quantity demanded are inversely related—meaning price and quantity are moving in opposite directions. This means that when price increases, people demand less of a product; when price decreases, people demand more of a product. 

69  Supply is defined as the amount of goods or services a business is willing and able to sell at a given price. Price is what the business sells a product to consumers for. When prices are lower, suppliers are less willing (and able) to sell a product for; when prices are higher, suppliers are more willing (and able) to supply a product. The relationship between price and quantity supplied are directly related—meaning they move in the same directions.

70 Demand and Supply The interaction of demand and supply result in the prices of products.

71 15. What is the business cycle? Fill in below and describe the four parts of the business cycle, including the two extremes.

72 Business Cycle  A period of macroeconomic expansion followed by a period of contraction  An “economic roller-coaster” showing the ups and downs of an economy

73 Business Cycle Expansion growth, recovery Trough Peak Contraction

74 Business Cycle + 2 Extremes Peak Expansion growth, recovery Trough Contraction Recession*** Depression***

75 . The business cycle represents the economy’s “roller coaster.” There are only four parts to the business cycle: expansion, peak, contraction, and trough. There are “ups”—called recovery, expansion, or growth; there are “downs”—called contractions. When an economy stops rising, this is called a peak (like the top of a mountain). When an economy stops falling, this is called a trough (pronounced, “trof”). When the economy is really not doing well, the economy can experience some extremes—which are NOT part of the business cycle. A prolonged economic contraction is called a recession; a very severe contraction is called a depression. 

76 16. Who is Ben Bernanke?

77 Who is Ben Bernanke?  Replaced Alan Greenspan on February 1 st, 2006 as the new Chairman of the Federal Reserve (FED)

78 Who is Alan Greenspan?  Former Chairman of the Board of Governors of the Federal Reserve (FED)

79 Federal Reserve (Fed)  In charge of monetary policy

80 17. Explain the factors that influence the health of an economy including Gross Domestic Product (GDP), interest, inflation, monetary policy, and fiscal policy.

81 Gross Domestic Product (GDP)  The dollar value of all final goods and services produced within a country’s borders within a given year  Measures the health of an economy  Want to increase

82 FYI: Gross Domestic Product (GDP) is different from Gross National Product (GNP)  Both measure the health of a society.  Like GDP, normally the greater the amount of GNP indicates that an economy is doing well

83 Interest  The price paid for the use of borrowed money, or, money earned by deposited funds.

84 Interest Example:  You want to buy a new car for $5000  Problem: you don’t have enough money to buy the entire car.  You go to the bank and ask to borrow $5000  If you are approved (you may need a parent’s signature), you get the money…

85 Interest  However, not only do you have to pay back the $5000, you have to pay back INTEREST  When you include interest into the calculation, you will pay more money every month and during the course of the loan

86 Inflation  A general increase in prices  Example: When your parents were younger, they paid less for the same product

87 Inflation  Once upon a time, Miss Kroope turned 16 years old (in 1996) and got her driver’s license.  How much do you think gas per gallon was for her 1984 Chrysler Laser?

88 $.89 for a gallon of gasoline

89 How much is a gallon of gasoline today? Approximately$2.55 per gallon of gasoline

90 Why has the price of Gasoline increased? Inflation.

91 What is Monetary Policy? a)Amount of money is in circulation b)Controlling inflation c)Adjusting interest rates

92 What is Fiscal Policy?  Government’s spending  Taxes

93 Standards  K  A – F  F


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