ECONOMICS Major Concepts

MAJOR CONCEPTS Everything has a cost and a tradeoff Incentives matter Voluntary trade increases value Competition influences choices hop1.htmlhttp:// hop1.html

DECISIONS MEAN COSTS Does getting something of value always cost something? “There is no such things as free lunch” discussion and the Decision making table activity

DECISIONS MEAN COSTS What should you know? What has been demonstrated to you? o Every decision you make has an opportunity cost o Choosing is refusing o Opportunity Cost is the next best alternative, not all of the possibilities o Because people value different things, everyone’s opportunity costs might be different o Because people’s values differ, the opportunity cost of the same decision may differ from person to person

INCENTIVES MATTER Do people respond to incentives in predictable ways? The Tragedy of the Commons Activity

INCENTIVES MATTER What should you know? What has been demonstrated to you? Incentives drive behavior Resources owned in common tend to be overused When a resource isn’t owned, people don’t have a clear incentive to protect it. Property rights can be defined in many ways The “tragedy” of the commons isn’t an issue of greed or stupidity, but one of the rules of the game. Private ownership comes with its own negative costs

VOLUNTARY TRADE Is trade mutually beneficial? The Secret Bag Activity

VOLUNTARY TRADE What should you know? What has been demonstrated to you? Voluntary trade creates value The benefits of trading far outweigh the costs in almost every situation Trade improves people’s wealth and satisfaction People won’t trade if the good being offered is worth less than the good they are asked to exchange.

COMPETITION How are the price of rare goods different than other goods? The Cartel Simulation

Cartels Real life example – the Oil Industry o Oil is a scarce resource (virtually everyone thinks this) o Many countries have joined together to form an organization called OPEC [Organization of the Petroleum Exporting Countries] Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Ecuador, Libya, the UAE, Algeria, Nigeria, Angola

Cartels The members of OPEC have signed agreements to cut and raise production of oil. Their goal [stated from their web site] is to secure a steady income for their member countries and to secure a supply of oil to the world. OPEC manipulates prices and profits.

Cartels In the 1970s the cartel was strong…prices were high and production stayed low to keep those prices high.

Cartels In the 1980s and 1990s prices have been up and down – the motivation for profit has been too great. Recently many countries (US included) have attempted to break the cartel by accessing more of their own oil supplies and decrease the overall % of oil worldwide that OPEC countries sell. Additionally, some countries [ex. Iraq] wish to increase production to help solve their own economic or war problems that have dragged them down. They have been less willing to listen to the other members of OPEC

Cartels

business/industry-news/energy-and- resources/table/article / OPEC TODAY – The end of the Cartel? “The group is increasingly competing with new oil sources that are starting to chip away at its share in previously secure markets, while a shaky global economy keeps demand for oil at bay.” “It adds up to a nightmare scenario for the group. China, Russia and other countries are taking early steps to match the North American oil boom of recent years, which has the U.S. on track to overtake Saudi Arabia as the world’s largest oil producer.”

COMPETITION What should you know? What has been demonstrated to you? o When companies act together to set prices they are a cartel o When acting together, a cartel is a monopoly o Cartels don’t last long because incentive for profit (by cheating) is usually too great o Prices aren’t actually set by one person or group – it is decided by a number of factors

ECONOMICS GUIDE Economics Guide: 1.People Choose 2.Choices involve costs 3.People respond to incentives in predictable ways 4.People create economic systems that influence individual choices and incentives 5.People gain when they trade voluntarily 6.Choices have consequences that lie in the future