THE ECONOMICS BEHIND FINANCIAL DECISIONS

STUDENT TARGET I can understand the fundamentals of the market system. I can understand the definition of Economics. I can understand why people have to make choices and that with choosing comes consequences. I can understand that with every benefit there is always a cost.

CONCEPTS Economics Scarcity Market Economy Opportunity Cost Entrepreneurship Capital Cost Revenue Profit Incentives Supply and Demand Price Budget Utility Benefit Investment Growth Choice Consumer Producer Wages

NATIONAL STANDARDS Standard 1 : Scarcity Productive resources are limited. Therefore, people can not have all the goods and services they want; as a result, they must choose some things and give up others. Standard 2 : Marginal Cost/Benefit Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Most choices involve doing a little more or a little less of something: few choices are "all or nothing" decisions.

NATIONAL STANDARDS Standard 3 : Allocation of Goods and Services Different methods can be used to allocate goods and services. People acting individually or collectively through government, must choose which methods to use to allocate different kinds of goods and services. Standard 4 : Role of Incentives People respond predictably to positive and negative incentives

WHICH ONE OF THESE TWO THINGS WOULD YOU RATHER BE DOING RIGHT NOW?

COSTS AND BENEFITS A Cost is something you give up in making a choice and a Benefit is something you gain. What would be the costs and the benefits of doing this now?

COSTS AND BENEFITS Why have you chosen to do this instead? What are the costs and benefits? WHY MUST YOU CHOOSE? BECAUSE OF SCARCITY

SCARCITY SCARCITY TELLS ME I CAN’T DO BOTH, I HAVE TO MAKE A CHOICE. SINCE YOU CAN’T HAVE EVERYTHING YOU WANT ECONOMICS HELPS US GET THE MOST OUT OF WHAT WE CAN HAVE.

T.I.N.S.T.A.A.F.L. “There’s no such thing as a free lunch”? Have you ever heard the phrase: “There’s no such thing as a free lunch”?

OPPORTUNITY COST EVEN THOUGH THE SIGN SAYS SO, IS IT TRULY FREE? I MAY NOT GIVE UP MONEY, BUT WHAT AM I GIVING UP BY ATTENDING?

IF I EAT LUNCH FROM 12:00 TO 1:00 P.M., WHAT CAN’T I DO?

OPPORTUNITY COST IS THE BEST OPTION GIVEN UP WHEN YOU MAKE A CHOICE What is the Opportunity Cost of the following decisions? Buying a gift for a friend. Working at a job after school Waiting on line for an hour to buy a new cell phone Playing on your X-Box for two hours after dinner. Did you all have the same answers? Why not?

WHAT IS ECONOMICS? Economics is the study of how people make choices. When you make a good economic decision the benefits will be greater than the costs.

UTILITY = SATISFACTION He made a good decision He made a bad decision

WHY DO PEOPLE MAKE THE DECISION TO GO INTO BUSINESS FOR THEMSELVES?

HAVE MORE CONTROL OVER MY WORK SCHEDULE TAKE OUT A PIECE OF PAPER AND DRAW A LINE VERTICALLY DOWN THE MIDDLE. LABEL ONE SIDE BENEFITS AND THE OTHER SIDE COSTS. WHAT WOULD BE THE BENEFITS OF OPENING YOUR OWN BUSINESS AND WHAT WOULD BE THE COSTS? PROFIT BE YOUR OWN BOSS FREEDOM FILL A NEED HAVE MORE CONTROL OVER MY WORK SCHEDULE PAID MORE FOR MY WORK GREAT CHANCE OF FAILURE NO ONE TO SHARE THE COSTS WITH NO ONE TO SHARE RESPONSIBILITIES OR SKILLS DO THE JOB OF THE WORKER AND THE BOSS BENEFITS COSTS

PEOPLE RESPOND TO INCENTIVES INCENTIVES are things such as rewards that motivate a person to do something. Punishment is meant to be a disincentive.

INCENTIVES HELP PEOPLE MAKE CHOICES THERE WAS A TIME WHEN THE MAJORITY OF ADULT AMERICANS SMOKED AND PEOPLE THOUGHT IT LOOKED COOL.

CHANGING INCENTIVES CHANGE PEOPLE’S CHOICES NOW LESS THAN 25% OF THE U.S. POPULATION SMOKES AND THE NUMBERS HAVE BEEN SHRINKING FOR DECADES. WHAT CHANGED? WE GOT EDUCATED

SO, TO RECAP!!! SCARCITY TELLS US WE CAN’T HAVE EVERYTHING WE WANT EVERY DAY OF OUR LIVES WE HAVE TO MAKE CHOICES IN MAKING CHOICES WE WEIGH THE BENEFITS AGAINST THE COSTS NOTHING IS FREE, THERE IS ALWAYS AN OPPORTUNITY COST A GOOD ECONOMIC DECISION CREATES MORE BENEFITS THAN COSTS INCENTIVES HELP US TO CHOOSE

THE MARKET ECONOMY THE WORLD’S ECONOMIES PROVIDE US WITH A LOT OF CHOICES AND THE WORLD’S SHOPPERS HAVE A LOT OF DIFFERENT INTERESTS.

THE MARKET ECONOMY IN AMERICA, WE HAVE A LOT OF FREEDOM TO DECIDE WHAT WE WANT TO DO WITH OUR LIVES AND HOW WE WANT TO SPEND OUR MONEY

THE MARKET ECONOMY ALLOWS SELLERS TO COMPETE FOR CONSUMER DOLLARS SUPPLY DEMAND

PRICE OF LABOR WHY DOES THIS GUY MAKE $30,000,000?

THE ANSWER IS: SUPPLY AND DEMAND WE LOVE BASKETBALL, ESPECIALLY HIGH FLYING AND ACROBATIC DEFYERS OF GRAVITY ( HUGE DEMAND) THERE’S ONLY ONE LeBRON (TINY SUPPLY) WE LOVE FAST-FOOD THOUGH WE KNOW IT’S NOT GOOD FOR US (HUGE DEMAND) THERE ARE SEEMINGLY ENDLESS CHOICES FOR IT AND THE PROCESS OF MAKING IT DOESN’T REQUIRE MUCH THOUGHT. JUST ABOUT ANYONE CAN FILL THE JOB. ( EVEN BIGGER SUPPLY)

DO YOU KNOW WHAT THIS IS? It’s the Motorola DynaTAC 8000X , the world’s first cell phone. It went on sale March 6, 1983 and the initial price was $3995. It had enough battery life for 30 minutes of talk and there was a waiting list of thousands anxious to buy it.

Today we have cellular technology that allows for all kinds of communication, video streaming, and downloads with more computing power and memory then the technology that sent all of our astronauts to the Moon. Many are given away with service contracts. HOW DID THAT HAPPEN?

THE ANSWER IS: SUPPLY AND DEMAND IN 1983, ONE COMPANY MADE CELL PHONES WITH VERY EXPENSIVE PARTS AND A GREAT AMOUNT OF COSTLY LABOR (TINY SUPPLY) PEOPLE WERE CRAZY ABOUT IT AND WAITED FOR MONTHS BEFORE DELIVERY (BIG DEMAND) IN 2010, MANY COMPANIES MAKE A VARIETY OF PHONES WITH VERY INEXPENSIVE PARTS AND VERY LITTLE HUMAN LABOR INVOLVED (HUGE SUPPLY) MOST CONSUMERS HAVE A PHONE AND SPEND MOST OF THEIR MONEY ON SERVICES (DEMAND IS SLOWING DOWN)

READ EACH STATEMENT BELOW AND DECIDE WHETHER THE PRICE OF THE ITEM WILL GO UP OR DOWN. ALSO, IS THIS BECAUSE OF A CHANGE IN SUPPLY OR DEMAND? A TICKET TO SEE YOUR FAVORITE FOOTBALL TEAM NOW THAT THEY’VE MADE THE PLAYOFFS A GALLON OF GASOLINE AFTER A HURRICANE SHUTS DOWN OIL DRILLING PLATFORMS IN THE GULF OF MEXICO. A BUSHEL OF CORN AFTER FARMERS IN IOWA DISCOVER A MORE POWERFUL FERTILIZER. A PAIR OF DESIGNER JEANS AFTER EVERYONE’S FAVORITE CELEBRITY IS SEEN WEARING THEM THE NIGHT BEFORE ON AN AWARDS SHOW. A BIG MAC AFTER RESEARCHERS DETERMINE THAT EATING TOO MUCH FAST FOOD CAUSES STUDENTS TO GET LOWER GRADES.

SO, TO RECAP!!! IN ORDER FOR THE MARKET TO WORK IT MUST BE OPEN TO EVERYONE MARKETS ARE CREATED TO ALLOW BUYERS AND SELLERS TO PROFIT. SELLERS MAKE MONEY AND BUYERS GET THE ITEMS THEY’RE LOOKING FOR. THE PRICE HELPS BUYERS MAKE DECISIONS ON WHAT THEY WILL PURCHASE AND HELPS SELLERS DETERMINE WHAT THEY SHOULD PRODUCE. WAGES ARE DETERMINED BY THE SUPPLY AND DEMAND FOR THE JOB SKILLS OFFERED.

IS THE MARKET POWERLESS TO DO ANYTHING ABOUT THE PRICE OF GASOLINE?

IS ANYTHING IN THIS WORLD TRULY PRICELESS?