1. What is Economics? Is the study of how people choose to use their limited resources to satisfy their unlimited wants and needs Important Parts of Economics– CHOICES SCARCITY

2. Economics is… Dependant upon assumptions Dependant upon simplification of reality

3. Basic Assumptions Human Beings are rational All societies suffer from scarcity All buyers seek to maximize utility All sellers seek to maximize profits

4. Agenda 9/18/12 Essential Q’s – How does scarcity impact decision making? Why democracy and mixed economy? Factors of Production The Three Basic Questions

5. Scarcity refers to the limited number of resources (factors of production) that can be used to satisfy the unlimited human wants and needs =

6. Factors of Production LAND Also called Natural Resources Consider them “gifts of nature” such as air, soil, minerals, water, and plants LABOR Also called Human Resources Includes physical and mental activities that go into producing goods/services CAPITAL Includes tools, machines, buildings, and technologies ENTREPRENEUR Risk taker who is responsible for combining land, labor, and capital to produce goods and services Task! Why are entrepreneurs the driving force in our economy?

7. The price of… land is rent. Capital is interest. Labor is wages. Entrepreneurship is profit.

8. Economic efficiency is achieved when all available resources are being used.

9. All societies must answer three basic questions to satisfy the needs and wants of their populations.

10. 1. What to produce? Should it be military or civilian goods? Food or clothing? Medicine or movies?

11. 2. How to produce it? Automated or manual labor? Expensive or cheap materials? Domestic or overseas labor?

12. 3. For whom to produce it? The wealthy or the needy? The sick or the healthy?

14. Factors of Production Review Which factor of production is each of the following? 6.Rocks 7.Toyota Factory 8.Promethean Board in this room 9.Fish in the ocean 10.Economics teacher at CB West 1.Trees in a forest 2.Cook in a restaurant 3.Tractor used to plow fields 4.Ice cream store owner 5.Car used to deliver pizza

15. Agenda 9/19/12 Essential Q’s – How does scarcity impact decision making? Why democracy and mixed economy? Choices Student News Opportunity Costs PPF’s

16. Task! Get ready to work with a partner or two Your group will receive $100,000 to use however you want In 2 minutes, you will describe how you plan to spend, save, and/or invest the money! Know exactly how you will use the money and why you will do so!

17. How do we satisfy our economic wants? We buy goods or services! Good – a physical object (tangible) that has been produced for sale Durable – last 3+ years Nondurable – last up to 3 years Service – work done by someone else for which someone is willing to pay

18. How do we make goods & services? Use Factors of Production - The productive resources that go into producing goods and services Production Equation LAND + LABOR + CAPITAL = GOOD/SERVICE inputs output

19. Economic Interdependence What does ‘interdependence’ mean? Is our world becoming economic interdependent or independent? Economic Interdependence: the actions of one part of the country (world) has an impact on what happens elsewhere

20. You Can’t Always Get What You Want… “And you can’t always get what you want, Honey, you can’t always get what you want You can’t always get what you want But if you try sometime, yeah, You just might find you get what you need!” -Mick Jagger and Keith Richards 1969

21. Wants > Resources Because of scarcity, we have to make choices! How do we make a choice? What do we give up?

22. Making Choices to Deal With Scarcity People seek to maximize their utility when making decisions. This requires them to consider tradeoffs. Utility – the satisfaction or benefit a person receives from consuming a good or service Tradeoffs – the alternate choices people have when making a decision  also the benefits/advantages of making on decision over another

23. Examples… Some choices are easy to make… Hmm… Should I have pizza or a hoagie for lunch today? Other decisions are agonizing… Should I get out of bed and go to school today or should I sleep in?

24. Task! Reflecting on Personal Trade-offs… Think of ONE decision that you had to make in the last week…Identify your various tradeoffs for that decision Be prepared to share! In the end, what helped you decide amongst your choices?

25. Opportunity Cost When comparing the top 2 choices, it is the BENEFIT of the next best alternative that must be sacrificed to satisfy a want. Opportunity Cost – The best thing we give up to get what we want

26. Considering the Opportunity Cost of Decisions… Revisit the choice that you made in the last week… What was the opportunity cost? Be prepared to share!

27. What else influences your choices? People make decisions based on their marginal utility, or the extra satisfaction they gain from one additional unit of a good/service. Law of Diminishing Marginal Utility says that as we get or do more of something, the pleasure we derive from it tends to decrease and so does our willingness to buy it or do it!

28. Finally… Why it Matters Understanding the opportunity costs/tradeoffs of different choices in life makes you a better decision-maker! Today’s Message – “There’s No Such Thing As a Free Lunch” You always have to give something up…” ALL Individuals, Businesses, & Societies have to consider tradeoffs/opportunity costs when making decisions

29. Visualizing the Relationship… Limited Resources & Unlimited Wants ScarcityTrade-offs (choices)Opportunity Costs

30. How Can We Measure What We Gain and Lose When Making Choices? Answer- With a Production Possibilities Frontier

31. Production Possibilities Frontier Diagram representing the possible combinations of goods and or services an economy can produce when all resources are being fully employed

32. PPF Assumptions We live in a two good world There are fixed resources There is fixed technology Resources are not specialized

34. Production Possibilities Curve C D E OUTPUT OF CONSUMER GOODS (units per year) OUTPUT OF MILITARY GOODS (units per year) A BO X F G Limited resources necessitate choices about WHAT to produce.

35. The Choices Nations Make A nation must choose what to do with its scarce resources during war or periods of military buildup. Produce military goods or consumer goods?

36. Economic Growth 2000 production possibilities 1900 production possibilities O UTPUT OF CONSUMER GOODS (units per year) OUTPUT OF MILITARY GOODS (units per year) Production possibilities increases with more resources and technology

37. The Classic Guns and Butter example: Guns Butter 10,00020,00030,00040,00050,000 100,000 95,000 85,000 70,000 50,000 40,000 B A C D E F At point A, all resources are used for butter Moving from point A to point B requires shifting resources out of butter and into guns. At point F. all resources are used for Guns.

38. Productivity A PPF can help us see how efficient our choices are. Productivity - measurement of how efficiently we are utilizing our resources An economy producing on the curve = using their resources to produce the MAXIMUM amount of goods/services

39. Locations on a PPF Efficient Point: place where an economy is achieving as much output as possible from a given amount of resources – occurs at any point on the curve. Inefficient Point – place where the economy is not functioning as it could be – occurs at any point inside the curve Unattainable Point – place where the economy cannot produce, given its current resources – occurs at any point outside the curve

40. Butter 10 8 6 4 2 0 2 4 6810 Guns CD A B Efficient points Inefficient point Unattainable point, given current resources Q: How can an economy produce at the unattainable point? A: Be more productive/efficient and/or gain new resources (curve shifts outward)

41. Food Computer 4 3 2 1 1234 O.C. between 1 and 2 computers = 1 Food Unit O.C. between 3 and 4 computers = 1 Food Unit Constantly giving up the same quantity of food to get additional computers STRAIGHT-LINE PPFs Constant O.C.

42. Economic Systems An economic system is the way a society coordinates the production and consumption of goods & services. How a society answers the three basic economic questions determines which type of economic system they are! Three Types of Economic Systems:  Command  Traditional  Market

43. Economic & Social Goals of an Economic System Economic Freedom Economic Efficiency Economic Equity Economic Security  Economic Stability  Economic Growth

44. Review of Economic Systems A traditional economy relies on custom and tradition to dictate production and consumption In a command economy, decisions about production and consumption are made by a powerful ruler or central authority In a market economy, individual producers and consumers coordinate economic activity.

46. What are the most important goals of each economic system? Traditional Security and Stability Command Equity and Security MARKET Efficiency and Freedom **Societies differ in the degree of importance they attach to each goal. Progress toward one goal can sometimes be achieved only at the expense of another (TRADEOFFS!)**

47. Which economic system does the U.S. use?

48. The American Economic System We have a mixed market economy! COMMAND MARKET

49. The U.S. mixed economy In a mixed economy… Individuals:  Own the factors of production  Possess freedom to produce or consume  Must operate under confines of law Government:  Protects workers and consumers  Regulates business and preserves competition  Provide public goods/benefits

50. U.S. Mixed Economy Brainstorm Market ElementsCommand Elements **Nearly all countries have mixed economies, where both the government and individuals play important roles in production and consumption.**

51. U.S. Economic System Characteristics 1. Economic freedom (“laissez-faire”) 2. Limited government 3. Equal opportunity 4. Competition 5. Profit motive 6. Property Rights 7. Binding Contracts

52. Circular Flow of Economic Activity RevenueConsumer Spending Income Factor Payments Buy Factors of Production to Make Stuff Sell Goods & Services Buy Goods & Services Sell Factors of Production Product Market Individuals Households Factor Market Business Firms Circular Flow of Economic Activity Flow of Money Flow of Resources & Products

53. Understanding how all parts fit together Circular Flow of Economic Activity  Represents a market economy  2 main “markets”  Product Market:  Factor Market: where goods and services where the 4 factors of are bought/sold production are bought/sold  Shows interdependence between businesses and individuals

54. Task! Circular Flow Model Identify a good or service that an economy can produce. Next, explain TWO transactions that would take place in the factor market and ONE that would take place in the product market that focuses on the production and consumption of your selected good or service.