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CHAPTER 1 WHAT IS ECONOMICS? Why is the economy us? What kind of economy do we have Why do we have this economy?

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Presentation on theme: "CHAPTER 1 WHAT IS ECONOMICS? Why is the economy us? What kind of economy do we have Why do we have this economy?"— Presentation transcript:

1 CHAPTER 1 WHAT IS ECONOMICS? Why is the economy us? What kind of economy do we have Why do we have this economy?

2 Definition of Economics?

3 Definition of Economics The study of how people, both individually and in groups, deal with the problem of scarcity. Why is economics considered a social science? Scarcity forces human beings to make choices Why has there always been an economic problem? man’s wants are virtually unlimited scarcity of resources *Have to prioritize

4 All resources regardless where they are located are scarce. The scarcity causes most to have a cost because the demand does not go away…. Supply is limited The scarcity of resources causes most things to have a cost.

5 Remember**** Society has virtually unlimited wants BUT limited resources This means prioritization! The three questions are ever-present: What How For Whom?

6 Resources to produce Goods These are referred to as FACTORS Of production. Land Labor Capital Entrepreneurship…….

7 When we use resources…. If we use corn for ethanol then we can’t use it for another product. Opportunity Cost. (the thing you give up.)

8 When we are successful…. IS THAT GREED? Should we share with those who do not produce?

9 Did you ever wonder????? How did man advance from clans and tribes? How could a small feisty group of people put together a country that would become the leader of the free world? How did we finally get electricity, running water, clean water, good nutrition, good health standards, good education, and all these bounties of nature? Why aren’t we still struggling like other countries today? Some of the world refers to the U.S. as the “greedy Americans.” Is that true or are they just envious of our freedom to better ourselves?

10 U.S. as an independent nation Weak economy- heavy in resources Transportation spotty and unreliable In-fighting among the states Trade was high priority Infant mortality was very high- life expectancy (men and women between 38 and 48 years.) Disease and sanitary conditions poor Majority depended on growing own food. Living as a pioneer was a challenge daily.

11 Let’s go back to the 1900’s Average worker made $12.98/week for 59 hours Life expectancy: 47.3 female, 46.3 male - 33.0 blacks Life was brutal. Books like The Jungle, Woman’s Suffrage, Wizzard of Oz were published. Industrial age was here – mass production brought prices down. Social issues included urban poor and disease and filth and monopoly power – disparity of incomes and standard of living.

12 U.S. in the 1930’s Population: 123,188,000 in 48 states Life Expectancy: Male, 58.1; Female, 61.6 Average salary: $1,368 Depression in U.S. Unemployment rises to 25% The economy was the linchpin to survival……..poverty spread like wildfire Democracy still strong- Germany and Italy fell to dictators, but the U.S. Constitution prevailed

13 1950’s Economic growth- homes construction, post war boom Manufacturing jobs available Many families had 2 cars. Salaries going up each year – average approx salary was $600/month Late 1950’s minimum wage increased to $1.25. Life expectancy approximately 60 years.

14 Jump to 2000 Life expectancy ( men and women – 77.1) 100 deaths per 1,000 births in 1900 to 6.89 in 2000 Per capita income $46,999 Productivity (output per hour) still leading the world, but slower than 1990. Minimum wage $7.25 is federal law- see below

15 Improved standard of living- why? Greeks had it figured out- lots of inventions, etc, but it never got off the ground. Not until 18 th century England with Industrial Revolution did the economic growth take off. What caused that success and then the spread of ideas to other countries (America included.) Certain institution were in place that opened up the world economic growth and higher standard of living.

16 Classic video on Greed Scarcity forces individuals and groups to do what? What IS Greed? What is self-interest? Is there a difference.

17 Key institutions Democracy (nobles were taken out of power, common man merchant and manufacturer had a say in direction.) Limited Liability Corporation (corporate growth was accelerated as no one could lose more than initial investment.) Patent rights to protect inventors (individuals could keep the spoils from their innovation.) Literacy and education ( key to economic growth and individual success.)

18 Challenge today! Need to get more out of world’s limited resources. How is the best way to achieve that so that all mankind can prosper and profit? Still have diseases to conquer, infant mortality is too high, poverty and malnutrition exist everywhere, illiteracy, unemployment. Need to raise standards of living without massive pollution. What is your choice???? What type of government? What about education? Don’t mean a piece of paper, but real knowledge. Let’s dig in and see what we can learn.

19 The Five Foundations of Economics 1. Incentives matter 2. Life is about trade-offs 3. Opportunity costs 4. Marginal thinking 5. Trade creates value

20 1. Incentives Matter Incentives Factors that motivate you to act or exert effort People respond to incentives! Incentives are everywhere, and financial gain often plays a prominent role Positive incentives Tax refund, pay raise, employee of the month award, sticker and a smiley face, extra credit Negative incentives Taxes, jail, fees, fines, spankings, getting grounded, getting fired, failing class

21 Incentives Work……

22 What is a Trade-off Giving up one thing to get something else. Thing you give up is called “opportunity cost.” So if resources are limited and wants are unlimited…. Makes for an interesting “trade- off.”

23 Reality of Trade-offs- Crude Oil options Just a few of the products getting a start from a barrel of oil: Aspirinfurniture not to mention gasoline Candleshair dryerscarpets CD playerslipstickpaints Clothingluggagefertilizer Compact discsperfumesoils of all kinds Computersphotographs Credit cardspiano keys Deodorantroller blades Diapersshampoo Dinnerwaresoft contact lenses DVDstoothpaste Eyeglass framesvitamin capsules

24 2. Life is About Trade-offs With scarcity, decisions incur costs Individual examples Go to theater: do I watch the action movie or the romantic comedy? Go to food court: do I eat Nick’s Barbeque or Sushi Bar? After high school: do I attend Harvard or University of Texas? Which president do I vote for?

25 4. Marginal Thinking Economic thinking Systematically evaluating a course of action Requires a purposeful evaluation of available opportunities to make the best decision Marginal thinking Evaluate whether the benefit of one more unit of something is greater than the cost Margin examples: one more unit (slice of pizza), one more hour of activity (studying, sleeping)

26 5. Trade Creates Value Markets Bring buyers and sellers together to voluntarily exchange goods and services Trade The voluntary exchange of goods and services between two or more parties Key word = voluntary You don’t engage in trade if it makes you worse off; therefore, trade only occurs if both parties feel they gain from the trade!

27 Economics is a Social Science What does that mean?

28 What is the Invisible Hand? In 350 BC – Aristotle declared property should be private. In 1776 – Adam Smith _ Wealth of Nations All of this evolves around self-interest – Why? How? How could there be an invisible hand??? How scary!!!

29 Rational Self-Interest  Individuals act as if motivated – self interest  Idea first brought forth- Adam Smith- Wealth of Nations. Father of Market Economics.  Did you arise this a.m. and say>>>> I want to make terrible decisions all day that are NOT in my self-interest???  Is Self-interest translated as greed? Did Smith really mean you think of you always above others?

30 The Mechanisms of Choice Our personal choice is altered by the freedoms we have to make it… should market allow us to make our selection or should government have a major say. There are three basic ways to make the necessary choices: The market mechanism. Government directive. A mixture of both. 1-30

31 The Market Adam Smith called it “the invisible hand.” – It is as if we are “guided” to the correct point on the PPC. (to be discussed later.) – In fact, we get there by the interaction of millions of decisions made by buyers, sellers, and producers in their own self-interest (i.e., to make themselves better off). We call this the market mechanism: Price directs resources. – The use of market prices and sales signal desired outputs and resource allocations. – Will the market direct us to purchases a Prius? 1-31

32 The Market Here is how the market answers the three basic questions: – WHAT to produce? Produce goods and services that customers want. – HOW to produce? Profitably; produce an acceptable good or service while keeping production costs low. – FOR WHOM to produce? Produce for those who are both willing and able to pay for it. 1-32

33 The Government At its extreme, government could dictate answers to all three questions. – Such decisions would be made by political leaders and bureaucrats. – In many or most instances these decisions would not mirror the individual desires of the people. – The FOR WHOM decision would lean heavily toward their political base: goods for those the government favors and nothing for those not in favor. – Remember this is by degree depending on type of government. 1-33

34 A Mixture of Both The market is highly efficient in production of wanted goods and services. The government acts as a maintainer of balance in the economy. – Makes sure the market does not go to excesses either in underproduction or overproduction. – Regulates production to ensure that goods and services are safe. – Acts to redress excessive inequalities. 1-34

35 What Mix Is Best? Few governments have relied exclusively on either pure market or pure government to manage the economy. Public opinion around the world indicates that the free-market economic system is best. The Index of Economic Freedom ranks nations according to economic freedom. The Index of Economic Freedom – Market-dominated economies rank high; government-run economies rank low. 1-35

36 Market Failure and Government Failure If the market does not produce the mix of goods that society desires, market failure is said to occur. This provides an opening for government to step in. – If government can move us closer to the mix society desires, the intervention is successful. However, government can do the opposite, or impose such high costs that the market simply ceases to produce. This is government failure. 1-36

37 What Economics Is All About Society and its leaders set the nation’s economic goals. Economics focuses on the means of achieving those goals. Macroeconomics will focus on “big picture” economics while microeconomics will focus on economic interactions of consumers and producers. 1-37

38 Invisible Hand- apolitical Individuals rather than government should answer the 3 basic questions. What to produce How to produce For Whom to produce But not just carte’ blanche Smith distinguished between self-interest and greed! It is in our self-interest to have Rule of Law in place – (property rights, patents, copyright, protection of workers, regulations, etc.)

39 Two things that allow economies to progress This is an Adam Smith concept: Division of labor Specialization of labor

40 Economic Wants These wants vary from culture to culture. One culture’s ideas may not be the goals of another cultures’. Ones we satisfy in the economic system. Ones that money will buy.

41 Economics Wants a concept underlying for all mankind. things we feel we need to have so we can live the style of life we want to enjoy.

42 Economics depends on models Models are used to predict behavior. Models are simplified replica of real world Empirical Evidence and data- material gathered by observation or experience. Usually a working hypothesis that is testable. Enter Ceteris Paribus Economic models do not relate to how people think, but how they behave.

43 What is Standard of Living? How can you calculate it? How well off people are! How well off are you? Divide total production by population… GDP/population If production is high and population is low…. “get more stuff.” 3 rd world countries… high population/low production apita_2013_0.html

44 Terms to Know Positive economics = deals with facts “what is” Normative economics = involves someone’s judgment “what ought to be” Fallacy of Composition = it is not correct.. ( the validity of a particular generalization for an individual or part does not necessarily ensure its accuracy for the group or the whole) I stand up… everyone stands up… Post Hoc Fallacy = Be careful concluding that because event A precedes event B that A is the cause of B. Wear purple shirt to ballgame…win.. Need to wear purple shirt again to win. Rooster crows before dawn… rooster responsible for sunrise. Rational Behavior = based on rational self-interest. People make different choices because their circumstances and available information differs. Marginalism = extra or less (one more unit, one less unit) Marginal Cost = additional cost over sunk cost paid for choosing an action Marginal Benefit = benefit received from choosing an action

45 Talk today is about the federal debt and deficit What is a deficit? What is a debt? In what area do you think government spends the greatest amount of revenue? Why is it significant to address the debt ceiling?

46 Latest release on federal budget Office of Management and Budget, Budget of the U.S. Government, FY2008, Budget of the U.S. Government, FY2008

47 2014 Budget Outlook t_detail_fy13 t_detail_fy13

48 Conventional wisdom accepts economic goals Economic growth Full Employment Economic Efficiency Price-level stability Economic Freedom Equitable Distribution of Income –believed by some Economic Security Balance of trade

49 Any Questions? Are you learning to think in Economic Terms????? When you drive by a strip mall – What do you see? What do you think? Does the economy come to mind?

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