2.  Study of scarcity and choice.  People, firms, and governments make choices because of scarcity.

3. MicroeconomicsMacroeconomics Focuses on the choices of individuals, households, and firms “Bottom-up” Questions like: Should a business hire another worker Should I got to college or get a job? VIDEO CLIP! Focuses on the economy as a whole and aggregate data (GDP, Unemployment, Inflation) and how it can be manipulated “Top-down” Questions like: How many people are employed in the US Right now? What policies could the government adopt to increase economic growth?

4. PositiveNormative Focuses on concepts that have definitive answers. Right answer everyone can agree on Focuses on how the world should work. “What if” questions or questions where there can be disagreement over the final outcome.

5.  Rule one of Economics: Resources are scarce  Resource = anything used to produce something else

6.  A.K.A. Factors of Production  Can be divided into four areas  LAND ▪ Water, minerals, oil, and other natural resources  LABOR ▪ The effort of workers  CAPITOL ▪ Machinery, buildings, and tools used in production of goods and services  ENTREPRENUERSHIP ▪ Risk taking, innovation, and orginizational skills

7.  The economic “cost” of the decision is the benefit or alternative you give up to do something.  Example:

9.  Just about every graph we do in this class is in Quadrant I of a x y plane  X = Horizontal  Y = Vertical  O = origin (0,0)  Now that we have reviewed basic math… I

10.  Graphical representation of the trade-off an economy must face when allocating resources between two goods  The frontier of the curve shows the maximum quantity of one good that can be produced for each quantity of the other

11. CarsPlanes 500 4010 3020 30 1040 050 Frontier

12.  Points that are on the curve (or frontier) itself represent the use of all resources for production  Maximum utilization of resources = efficiency  Points falling under the curve are feasible, but not efficient.  This is called underutilization. An economy producing below what it is capable is not efficient. ▪ This can be caused by inefficiencies such as high unemployment,

13.  In this graph:  Points “H” and “D” (and all other points on the curve itself) represent efficiency. ▪ more output can be achieved from the given inputs  Point “B” represents underutilization. ▪ Producing this combination of goods would be inefficient.  What can we determine about point “A”?

14.  Points beyond the PPC Frontier are considered to be unattainable due to scarcity of resources.

15.  A change in the amount of resources will change the frontier.  The curve will shift right when:  More productive resources become available  Better technology allows you to use your resources more efficiently.

16.  Since resources are scarce, increasing production of a first good entails decreasing production of a second  Scarce resources must be transferred to the first and away from the second.  The loss of production of one good to increase production of the other is the opportunity cost.

17.  If the opportunity cost to change production remains the same at all production points, the PPC will be straight.  The more similar the resources needed to produce each good, the straighter the PPC will be.

18.  The slope of a straight line PPC = Opportunity Cost  Slope for a straight line PPC should always be negative

19.  The PPC is "bowed outward" (concave) from the origin. This represents INCREASING OPPORTUNITY COST.  As more scarce resources are used to increase production of one good or service, production of another good or service falls by larger and larger amounts.  The less similar the resources needed to produce each good, the further the PPC will be bowed out from the origin.

20.  System that coordinates production and distribution of goods and services.  Must answer the THREE BASIC questions of:  What to produce?  How to produce it?  Who will consume it?

21. TraditionalMarketCommand 3 questions are answered by tradition and custom 3 questions are answered by individuals 3 questions are answered by the government. The way these questions are answered (and by whom) determines what type of economy

22.  The government… 1. owns all the resources. 2. decides what to produce, how much to produce, and who will receive it. Examples: Cuba, North Korea, former Soviet Union, and China

23. COMMUNISM  Communism is a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the government. Communist governments are authoritarian in nature. SOCIALISM  Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society.

24. ADVANTAGES 1. Low unemployment- everyone has a job 2. Great Job Security-the government doesn’t go out of business 3. Equal incomes means no extremely poor people DISADVANTAGES 1. No incentive to work harder 2. No incentive to innovate or come up with good ideas 3. No Competition keeps quality of goods poor. 4. Corrupt leaders 5. Few individual freedoms

25. 1. Little government involvement in the economy. (“Laissez Faire” = Let it be) 2. Individuals OWN resources and answer the three economic questions. 3. The opportunity to make PROFIT gives people INCENTIVE to produce quality items efficiently. 4. Wide variety of goods available to consumers. 5. Competition and Self-Interest work together to regulate the economy (keep prices down and quality up).

26.  The concept that society’s goals will be met as individuals seek their own self-interest.  Example: Society wants fuel efficient cars… Profit seeking producers will make more. Competition between firms results in low prices, high quality, and greater efficiency. The government doesn’t need to get involved since the needs of society are automatically met. Competition and self-interest act as an invisible hand that regulates the free market.

27. ADVANTAGES  Economic Efficiency  As a self-regulating system, a free market economy is efficient.  Economic Growth  Because competition encourages innovation, free markets encourage growth.  Economic Freedom  Free markets offer a wider variety of goods and services than any other economic system DISADVANTAGES  Lack of Economic Equity  With freedom comes a degree of instability

28.  All modern economies are a mix of market and command  “Mixed” economies Continuum of Mixed Economies Centrally plannedFree market Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick Hong Kong The United States North Korea Cuba China France Canada Greece Singapore The United Kingdom

29.  Government takes of people’s needs  Marketplace takes care of people’s wants.

31.  Simplified view of how money and resources move through an economy.  In the circular flow model, the inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively and provide each other with factors in order to facilitate the flow of income.  Firms provide consumers with goods and services in exchange for consumer expenditure and "factors of production" from households.

32. Product Market (Goods & Services) Goods & Services Households/Individuals Businesses/Firms $$$$$$ $$$$$$$$ Factor/Resource Market (Factors of Production) Factors of Production FOP

34.  Product Market - any setting where goods and services are bought and sold by producers and consumers  Kroger, target, Taco Bell, ebay ▪ This type of market is where goods and services are bought by you ▪ Basically any purchase you make is in this market ▪ Bought by Households, sold by firms (businesses)

35.  Factor Market – any setting where land, labor, capital, and entrepreneurship are bought and sold by producers and consumers  This market is where Factors of Production are sold by you (households) and bought by firms (businesses) ▪ The best example – wages earned for your labor ▪ This market is where households earn money to spend in the Product market

37.  http://www.reffonomics.com/TRB/Chapter3/c ircularflow5.swf http://www.reffonomics.com/TRB/Chapter3/c ircularflow5.swf

38.  The process of buying goods and services from the rest of the world (importing) and that of selling goods and services to the rest of the world (exporting) is referred to as international trade

39.  Differences in Factor endowments  Variety and quality of goods  Gains from specialization  Political reasons

41.  1723-1790  “Father of Modern Economics”  Wrote “The Wealth of Nations”  Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage

42.  A country has an absolute advantage in the production of a good when it can produce more of that good than another country with the same resources.WineComputersFrance 707070702 US 505050503 Suppose that by using x units of resources… The French have an absolute advantage in the production of wine

43.  One of your friends, Gina, can print 5 t-shirts or build 3 birdhouses an hour.  Your other friend, Mike, can print 3 t-shirts an hour or build 2 birdhouses an hour.  Because your friend Gina is more productive at printing t-shirts and building birdhouses compared to Mike, she has an absolute advantage in both printing t-shirts and building birdhouses.

45.  Came up with the law of comparative advantage.  According to this law, specialization and free trade benefits all trading partners.  Countries should specialize in those goods they can produce at the lowest opportunity cost

46.  The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals.  A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.  This is not the same as being the best at something.  Comparative advantage is the basis for all trade between individuals, regions, and nations.

47.  India can produce 4,000 yards of textile per day or 1 ton of chocolate per day.  Nepal can produce 1,000 yards of textile a day or 4 tons of chocolate per day.

48.  India has a comparative advantage in producing textiles. Nepal has a comparative advantage in chocolate.

49. 1 2 3 4 5 4 3 2 1 5 Chocolate (in tons) Textiles (in thousands of yards) Nepal India McGraw-Hill/Irwin

50.  India has chosen to produce 2,000 yards of textiles and 0.5 tons of chocolate.  Nepal has chosen to produce 500 yards of textile and 2 tons of chocolate.

52.  Point A: The combination of textile and chocolate chosen by India. Point B: The combination of textile and chocolate chosen by Nepal. Point C: The joint combination without trade.

53. 1 2 3 4 5 4 3 2 1 5 Chocolate (in tons) Textiles (in thousands of yards) Nepal India A B C McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

54.  The two extreme combinations are:  both countries producing only textile (point D)  both producing only chocolate (point E).  The combined production possibilities curve with no trade is drawn by connecting these two points.

55. 1 2 3 4 5 4 3 2 1 5 Chocolate (in tons) Textiles (in thousands of yards) Nepal India A B C D E Joint ( trade) McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

56.  Point F: This is where each nation is focusing on that activity for which it has a comparative advantage.  India produces 4,000 yards of textile.  Nepal produces 4 tons of chocolate.

57. 1 2 3 4 5 4 3 2 1 5 Chocolate (in tons) Textiles (in thousands of yards) Nepal India A B C D E Joint ( trade) McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. F

58. Output Questions: OOO= Output: Other goes Over 58

59. Input Questions: IOU= Input: Other goes Under 59

61. A.Which country has an absolute advantage in the production of tractors? Explain how you determined your answer. B.Which country has an absolute advantage in the production of cars? Explain how you determined your answer. C.Which country has a comparative advantage in the production of cars? Use the concept of opportunity cost to explain how you determined your answer. D.For Xanadu, what is the opportunity cost of producing one car? E.If the two countries specialize and trade with each other, which country will import cars? Explain why?

62. 10 Points Possible (2 Points For EACH: 1 point answer, 1 point explanation) A. Answer-Xanadu Explanation- Because they can produce more total tractors than Atlantis. B. Answer-Atlantis Explanation- Because they can produce more total cars than Xanadu.

63. (2 Points For EACH: 1 point answer, 1 point explanation) C. Answer- Atlantis Explanation- Because the opportunity cost for Atlantis to make one car is 1/3 a tractor which is less than then the opportunity cost for Xanadu (1 car =2 tractors). D. Answer- Opportunity Costs is 2 Tractors. No explanation required

64. (2 Points For EACH: 1 point answer, 1 point explanation) E. Answer- Xanadu will import cars Explanation- Xanadu should not make cars. They should specialize in making tractors and import cars from Atlantis since they have a lower opportunity cost.

66.  Simplified view of the upturns and downturns in the macroeconomy  The increases and decreases in output consisting of four phases:  Peak: highest point of output  Recession: output declining for 6 months  Trough: lowest point of output  Recovery: output increasing (trough to peak)

67.  People generally prefer steady, stable growth to large “ups” and “downs.” Therefore, government policies, both fiscal and monetary (see later sections), are aimed at flattening the business cycle.  The government wants not only to stimulate the economy when it’s slow, but also to slow it down when it’s growing too quickly.

68. EMPLOYMENT  Total number of people working for pay UNEMPLOYMENT  Total number of people looking for work that are not currently employed LABOR FORCE Sum of employment and unemployment.

69.  Percentage of labor force that is unemployed # UnemployedUnemployment Rate Labor Force Increases during recession Decreases during a recovery

70.  Total production of all goods and services in the economy  Measured by real GDP  Decreasing output leads to a recession  Increasing output leads to a recover/expansion

71.  Inflation  Rise in the general level of prices  Reduces the purchasing power of money  Measured with the Consumer Price Index (CPI)  Increases during periods of expansion  Deflation  The opposite of inflation  Prices go down  Purchasing power of money increases

72. 1. Draw and label the business cycle 2. Explain what happens to output, unemployment, and inflation in each stage.