1. Unit 1: Introduction to economics
Honors Economics

2. What is Economics?
The social science that studies the choices that individuals, businesses, and governments make as they cope with scarcity and the incentives that influence and reconcile those choices.
Scarcity
Incentives
Self-interest vs. Social interest

3. The Micro and Macro Views of the World
Microeconomics~ The study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments.
Macroeconomics~ The study of the aggregate effects on the national economy and global economy of the choices that individuals, businesses and government make.

4. Core Economic Ideas
People make rational choices by comparing costs and benefits.
Cost is what you must give up to get something.
Benefit is what you gain when you get something and is measured by what you are willing to give up to get it.
A rational choice is made on the margin.
Choices respond to incentives.
A choice that uses the available resources to best achieve the objective of the person making the choice.
A choice made by comparing all relevant alternatives systematically and incrementally.

5. Economics as a Social Science
Identify the following statements as positive or normative:
The gap between the lower class and upper class has grown over the past three decades.
An increase in the minimum wage will bring more teenage unemployment.
The minimum wage should not be increased.
The poor pay too much for housing.
The number of farms has decreased over the last 50 years.
The population in rural areas has remained constant over the past decade.
An increase in the tax on cigarettes will decrease teen smoking.
An increase in the number of police on the inner-city streets will reduce the crime rate.
The United States should place more emphasis on reducing carbon emissions.
Healthcare should be provided to every American.
Economists seek to discover how the economic world works. In order to best do this they must distinguish between positive and normative statements.
Positive statements
A statement about “what is”
Can be right or wrong
Can be tested against facts
Normative statements
A statement about “what ought to be”
Depends on values, opinions
Cannot be tested
Cause and Effect Focus

6. Economics as a Policy Tool: Evaluating the Opportunity Cost of Choice
Personal Economic Policy
Opportunity cost
Business Economic Policy
FOP
Government Economic Policy
Guns or Butter

7. Production Possibilities Curve
Use of the Production Possibilities Curve
Cost
Alternative good or service given up as a result of a decision.
Every point on the PPF indicates a cost in on item or another.
Efficiency
Maximum production or output of goods and services.
Any point on the PPF
Underutilization
Growth
Expanding the ability to produce.
Shift of the entire PPF to the right
Resources/Technology
Production Possibilities Curve
Production Possibilities Curve
~~~~~~~~~~
A graph that shows alternative ways to use an economy’s resources.
Growth
Efficiency
Underutilization

8. FOP ACTIVITY In small groups you will complete the following: PART I
Terms and Concepts (SIDE ONE)
Definition of the term factors of production
List and define the “four” factors of production
PART II
Scavenger Hunt (SIDE TWO)
Walk around and find examples of each in the creation of “education”.

9. Chapter 1 Review Economics Defined Scarcity vs. Shortage
Microeconomics vs. Macroeconomics
Positive vs. Normative
Factors of Production
Opportunity costs vs. Trade offs
Marginal Decision Making
Guns vs. Butter
Production Possibilities Frontier

10. Economic Systems
Chapter 2

11. The Three Economic Questions
Because ALL economic resources are scarce, every society must answer three questions:
What goods and services should be produced?
How should these goods and services be produced?
Who consumes these goods and services?

12. What to Produce?
Consumption Goods and Services- goods and services that are bought by individuals
Capital Goods- goods that are bought by businesses to increase their productive resources.
Government Goods and Services- goods and services that are bought by governments.
Export goods and services- goods and services that are produced in one country and sold in other countries.

13. What we ACTUALLY produce.

14. How Do We Produce?
The difference in what combination of factors of production we choose to utilize.
Developed nations / less developed nations
Changes in the United States over time

15. For Whom Do We Produce?
This question is dependent on who owns and controls the factors of production.
Given individual ownership of the factors of production, a nation will produce for the consumer that has the ability to purchase products.
Types of Income:
Rent (land)
Wages (labor)
Interest (capital)
Profit (entrepreneurship)

16. Personal Distribution of Income

17. Economic Goals
Societies answer the three economic questions based on their goals and values.
Economic Goals
Economic Goals
Making the most of resources
Economic efficiency
Freedom from government intervention in the production and distribution of goods and services
Economic freedom
Assurance a safety net will protect individuals in times of economic disaster
Economic security and predictability
Fair distribution of wealth
Economic equity
Innovation leads to economic growth, and economic growth leads to a higher standard of living.
Economic growth and innovation
Environmental protection, variety
Other goals

18. Command/Centrally Planned
Four Economic Systems
An economic system is the method used by a society to produce and distribute goods and services.
Traditional
Free Market
Command/Centrally Planned
Mixed

19. Free Markets
A purely free market can rarely exist, but in theory a market economy would answer the three economic questions through a system of exchange and trade.
Advantages: Freedom, Efficiency, Growth, Flexibility, Variety
The core factors that allow a market system to work efficiently:
Profit motive
Flow of information
Accurate price levels
Ease of product movement

20. Adam Smith (1723-90) Father of modern economic theory
Scottish social philosopher/professor
Laissez Faire Economic Theory
“An Inquiry into the Nature and Causes of the Wealth of Nations” (1776)
10 years to write and consisted of 5 volumes.
Established Economics as its own discipline

21. Core Principles of Adam Smith
On the Division of Labor
Increase in quantity of work
1. Dexterity of workers
2. Saves time: no switch from one activity to the next
3. Machines replace manual labor
Division of physical and mental labor: professional specialization; expertise
Increased productivity = increased wealth for everyone
Motivation for labor
Disposition to barter
Invisible Hand of the Marketplace
EXAMPLE

22. Adam Smith and the Invisible Hand
In every transaction, the buyer and seller consider only their self-interest, or their own personal gain. Self-interest is the motivating force in the free market.
Producers in a free market struggle for the dollars of consumers. This is known as competition, and is the regulating force of the free market.
The interaction of buyers and sellers, motivated by self-interest and regulated by competition, all happens without a central plan. This phenomenon is called “the invisible hand of the marketplace.”
Back to Principles

23. Circular Flow Model
monetary flow
physical flow
Households
Firms

24. Market Failure
The provision of public goods (shared consumption/ exclusion)
The provision of merit goods (lack of funds/opt out – under consumption)
Income inequalities (social tension/economic problems)
Existence of shortages and surpluses (unemployment)
Existence of negative externalities
NPR

25. Karl Marx ( )
German philosopher, political economist and historian
Developed radical approach to understanding and coping with the problems that occurred in free market systems, namely the Industrial Revolution
Published the Communist Manifesto in 1848 with close friend Frederick Engels
Marxism is rooted in an analysis of modern, Western thought.
18th century Enlightenment
Classical Economics
Utopian Socialism
German Philosophy

26. Marxism in Theory Thesis Antithesis Synthesis Dialectical materialism
Philosophical doctrine stating that matter is the only reality and that everything in the world, including thought, will, and feeling, can be explained only in terms of matter.
Opposite of idealism
Dialectical
The theoretical process in the social sciences in which change occurs based on contradictory, interacting forces
The forces are based on existing class struggles
Stages of economic development
Pre-determined
Tribal, Slave-Owning, Feudal, Capitalist, Socialist, Communist
Thesis
Antithesis
Synthesis

27. Frederick Engels
Karl Marx

29. The Communist Manifesto: Online Reading Assignment
Introduction
Part I
Part II
Part III
Identify problems with each of the following according to Marx:
Reactionary Socialists (Feudal, Petty-Bourgeois , and German Socialists)
Conservative/Bourgeois Socialism
Critical-Utopian Socialism and Communism
Part IV

30. Centrally Planned Economies
Definition ~The government, or central authority controls the factors of production.
Modern Day Forms of Central Planning:
Socialism~ a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society.
Communism~ 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.

31. Vladimir Lenin in The State and Revolution
The Soviet Experiment
The October Revolution (1917)
Vladimir Lenin led the Bolshevik revolution and remainder the party and government leader until his death in January 1924.
The new Soviet government was established two days after the revolution under the leadership of the Council of People’s Commissioners. Lenin was the chairman of the Council.
Allowed peasants to seize land, workers to take over factories, nationalized banks, confiscated private accounts, foreign trade became the dictate of the state, abolished the existing judicial system, titles/ranks were abolished, and church land was confiscated.
By June 1918 private industry had all but disappeared and the nationalization of land ensued.
“It is more pleasant and more useful to live through the experience of revolution than to write about it.”
Vladimir Lenin in The State and Revolution

32. The Soviet Experiment (cont.)
Land, labor and capital was all controlled by the state. The best resources were allocated to the armed forces, space program, and production of capital goods.
Government committees decided the quantity, process and distribution of all products.
The government created large state-owned farms and collectives to produce all agricultural products.
Problems in centrally planned societies:
Performance falls short of the set ideals
Fail to meet consumer needs and wants
Little individual incentives to work hard
Lack of innovation
Expensive and inflexible government structure needed to manage the system
Sacrifice of individual freedoms to pursue societal goals

33. Mixed Economies
It is doubtful that any nation can exist successfully as a pure market economy.
Most modern industrial economies mix features of free markets and centrally planned systems.
An economic system that permits the conduct of business with minimal government intervention is called free enterprise.
The degree of government involvement in the economy varies among nations. Nations are placed on a continuum (a range with no clear divisions) of mixed economies. On one end are centrally planned economies and on the opposite end are free markets economies.
Continuum of Mixed Economies
Centrally planned
Free market
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Iran
North Korea
Cuba
China
Russia
Greece
Peru
United States
South Africa
France
United Kingdom
Botswana
Canada
Singapore
Hong Kong
Iran
North Korea
Cuba
China
Russia
Greece
Peru
United States
South Africa
France
United Kingdom
Botswana
Canada
Singapore
Hong Kong

34. Economic Freedom: Contemporary Application
The World Map
The Heritage Foundation’s Analysis of Economic Freedom
“Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.”
Business Freedom | Trade Freedom | Fiscal Freedom | Government Spending | Monetary Freedom | Investment Freedom | Financial Freedom | Property rights | Freedom from Corruption | Labor Freedom
Check out the data:

35. Chapter 3: Free Enterprise

36. Features of Free Enterprise
Freedom
Competition
Contracts
Self Interest
Profits
Private Property
Voluntary Exchange

37. When does the government intervene?
Regulation
Public Goods and Services
Negative Externalities
Redistribution Programs

38. Regulation
Government Policies Designed to Mitigate Incomplete Information
Regulatory Bodies: OSHA, SEC, FDA
Laws: Truth in Lending Act, Truth in Advertising Act, Credit Card Act
Antitrust Policies
Administered by the DOJ and FTC
Goals (To eliminate monopolies, promote social welfare and to make it illegal for managers to pursue strategies that foster monopoly power)
Sherman Act (1890)~ Prohibits price-fixing, market sharing and other collusive practices designed to “monopolize, or attempt to monopolize” a market.
United States v. Standard Oil of New Jersey (1911)
Charged with attempting to fix prices of petroleum products.
Standard Oil dissolved into 33 subsidiaries.
The rule of reason: Not all trade restraints are illegal, only those that are unreasonable are prohibited

39. Public Goods and Services
Public Goods~ A good that is non-rival (shared consumption) and non-exclusionary in consumption.
Non-rival (shared consumption): A good which when consumed by one person does not preclude other people from also consuming the good.
Non-exclusionary: No one is excluded from consuming the good once it is provided.
“Free Rider” Problem
Individuals have little incentive to buy a public good because of their non-rival & non-exclusionary nature.

40. Externalities
The effects of a decision by consumers and producers that has an impact on a third party
Positive Externalities – beneficial effects on third parties
Negative Externalities – costs incurred by third parties
Pollution
Government regulations may induce the socially efficient level of output by forcing firms to internalize pollution costs
The Clean Air Act of 1970

41. Government Safety Net: Redistribution Programs
Cash transfers
In-kind benefits
Health related benefits
Education benefits

42. The Role of US Presidents: Income Redistribution
Franklin Roosevelt
New Deal
Social Security, Unemployment, Aid to Dependent Children
Lyndon Johnson
War on Poverty
Head Start, Medicare, Medicaid
Bill Clinton
Comprehensive welfare reform
AFDC-TANF