Section 1 Basic Elements of Economics

The story of wealth and health for 200 countries over 200 years

5 Everyone Responds to Incentives! Incentives matter: choice is influenced in a predictable way by changing incentives ex. Money Game ex. Killer Seatbelts ex. 5 th grade spelling tests ex. Prices

6 Everyone Responds to Incentives! This economic principle influences all people Students Students Politicians Politicians Altruists Altruists Criminals Criminals

7 Everyone Responds to Incentives! Individuals are rational: they try to get the most from their limited resources. “greatest benefit at least possible cost” Note: What is rational for one person may not be rational for everyone

8 There is No Such Thing as a Free Lunch Because resources are scarce, trade-offs must be made. Opportunity Cost: The highest valued alternative that must be sacrificed when choosing an option Even if it is free to you, it is not free to society!

9 There is No Such Thing as a Free Lunch Opportunity Cost: “With every choice you risk the life you would have had; with every decision, you lose it.” – Richard Bach

There is No Such Thing as a Free Lunch What do we want: More Health Care? A Cleaner Environment? Less Debt? Then what do we give up? Social Security? Business Investment? Unemployment Benefits?

11 Voluntary Trade Promotes Economic Progress Because the value of a good or service is subjective, voluntary trade moves goods from people who value them less to people who value them more Because the value of a good or service is subjective, voluntary trade moves goods from people who value them less to people who value them more Ex. The Candy Game Ex. The Candy Game Trade also leads to specialization, innovation, and peace! Trade also leads to specialization, innovation, and peace!

Supply and Demand LAW OF DEMAND When a rise in the price of a good or service makes it more expensive for buyers to purchase it, they will normally choose to buy fewer units. The opposite is true when a price falls. Thus, there is an inverse relationship between the price of a good and the amount buyers will purchase. This is the law of demand.

Supply and Demand

LAW OF SUPPLY Higher prices will make it more attractive for sellers to provide the good or service. The opposite is true if prices fall. Thus, there is a positive relationship between the price of a good or service and the quantity sellers will be willing to supply. This is the law of supply.

Supply and Demand

16 Prices bring the choices of buyers and sellers into balance Buyers prefer to buy things for lower prices Buyers prefer to buy things for lower prices Sellers prefer to sell things for higher prices Sellers prefer to sell things for higher prices Market prices brings these two conflicting forces into balance.

Market Equilibrium

18 Profits direct businesses toward activities that increase wealth A profit occurs only when the value of the good produced is greater than the value of the resources used for its production. Losses are penalties imposed on those who produce goods that are valued less than the resources required for their production

19 People Earn Income by Helping Others The process by which some people become rich will make everybody richer. Ex. Bill Gates WrongRight!

The Process of Wealth Creation Resources Land Labor Raw Materials Time Entrepreneurs: People who make, combine, and arrange resources to create new goods and services Consumer Goods and Services: Pizza Haircuts Televisions Cell Phones

21 The invisible hand directs people toward activities that promote the general welfare The Invisible Hand Principle: The tendency for people, while pursuing their own interests, to promote the economic well-being of society.

The invisible hand directs people toward activities that promote the general welfare

End of Section 1….Enjoy your Break! Thank You!