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What is Economics? Social science that studies how people, acting individually and in groups, decide to use scarce resources to satisfy their needs. Economics.

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Presentation on theme: "What is Economics? Social science that studies how people, acting individually and in groups, decide to use scarce resources to satisfy their needs. Economics."— Presentation transcript:

1 What is Economics? Social science that studies how people, acting individually and in groups, decide to use scarce resources to satisfy their needs. Economics is about the “ordinary business of life” Economist Alfred Marshall CHAPTER 1: What is Economics?

2 Learning Objectives Unit 1 Describe the nature of human wants and how they are satisfied. Describe the nature of human wants and how they are satisfied. Identify and define the four factors of production. Identify and define the four factors of production. Define the meanings of scarcity and opportunity cost. Define the meanings of scarcity and opportunity cost. Explain the key ideas in the economic way of thinking. Explain the key ideas in the economic way of thinking. Explain what it means to think at the margin. Explain what it means to think at the margin. Describe the choices businesses face and a major goal of business. Describe the choices businesses face and a major goal of business. Identify the basic economic decisions facing all societies. Identify the basic economic decisions facing all societies. Describe the two branches of economics. Describe the two branches of economics. Explain why private property, specialization, voluntary exchange, the price system, market competition, and entrepreneurship are considered the pillars of free enterprise. Explain why private property, specialization, voluntary exchange, the price system, market competition, and entrepreneurship are considered the pillars of free enterprise. Describe the nature of command, traditional, and mixed economic systems. Describe the nature of command, traditional, and mixed economic systems. Explain the three kinds of models economists use. Explain the three kinds of models economists use. Describe how the Circular Flow of Money, Resources, and Products explains the function of a free market economy. Describe how the Circular Flow of Money, Resources, and Products explains the function of a free market economy. Define money and explain its three functions. Define money and explain its three functions. Identify the goals of the U.S. economic system. Identify the goals of the U.S. economic system.

3 3 basic economic questions: 3 basic economic questions: What goods/services to produce? What goods/services to produce? How should goods/services be produced? How should goods/services be produced? For WHOM will goods/services be produced? For WHOM will goods/services be produced? 2 Primary Wants: 2 Primary Wants: Physical wants: necessary to maintain a healthy, safe life Physical wants: necessary to maintain a healthy, safe life food, clothing, housing food, clothing, housing Psychological wants: are not necessary to human existence Psychological wants: are not necessary to human existence Special car Special car

4 Want-Satisfaction Chain Human wants Human wants Land, labor, capital Land, labor, capital Go into production Go into production Resulting in goods and services Resulting in goods and services Which go through distribution Which go through distribution Goods made available for consumption Goods made available for consumption Resulting in WANT-SATISFACTION Resulting in WANT-SATISFACTION

5 The Economic Way of Thinking People Choose All Choices Involve Costs People Try to Make Good Choices People Respond to Incentives People Gain When They Trade Voluntarily Our Choices Are Future Oriented Our Choices Are Influenced By the Choices of Others

6 Factors of Production Land Land Labor Labor Capital: buildings, tools, and machines people create and use to produce final goods and services Capital: buildings, tools, and machines people create and use to produce final goods and services Entrepreneurship Entrepreneurship

7 1. People Choose Scarcity= Wants > Available resources Scarcity= Wants > Available resources Scarcity is the Economic Problem Scarcity is the Economic Problem

8 2. All Choices Involve Costs Opportunity cost: highest valued alternative given up as a result of making a choice Opportunity cost: highest valued alternative given up as a result of making a choice What you choose to spend $10 on. What you choose to spend $10 on. Cost/Benefit thinking Cost/Benefit thinking Marginal Thinking: how much time to spend on one activity and how much time to spend on something else…thinking at the margin. Marginal Thinking: how much time to spend on one activity and how much time to spend on something else…thinking at the margin. Marginal: the extra or additional costs or benefits of a decision Marginal: the extra or additional costs or benefits of a decision

9 3. People try to make good choices We think “at the margin” Incentives: positive reward that results from making a choice or behaving in a certain way Incentives: positive reward that results from making a choice or behaving in a certain way Higher wages, lower prices, a good grade Higher wages, lower prices, a good grade Disincentives: a negative or withdrawn reward Disincentives: a negative or withdrawn reward Fines or punishments Fines or punishments Economists try to predict how people respond to incentives and disincentives 4. People Respond to Incentives

10 5. People Gain When They Trade Voluntarily In a voluntary exchange between two people, In a voluntary exchange between two people, one person benefits more than another one person benefits more than another both people believe that they are benefiting both people believe that they are benefiting cash is always exchanged cash is always exchanged there is no benefit or cost to either person there is no benefit or cost to either person

11 A high school student buys dinner at a restaurant. The restaurant offers a special price which offers 20 percent off the regular price of dinner. In this exchange, A high school student buys dinner at a restaurant. The restaurant offers a special price which offers 20 percent off the regular price of dinner. In this exchange, the restaurant benefits, student does not the restaurant benefits, student does not the student benefits the restaurant does not the student benefits the restaurant does not the student and the restaurant both believe they are benefiting the student and the restaurant both believe they are benefiting neither benefit neither benefit not enough information is given to know who benefits not enough information is given to know who benefits

12 6. Our Choices Are Future Oriented You cannot change a choice made in the past, but can make choices about the future; based on what has happened in the past. You cannot change a choice made in the past, but can make choices about the future; based on what has happened in the past. Example: Housing Market Example: Housing Market Examples: Actions of Congress, banks Examples: Actions of Congress, banks 7. Our Choices Are Influenced By the Choices of Others

13 Profit = Total Sales > Total Costs Profit = Total Sales > Total Costs Positive difference between total sales and total costs Positive difference between total sales and total costs Total sales MUST be greater than total costs Total sales MUST be greater than total costs MARKET ECONOMY: MARKET ECONOMY: Capitalism or free enterprise? Capitalism or free enterprise? Capitalism: means of production are privately owned and operated for profit Capitalism: means of production are privately owned and operated for profit Free enterprise: the condition that allows people to freely make choices in their economic roles Free enterprise: the condition that allows people to freely make choices in their economic roles Economy that relies on voluntary trade as the primary means of organizing and coordinating production. Economy that relies on voluntary trade as the primary means of organizing and coordinating production. Market: arrangement that allows buyers and sellers to make exchanges Market: arrangement that allows buyers and sellers to make exchanges Consumers weigh the costs and benefits of choices Consumers weigh the costs and benefits of choices

14 Macro/MicroEconomics Macro: study of the economy as a whole Macro: study of the economy as a whole BIG picture BIG picture How fast are prices rising? How fast are prices rising? Unemployment? Poverty? Unemployment? Poverty? Micro: study of the individual consumers and businesses Micro: study of the individual consumers and businesses Individuals, families, and businesses. Individuals, families, and businesses. What wages should we pay our employees? What wages should we pay our employees? Should we invest in new computers? Should we invest in new computers?

15 CHAPTER 2: Free Enterprise in the U.S. Free enterprise: people in their economic roles are FREE to make CHOICES Free enterprise: people in their economic roles are FREE to make CHOICES 6 PILLARS OF FREE ENTERPRISE: 6 PILLARS OF FREE ENTERPRISE: Private Property Private Property Specialization Specialization Voluntary Exchange Voluntary Exchange The Price System The Price System Market Competition Market Competition Entrepreneurship Entrepreneurship

16 PROPERTY: PROPERTY: Property: land = buildings = machines = tools = natural resources = clothing = appliances = musical instruments Property: land = buildings = machines = tools = natural resources = clothing = appliances = musical instruments Private Property: Private Property: Resources and products owned by individuals or businesses Resources and products owned by individuals or businesses Public Property: Public Property: Resources and products owned by government Resources and products owned by government SPECIALIZATION: SPECIALIZATION: Process in which businesses and people focus on producing one or a few parts of an entire product\ Process in which businesses and people focus on producing one or a few parts of an entire product\ Example: Gap vs. Apple, Starbucks: coffee, music Example: Gap vs. Apple, Starbucks: coffee, music

17 Voluntary Exchange: Voluntary Exchange: People must buy and sell products to acquire all things they want from the economy People must buy and sell products to acquire all things they want from the economy Time! Time! Example: pencil pg. 18 Example: pencil pg. 18 The Price System: The Price System: Uses monetary prices as a message system to facilitate exchanges between buyers and sellers Uses monetary prices as a message system to facilitate exchanges between buyers and sellers When you buy something what is usually the first thing you look at? When you buy something what is usually the first thing you look at? Branding? Branding? Prices = MAIN MESSENGER in a market economy Prices = MAIN MESSENGER in a market economy

18 Market Competition: competition among businesses Market Competition: competition among businesses 1 st form: competition in resource markets 1 st form: competition in resource markets Land, labor, and capital that businesses use to produce goods and services Land, labor, and capital that businesses use to produce goods and services Getting a great education! Getting a great education! Compete more effectively against other workers (sellers of labor) but businesses (buyers of labor) will compete more intensely to employ you = get a better job and earn a higher wage! Compete more effectively against other workers (sellers of labor) but businesses (buyers of labor) will compete more intensely to employ you = get a better job and earn a higher wage! 2 nd form: competition in markets for products 2 nd form: competition in markets for products All the goods and services consumers buy, from running shoes to haircuts All the goods and services consumers buy, from running shoes to haircuts Rent, buying a house, concert tickets Rent, buying a house, concert tickets

19 Entrepreneurship: Entrepreneurship: Motivation that drives business leaders to compete and react to changing conditions in the market Motivation that drives business leaders to compete and react to changing conditions in the market OVERALL: OVERALL: 6 pillars = essential to the success of a market economy 6 pillars = essential to the success of a market economy T or F: T or F: The government involvement in how the U.S. economy operates is limited. The government involvement in how the U.S. economy operates is limited.

20 Households: word economists use to describe living in the United States regardless of the type of house or apartment Households: word economists use to describe living in the United States regardless of the type of house or apartment 2 important roles: 2 important roles: Members of households = consumers Members of households = consumers Resource owners: they own their labor Resource owners: they own their labor Land, capital Land, capital The circular flow model: The circular flow model: Illustrates how voluntary exchange works Illustrates how voluntary exchange works Helps us understand the flow of resources into businesses Helps us understand the flow of resources into businesses

21 Money: anything that is generally accepted as a payment for goods and services Money: anything that is generally accepted as a payment for goods and services Hamburgers instead of money? Hamburgers instead of money? Barter: exchange of goods and services without using money Barter: exchange of goods and services without using money Each person in the exchange wants what the other is offering Each person in the exchange wants what the other is offering Pudding cup. Pudding cup. 3 important functions of money: 3 important functions of money: A medium of exchange A medium of exchange A store of value A store of value A measure of value A measure of value

22 Medium of exchange: Medium of exchange: Instead of exchanging your labor for burgers, you can trade it for money. Instead of exchanging your labor for burgers, you can trade it for money. When people AGREE on the value of money, it become a medium, a means of exchange. When people AGREE on the value of money, it become a medium, a means of exchange. Store of value: SAVE Store of value: SAVE Means that you can hold on to money to use it sometime in the future. Means that you can hold on to money to use it sometime in the future. Does not become old or stale like a burger. Does not become old or stale like a burger. Measure of value: Measure of value: I n an exchange, each product or resource has a single money price I n an exchange, each product or resource has a single money price People can compare money prices to find the best value for what they are buying or selling People can compare money prices to find the best value for what they are buying or selling Compare values of good, services, and resources Compare values of good, services, and resources

23 7 goals of the U.S. Economic System: 7 goals of the U.S. Economic System: Full employment: almost all people in the labor force are able to find work Full employment: almost all people in the labor force are able to find work Economic growth: increase in output of goods and services Economic growth: increase in output of goods and services Price stability: prices of goods, services, and resources do not fluctuate significantly either up or down, in short periods of time. Price stability: prices of goods, services, and resources do not fluctuate significantly either up or down, in short periods of time. Economic freedom: in choice of employment, buying, selling, use of our time, and other decisions related to our economy. Economic freedom: in choice of employment, buying, selling, use of our time, and other decisions related to our economy.

24 Economic security: means that the basic needs of every person should be met. This INCLUDES people who are unable to pay for their own way for whatever reason. Economic security: means that the basic needs of every person should be met. This INCLUDES people who are unable to pay for their own way for whatever reason. Economic equity: fairness and impartiality = offer ALL citizens equal economic opportunities Economic equity: fairness and impartiality = offer ALL citizens equal economic opportunities Economic efficiency: getting the maximum output from the resources used to produce goods and services. Economic efficiency: getting the maximum output from the resources used to produce goods and services. Refers to the entire economy’s ability to get the most out of its limited resources. Refers to the entire economy’s ability to get the most out of its limited resources.

25 Homework 1. STUDY, STUDY, STUDY! 2. Study guide sheet 3. Workbook pages


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