1. Introduction to Economics
Economics: Easier to understand if you hear it with a cool British accent!

2. What is Economics Scarcity and choice are basic problems in Economics
Need—necessary for survival
Want—something we desire
Economics—study of how people seek to satisfy their needs and wants by making choices
Goods—physical objects
Services—actions or activities that on person performs for another
Scarcity—Limited quantities of resources for unlimited wants
Shortage—situation when a good or service is not available

3. What is Economics Factors of Production
Land—natural resources that are used to make goods and services
Labor—the effort that people devote to a task for which they are paid
Capital—any human-made resource that is used to create other goods and services.
Physical Capital—human-made goods used to produce other goods
Human Capital—skills and knowledge gained by a worker through education and experience.

4. What is Economics?
One of the key characters in the economy, particularly in a market economy, is the entrepreneur—ambitious leader who combines land, labor, and capital to create new goods and services.

5. Back to Scarcity…
Economist say that all goods and services are scarce because all factors of production are scarce.
Read page 6 Scarce Resources
Regardless of the good produced all resources are scarce and each productive resources has many alternative uses.

6. Review Why are scarcity and choice basic problems in economics?
What are the three factors of production?
What is the role of entrepreneurs?
Why are all goods and services scarce?

7. Opportunity Cost
Evaluate Tom Hank’s economic system and explain how he is dealing with the basic problems of scarcity and choice.

8. Opportunity Cost
All individuals, businesses, and societies make trade-offs—alternatives that we sacrifice when we make a decision.
Example of a societal trade-off—”guns or butter”
One of those trade-offs is more desirable than the rest. This is called opportunity cost.

9. Opportunity Cost
Opportunity Cost is the most desirable alternative given up as the result of a decision.
Sometimes it is unclear which should be the choice and which should be the opportunity cost.
To clear up any confusion economist use decision making grids and practice “thinking on the margin”
By using such devices and strategies individuals, business, and societies can economically evaluate their cost and benefits.

10. Decision-Making Grid Sleep late Wake up early to study Benefits
Enjoy sleep
Have more energy
Better grades
Teacher approval
Personal satisfaction
Opportunity Cost
Extra Study Time
Extra Sleep
Benefits lost

11. Decision Making at the Margin
Options
Benefit
Opportunity Cost
1st hour of extra study time
Grade of C on test
One hour of sleep
2nd hour of extra study time
Grade of B on test
2 hours of sleep
3rd hour of extra study time
Grade of B+ on test
3 hours of sleep

12. Review Describe why every decision involves trade-offs.
Explain the concept of opportunity cost.
Explain how people make decisions by thinking at the margin.

13. Activity 1
A. People strive to choose the best combination of costs and benefits in making decisions.
B. The level of exercise people maintain and the diet they favor reflect their personal choices.
C. The opportunity cost is the second-best choice.

14. Activity 1
D. The opportunity cost of exercising used to be much lower when many occupations involved more physical effort.
E. a reward
F. Money can be exchanged for many other things that people desire.

15. Activity 1
G. The incentives that influence decisions about exercise include forms of passive entertainment, like television and computer games. One incentive influencing decisions about diet is the reduced cost of food.

16. Activity 1 H. Rules act as incentives and influence our behavior.
I. American economic system responds to changes in technology. These changes have led to less physical demands. Consumer demand time saving and work-saving products.

17. Activity 1
J. Voluntary trade is a cooperative activity in which people exchange something they value less for something they value more.
K. Many people today are exchanging their labor for service jobs in which they are less likely to be injured and more likely to live longer.

18. Activity 1
L. People strive to make decisions they hope will benefit them in the future.
M. Many American have in effect decided to be less thin today in order to live longer and healthier lives by working in a service-based economy that demands little in the way of physical work. However, this choice comes with costs; losses in physical fitness may spur people to search out new ways to exercise.

19. Solve the Mystery
Americans are not gaining weight because they are lazy or because of a sudden increase in the desire to eat fatty foods. Instead, many Americans have accepted the new jobs created in a changing market system—jobs that involve less exercise. Americans have traded thinness and some of the health benefits associated with labor intensive jobs, long lasting life. The opportunity cost of physical activity has gone up because of new forms of passive entertainment and cheaper food.

20. Couch Potatoes Review: Economic Reasoning
People choose.
People’s choices involve costs
People respond to incentives in predictable ways.
People create economic systems that influence individual choices and incentives.
People gain when they trade voluntarily.
Peoples' choices have consequence that lie in the future.

21. Scarcity and Abundance
A situation in which human wants are greater than the capacity of available resources to provide for those wants.
A situation in which a resource has more than one valuable use.

22. Activity 1 A. Not scarce. No alternative valuable use.
B. Scarce. Two valuable uses.
C. Scarce. Limited amount and alternative uses.
D. Not Scarce. Information is not valuable
E. Scarce. Petroleum has many valuable uses.
F. Scarce. Many valuable uses.

23. Activity 2
A. Scarce resource treated as not scarce. Water for irrigation.
B. Scarce resource treated as not scarce. Food could feed hungry or stored.
C. Scarce. Limited amount of oxygen underwater.
D. Not scarce. No valuable use.
E. Scarce resource treated as not scarce.

24. Production Possibilities Curves
Decisions about which goods and services to produce affect of us every day. Production possibilities graphs can help us examine the opportunity cost of these decisions.

25. Production Possibilities Curves
Interpreting a production possibilities curve.
Production possibilities curve—shows alternative ways to use an economy’s resources (farm goods vs. factory goods)
Production Possibilities Frontier—the line on a production possibilities graph that show the maximum possible output

26. Crab Puffs vs. Storage Sheds
Movement along the frontier represents efficiency. At each point along the curve the economy is making a trade-off
Any point inside the frontier is called underutilization—using few resources than an economy is capable of using

27. Production Possibilities Curves
In the real world PPC’s may be in constant motion
Growth—immigration and technology
Reduction—aging population, war, disease

28. Production Possibilities Curves
PPC’s allow us to effectively evaluate our opportunity cost.
Law of Increasing cost–as we shift resources from making one good or service to another, the cost of producing the second item increases

29. Production Possibilities Curves
A country’s production possibilities depend on its available resources and technology.
Technology is reflected by both human and physical capital.
Example: Machine based manufacturing/planting vs. man based.

30. Economic Systems
Formal and informal rules that a society uses to answer the three economic questions.

31. Answering the three Economic Questions
Another definition—the method used by a society to produce and distribute goods and services.
What are the three economic questions that societies must answer?
What to produce?—how much of our resources should be devoted to ‘needs and wants’
How to produce?—how do we use our resources
Who will consume production?—how do societies distribute income

32. Answering the Three Economic Question
What determines how a country answers the three economic question?
Societies answer the 3 economic ?’s based on the importance they attach to economic goals or values.
Efficiency, freedom, security/predictability, equity, growth/innovation, etc.

33. Introduction to Economic Systems
Explain characteristics and societal values of the four types of economic systems?
Traditional—relies on habit, custom or ritual to answer economic ?’s.
Market (Free Market or capitalism)—economics questions are based on voluntary exchanges
Command Economy (Centrally Planned)—system in which the central government answers the economic ?’s.
Mixed—system that combines all three to answer economic ?’s.

34. Questions?
What are the three economic questions that society must ask?
What is a traditional economy and give an example?
What type of societal values might a traditional economy believe in?

35. The Free Market Explain why markets exists?
Markets exist because no one is self-sufficient
Markets allow people to specialize. which in the long run allows us to use our resources more efficiently
Specializing allows us to consume more of what we need and want.

36. Free Market
The free market is based off of voluntary exchanges between individuals and businesses where they exchange money and products.
Individuals own the factors of production (land, labor, capital). Therefore individuals answer the 3EQs.
The Free Market is best illustrated in a circular flow diagram

37. Free Market

38. Free Market How does a free market system regulate itself?
Adam Smith explained the free market in his book Wealth of Nations
Self-Interest is the driving force
People respond to incentives in predictable ways
Competition is the struggle amongst producers for consumers
Competition is the regulating force
The interaction between self-interest and competition is called the “invisible hand”

39. Free Market Identify advantages of the free market system?
Economic efficiency
Economic Freedom
Economic Growth
Other Goals--- Variety of Goods which leads to Consumer Sovereignty (consumers decide what is produced)

40. Free Market Weaknesses of the Free Market
Economic Equity-lacks equity which can result in exploitation
Economic Security-The market economy does not insure a safety net

41. Questions? How is it that firms and households cooperate so well?
Why is important for an economic system to have a market?

42. Centrally Planed Economy
Read Chapter 2 Section 3 when you come into class

43. Centrally Planned Economy
Describe how a centrally planned economy is organized?
Central Government answers the key economic questions.
A central bureaucracy collects information and tells firms what and how much to produce.
The central government controls the factors of production

44. Centrally Planed Economy
How does socialism and communism differ?
In socialist countries the government often owns major industries. Socialism has been achieved peacefully through democracy.
Communist nations all economic and political power rests in the hands of the central government. They are authoritarian.

45. Centrally Planned Economy
Analyze the centrally planned economy of the former Soviet Union?
Created as a result of a violent revolution… (Bolsheviks)
Karl Marx Communist Manifesto capitalist vs. proletariat

46. Centrally Planned Economy
Collectives—large state-owned farms were farmers are provided with materials
Heavy Industry—state owned factories which produced chemicals, steel, and heavy machinery.

47. Centrally Planned Economy
Why did Soviet Collectives offer little incentive to farmers?
Gov’t gave farmers set wages and told them how much to produce. Little incentive to be innovative or efficient
In the Soviet Union, what was the opportunity cost of the emphasis on heavy industry?
Consumer goods and services

48. Centrally Planned Economy
Identify the problems of a centrally planned economy?
Effects: poor quality, shortages, diminishing production, unable to meet consumer needs and wants
Causes: lacks incentive, innovation, and Flexibility to adjust to demand

49. Modern Economies
It is doubtful that any nation can exist successfully under a pure centrally planned economy or a pure market economy. Most modern economies mix features of both systems. The economy of the United States is based on a the principles of the free market

50. Rise of Mixed Economies
In today’s world, laissez faire has its limits
Government intervention has increased due to the inability of the marketplace to provide all needs and wants in a modern society (national defense, roads, highways)
Government intervention insures that everyone has the opportunity to participate (education)

51. Rise of Mixed Economies
Limits of laissez faire
The most common intervention is the creation of laws that protect property rights and enforce contract.
These interventions promote innovation and insure fair competition
US intervention—5th and 14th Amendment
What decided the amount of Government intervention? Societal Goals

52. Circular Flow Model of a Mixed Economy
Use the text to draw and explain how the government operates within an economy.
Page 42-43

53. Comparing Mixed Economies
Using the Continuum of Mixed Economies on page 43 and a computer…
You and a partner reset the continuum in accordance with current rankings.
Use the Index of Economic Freedom

54. Comparing Mixed Economies
Write and answer “Assessment” questions 2 and 3.

55. American Free Enterprise System

56. Benefits of Free Enterprise
Why has America been such an economic success?
Open land
Natural resources, and uninterrupted flow of immigrants with different backgrounds and experience.
The key factor is the TRADITION of America’s Free Enterprise—the social and political commitment to giving people the freedom and flexibility to try out their business ideas and compete in the marketplace.

57. Benefits of Free Enterprise
Constitutional Protections
Property rights—5th amendment “be deprived of … property, without due process of law; nor shall property be taken for public use without just compensation.”
Equal Rights—14th amendment: same as 5th
Sixteenth Amendment—rules for taxation
Contracts—Article I, Section 10: prohibits the state from passing “law(s) impairing the Obligation of Contracts”

58. Benefits of Free Enterprise
Basic Principles
Open opportunity—everyone can compete in the market place
Competition—provides consumers with a large variety of goods
Private property—allows people to make their own decisions
Free contract—allows people to decided their own agreements

59. Benefits of Free Enterprise
Basic Principles
Profit motive—a force that encourages people to improve their material well-being. Also forces people to practice economic responsibility
Legal equality—allows a country to maximize its human capital
Voluntary Exchange—everyone benefits from trade

60. Benefits of Free Enterprise
Role of Consumers—To make their interest known to producers
Buying products
Joining Interest Groups
Role of Government—carry out its constitutional responsibilities and protect public interest—the concerns of the public as a whole.
Public Disclosure Law, Environmental protection, etc. pg. 55

61. Promoting Growth and Stability
The government attempts to stabilize business cycles, aids the growth of the economy, and encourages technological innovation.

62. Promoting Growth and Stability
In order to promote growth and stability the free enterprise must be able to track the economy.
Government and economist evaluate the countries GDP during a business cycle (less than a year or many years)
GDP—total value of all final goods and services produced in the economy
Business cycle is a period of macroeconomic expansion followed by a period of contraction.

63. Promoting Growth and Stability
The governments attempts to prevent wild swings in economic behavior.
Policy for Economic Stability
High employment—4-6 percent unemployment is desirable
Steady growth—GDP must continue to grow
Stable prices—reduce inflation and stabilize shortages and surpluses.
In order for living standards to improve there must be steady growth in goods and services

64. Promoting Stability and Growth
Indicators for Economic Stability
Healthy Prices
Strong Financial Institutions
Growth is measured but evaluating the standard of living.
Work ethic, a commitment to the value of work and purposeful activity, is one way to improve our SoL.
Technology and innovation allows America to improve it output and is the most coveted means of improving SoL.

65. Promoting Stability and Growth
Federal Incentives for Innovation/Gov’ts Role (Technology)
Funding of research and development
Government research and development
Patents
Copyright/Trademark laws

66. Providing Public Goods
The government sometimes steps in to provide a shared good or resource when it would be impractical for consumers to pay individually

67. Providing Public Goods
A good is considered a public good when it is impractical…
to make consumers pay individually
to exclude nonpayer‘s
Any number of consumers can use them without reducing the benefits to any single consumer
Examples include: Fire Stations, Police, Education, Highways….

68. Providing Public Goods
When a good or service is public,
the benefit to each individual is less than the cost that they would have to pay.
the total benefits to a society are greater than the total cost.
Public goods are financed by the public sector
Public goods are a necessity to solving the “free rider problem.” Read page

69. Providing Public Goods
Market Failure is a situation in which the market, on its own does not distribute resources efficiently.
An economic side effect the generates cost and/or benefits someone else is called an externality. (Positive and Negative)

70. Providing Public Goods
Both the private and public sector can create positive and negative externalities.
The public/gov’t sector tries to encourage positive ext. and limit negative ext. by providing public goods and regulating the private sector.

71. Providing a Safety Net
Sometimes the United States government has to step in to create programs to aid poor, disabled, and elderly people

72. Providing a Safety Net How do we fight poverty?
Poverty threshold—an income level below that which is needed to support families or households.
Prior to the Great Depression, fighting poverty was the responsibility of the local community.
The Great Depression expanded the number of impoverished peoples, therefore the government stepped in.

73. Providing a Safety Net How do we fight poverty?
Today the government has an active role in fighting poverty in America through the use of a “Welfare System”
Welfare—government aid to the poor
Types of Government Welfare…
Cash Transfers—Direct Relief (Cash)
In-kind Benefits—Direct Relief (goods/services)
Medical Benefits—Direct relief (health insurance)

74. Providing a Safety Net Cash Transfers
Temporary Assistance for Needy Families, Social Security, Unemployment insurance, Workers’ compensation
In-Kind Benefits
Food giveaways, food stamps, subsidized housing, legal aid
Medical Benefits
Medicare—elderly
Medicaid—poor
Public Education Indirect Relief