Transcript Chapters 1 and 2

Bonus Dates
• If you get your homework in before the
actual due date I will give five bonus
points for the homework assignment for
each chapter.
• Chapters 1 Bonus remains for Tuesday
9/13, Chapter 2 Bonus Friday 9/16.
• Otherwise all homework is due the
day of the Unit Test set tentatively
for the week of September 19-23.
I. What is Economics – The
Language
• A. Definition – Social Science concerned
with the efficient use of scarce resources to
achieve maximum satisfaction of human
material wants.
• HUH?!???????
I. What is Economics cont…?
• B. Unlimited Wants satisfied by Limited
Resources and using those resources as
efficiently as possible.
• Case example USA vs. USSR
• See this stuff is easy!!!
In the beginning…
I. What is Economics cont…?
• C. Scarcity and Choice
• 1. Because resources are scarce it forces
individuals and countries to make choices.
•
2. Those choices always come with
some sort of cost.
What is Economics?
Economics: the study of Unlimited
Wants Satisfied by Limited Resources.
Unlimited v. Limited: Forces people,
nations, & the world to deal with the
problem of Scarcity.
Scarcity forces Choice!
3. Economics is the study of Choice!!!
No, you can't always get what you want
You can't always get what you want
You can't always get what you want
You can't always get what you want
You can't always get what you want
You can't always get what you want
But if you try sometimes you might find
You get what you need
Economics, the study of choice!
I. What is Economics cont…?
• “There is no such thing as a free lunch.”
• One of the most repeated quotes in all of
economics.
• What does it mean??
• Because resources are scarce and we must make
choices based on those limited resources, our
choices ALWAYS come with a cost!
• Examples – Fill your gas tank lately?
Wants????
• Food, Clothing, and
Shelter
• Cars, Concerts, and
CD’s
• Primary v Secondary
Wants
• Different people?
• Different nations?
• Different wants?
I. What is Economics cont…?
• C. Scarcity and Choice
•
4. Opportunity costs –
the items you sacrifice in
order to acquire what you
want.
•
- Explicit costs - $
•
- Implicit costs – time,
energy…
Economics, the study of choice!
Making a Choice Carries a Cost!
• Opportunity Cost
• When one road is taken
an opportunity on
another road is missed!
• In taking AP Econ, what
did you not take?
• Going out for a sport
means…..
• Buying a new outfit
means…..
Basic Economic Questions
• $100 gift certificate
and a trip to Mayfair
Mall!
• Ever not buy
something?
• Ever regret a
purchase?
• Have a CD you hate?
Overview
• Because we have unlimited wants but
limited resources we have to make choices
and understand that our choices come with a
cost.
• How do we get the greatest satisfaction for
the lowest cost??
• “The most bang for the buck!”
I. What is Economics cont…
• D. Marginal
•
1. Economics seeks to compare the
marginal benefit to the marginal cost.
•
2. Marginal = Additional or extra.
• (More commonly; is it worth it? Is the
added effort worth the benefit you will
receive both individually and in society.)
An example • Needed – 3 volunteers.
• You get to eat.
Do you think like an Economist –
Yet??
• Can the government provide too much
financial aid???
• What should you consider?
• Costs=
• Benefits=
• How do you measure it?
• That’s what the class is about.
II. Why Study Economics
• A. Economics has
replaced politics as the
avenue toward
freedom.
•
1. Economics
dominates political
decisions.
• B. It will help you
make better financial
decisions.
Academic not Vocational –
Accounting = Vocational
Academic = the skills to run a business better
III. Broad Economic Goals
• A. 8 Widely accepted goals of USA
•
1. Growth – Higher Standard of Living
•
2. Full Employment – Provide jobs for all citizens willing and able
to work.
•
3. Efficiency – maximum fulfillment of wants with all available
resources.
•
4. Price-level stability – avoid large swings in prices (inflation
/deflation)
•
5. Freedom – allow for choices.
•
6. Equitable distribution of income – poverty v. wealth.
•
7. Security – provide for those unable to provide for themselves.
•
8. Balance of Trade – keep a reasonable balance of goods and
financial transactions.
• B. Debatable, complementary, and may involve trade-offs.
End of Chapter 1
• Economics Defined
• Unlimited wants vs.
limited resources.
• Scarcity leads to choice.
• Choice is made by
evaluating what is going
to give the most
satisfaction for the lowest
cost.
• Bonus for chapter 1 work
Tuesday September 13.
AP Macro Outline – 2005-2006
I.
A.
B.
C.
D.
E.
8 – 12 %
Basic economic concepts
Chapters 1, 2, 3, 4, 5 & parts of 20
Scarcity, choice and opportunity costs
Production possibilities curve
Comparative advantage, specialization and exchange
Demand, supply, and market equilibrium
Macroeconomic issues: business cycle, unemployment, inflation, growth
II. Measurement of economic performance
Chapters 4, 5, 7, 8
A. National Income Accounts (4-6%)
1. Circular flow
2. Gross Domestic Product
3. Components of GDP
4. Real versus Nominal GDP
B. Inflation measurement and adjustment (4-5%)
1. Price indices
2. Nominal versus real values
3. Costs of inflation
C. Unemployment (4-5%)
1. Definition and measurement
2. Types of unemployment
3. Natural rate of unemployment
Do you think like an economist yet?
Let’s See
12 – 16 %
Chapter 2
• I. The Economizing problem.
•
A. Society’s material wants are unlimited yet
resources are scarce?
•
1. On the one hand we deal with the
desires of consumers.
•
2. Consumers seek those items that give
them the greatest utility (pleasure/satisfaction).
•
3. Business and Gov’t also have wants
such as satisfying production goals or helping the
citizenry.
THE FOUNDATION OF ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS....
BUT LIMITED OR SCARCE
PRODUCTIVE RESOURCES!
Wants????
• Food, Clothing, and
Shelter
• Cars, Concerts, and
CD’s
• Primary v Secondary
Wants
• Different people?
• Different nations?
• Different wants?
I. The economizing problem
cont…
•
•
•
•
•
4. On the other hand we deal with all of
the natural, human and manufactured
resources.
B. Resource Categories
1. Land – All gifts of nature.
2. Capital – machinery, tools etc…
3. Labor – physical and mental talents
of individuals.
I. The economizing problem
cont…
• 4. Entrepreneurial Ability – an innovator
who takes the risk of trying to produce new
products, new techniques, or forms of
business organizations.
• Try to remember CELL
Resource Categories
• Land
• Labor
• Capital (
is not money but
is new machines and factories)
• Entrepreneurial
Skills
(CELL – a pneumatic device)
I. The economizing problem
cont…
• C. Resource markets
•
1. The place where resources or the services
of resource suppliers are bought and sold.
•
2. Business demands the 4 categories of
resources to make their goods and services.
•
3. In return business must pay for those
resources.
•
4. Those resource payments are in the form of
Rent, Interest, Wages and Profits/losses. (weasel
puss is red!)
5.
Business/Owners
Decisions based on…$$$
LAND
RENT
CAPITAL
INTEREST
LABOR
WAGES
ENTREPRENEUR
PROFIT &
LOSS
6. Simple
Circular Flow
Page 37 in book.
Circular Flow Model
BUSINESSES
Circular Flow Model
BUSINESSES
HOUSEHOLDS
Circular Flow Model
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
HOUSEHOLDS
Circular Flow Model
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
HOUSEHOLDS
Consumer Choices are based on...
UTILITY or Opportunity cost
LUXURIES vs. NECESSITIES
Secondary vs. Primary Wants
Circular Flow Model
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
Circular Flow Model
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
How Does an Economy Work?
The Circular Flow Model
1995 Essay:
Draw, Label, & Explain the Circular Flow!
7. Full vs. Allocative Efficiency
• Full – using resources and producing goods
in the least costly way.
• Allocative – using the resources and
producing goods in the least cost way but
also how society deems appropriate.
II. How do nations decide how to best
use those resources?
A. 3 Basic Questions for any nation:
1. What?
2. How?
3. For Whom?
To answer these questions, economic systems were created.
These economic systems vary greatly in how they use their scarce resources.
In the USA we used our scarce resources to produce $29,000 per person of goods
and services.
In Zambia scarce resources were used to produce $900 per person of goods and
services.
B. Economic Systems
•
•
•
•
1.
2.
3.
4.
Traditional
Command
Market
Mixed
Each system answers: what, how, and for whom differently.
Economic v Political Systems
• All nations fall
economically into
Traditional, Command,
Market, or Mixed systems
• Nations politically can be
Capitalist, Socialist,
Communist, Dictatorship,
or Fascist
C. Traditional Systems
• 1. Barter System
• 2. Low Productivity
• 3. Third World
Countries
• Saukville
D. Command Systems
• 1. Government
controls the economy
• 2. Government
determines:
– What to produce
– Who will produce it
– How it will be
produced
– For whom it will be
produced
E. Market Systems
• 1. Laissez Faire role
of government
• 2. Private ownership
of the means of
production
• 3. Markets determine
price and allocate
resources
F. Mixed Economic Systems
• 1. Most national
economies today
• 2. Market economies
dominate with varying
degrees of government
regulation and
manipulation.
Goals of Macroeconomists:
1. Economic Growth
2. Stable Prices
3. Full Employment
“ISMS”
•
•
•
•
•
•
•
Capitalism
Socialism
Communism
Imperialism
Nationalism
Fascism
Nazism
Capitalist Systems - USA
• Limited role of
government
• Private ownership of
the means of
production
• Markets determine
price and allocate
resources
Socialist Systems
• An expanded role of
government
• Government & Private
ownership of the
means of production
• Government &
Markets determine
price and allocate
resources
In most European countries
& in Canada health care is
PROVIDED by the Government.
Governments own and run airlines
and railroads in some countries too!
Communist Systems
• Government controls
the economy
• Government
determines:
– What to produce
– Who will produce it
– How it will be
produced
– For whom it will be
produced
Imperialism v. Nationalism
• Nationalism is waving
the flag and being
patriotic!
• Imperialism is
planting the flag in
another country and
claiming it for political
or economic gain!
Dictatorships
• Mussolini’s Fascism
– Control government
– Control the economy
– Allow some freedoms
• Hitler’s Nazism
– Total control of a
person’s life
– Total control of the
nation
A Quick Check
•
•
•
•
•
•
•
•
•
•
•
•
Answer T for traditional, C for Command or M for Market.
1. This economy has no money in its exchanges.
2. In this economy consumers decide what will be produced.
3. In this economy, government decides what will be produced.
4. In this economy, government has only a minor role.
5. This economy sees the greatest potential for productivity.
6. J. Stalin, A. Hitler, F. Castro A. Hilts use this system today.
7. In this economy the people decide who will receive the goods
produced by using money.
8. The pilgrims
9. Airbags and seat belts
10. McRib, Mcgrafton
Take a look at the first three questions for your chapter two homework.
You should be able to answer them.
Production Possibility Curves
Understanding Efficiency and Choice
III. PPC Curves
• A. Simplistic way of illustrating the consequences
of choice in an economy.
• B. 4 Assumptions
•
1. Full employment and productive efficiency.
•
2. Fixed resources.
•
3. Fixed Technology
•
4. Two goods – consumer goods and capital
goods.
• C. A PPC table lists the different combinations of
two products that can be produced with limited
resources.
• D. A PPC curve is a 2 dimensional graph of the
goods.
PRODUCTION POSSIBILITIES
Assumes....
Efficiency
Fixed Resources
Fixed Technology
Two Products
for example...
PRODUCTION POSSIBILITIES
Assumes....
Efficiency
Fixed Resources
Fixed Technology
Two Products
for example...
PRODUCTION POSSIBILITIES
What if we could only produce ...
10,000 Robot Arms
or
PRODUCTION POSSIBILITIES
What if we could only produce ...
10,000 Robot Arms
or
400,000 Pizzas
PRODUCTION POSSIBILITIES
What if we could only produce ...
10,000 Robot Arms
or
400,000 Pizzas
Using all of our resources, to
get some pizza, we must give
up some robot arms!
for example...
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
(in thousands)
10
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
in graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
in graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
in graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
in graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
in graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
in graphical form
Pizzas (hundred thousands)
III. PPC Curves cont…
• E. If an economy is at full employment and
full efficiency it must sacrifice some of one
good in order to get more of another good.
• F. The amount of other products that must
be sacrificed to obtain additional units of
another good is the – OPPORTUNITY
COST!
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Robots
in graphical form
Pizzas (hundred thousands)
III. PPC Curves cont…
• 1. Law of increasing opportunity costs - the
opportunity cost of each additional unit is greater
than the previous one.
•
- When you continue to add to Pizzas it is
going to cost you marginally more in robots.
•
- why? – it is not an equal trade off. There
comes a point when transfer of resources is more
costly than an equal trade off.
•
- That is why PPC curves are concave.
•
- Converting capital goods or military
good to consumer goods is not an equal trade off.
PRODUCTION POSSIBILITIES
in table form
PIZZA
0
1
2
3
4
9
7
4
0
(in hundred thousands)
Robots
10
(in thousands)
(thousands)
Total versus Marginal
Opportunity costs.
Robots
in graphical form
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Limited Resources means
a limited output....
PRODUCTION POSSIBILITIES
Limited Resources means
a limited output....
At any point in time, a fullemployment, full-production
economy must sacrifice some
of product X to obtain more
of product Y.
PRODUCTION POSSIBILITIES
Robots (thousands)
G. Allocative
Efficiency Q 14
13
1. Society
12
must
11 A
decide
B
10
on some
C
9
point
8
7
along
D
the frontier 6
5
MB = MC
Attainable
4
3
2
1
Unattainable
W
Attainable and
efficient
but
Inefficient
E
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes....
Unattainable
LAW OF INCREASING
A OPPORTUNITY
COSTS
B
The amount
of other
C
W
products which must be
forgone or D
sacrificed to
Attainable
and
obtain some amount of a
specific product is calledefficient
Attainable
the but
opportunity cost of
that good.
Inefficient
E
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes....
Unattainable
LAW OF INCREASING
A OPPORTUNITY
COSTS
B
This means that a graph of
C
W
the production possibilities
curve will be CONCAVE D
Attainable
bowed out from the origin.
and
efficient
Attainable
but
Inefficient
E
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes....
Unattainable
LAW OF INCREASING
A OPPORTUNITY
COSTS
B
This means that a graph of
C
W
the production possibilities
curve will be CONCAVE D
Attainable
bowed out from the origin.
Attainable
Economic resources are
but
not completely adaptInefficient
able
to other uses.
and
efficient
E
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
H. Unemployment
and underQ 14
13
utilization of
12
resources.
11
Shown inside
10
the curve.
9
Unemployment &
Underemployment
Shown by Point U
8
7
6
5
4
3
2
1
U
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Capital Goods
Q
A
a
Economic
Limits
Along
PPC Frontier
B
Consumer Goods
Q
PRODUCTION POSSIBILITIES
Capital Goods
I. Growth
Q
C
brought on
by an
increase in
A
resource
supplies
or advances
in technology.
Shifts the
Curve to the
Right.
Economic
Growth
b
a
B
D
Consumer Goods
Q
12
10
8
6
4
2
0
2
4
PPC – Constant Cost Graph
6
8
10
12
PPC – Constant Cost Graph
Quantity of Wheat
In tons
12
10
What if the Axis's
Were labeled wheat & oil?
8
6
4
2
0
2
What is this now an
Output or Input PPC?
4
6
8
10
12
Quantity of Oil
In millions of barrels
Quantity of Wheat
In tons
12
PPC – Constant Cost Graph of
10
Outputs
8
6
4
2
0
2
4
6
8
10
12
Quantity of Oil
In millions of barrels
Quantity of Wheat
In tons
12
PPC – What happens if output
increases?
10
8
6
4
2
0
2
4
6
8
10
12
Quantity of Oil
In millions of barrels
PRODUCTION POSSIBILITIES
Assumes....
Efficiency
PRODUCTION POSSIBILITIES
Assumes....
Efficiency
Fixed Resources
PRODUCTION POSSIBILITIES
Assumes....
Efficiency
Fixed Resources
Fixed Technology
PRODUCTION POSSIBILITIES
Assumes....
Efficiency
Fixed Resources
Fixed Technology
The Role of Government
FULL EMPLOYMENT
STABLE PRICES
ECONOMIC GROWTH
ALLOCATIVE EFFICIENCY
PRODUCTIVE EFFICIENCY
PRODUCTION POSSIBILITIES
Assumes....
Efficiency
Fixed Resources
Fixed Technology
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
Unemployment &
Underemployment
Shown by Point U
13
12
11
10
9
8
7
6
5
4
3
2
1
More of either or
both is possible
U
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes....
ECONOMIC GROWTH
The ability to produce
a larger total output a rightward shift of
the production
possibilities curve
caused by...
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes....
ECONOMIC GROWTH
1 - Increases in
resources 2 - Better resource
quality 3 - Technological
progress
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
A’
13
12
11
10
9
8
7
6
5
4
3
2
1
Economic Growth
B’
C’
D’
E’
1
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Two Examples of Economic Growth
Goods for the Future
FAVORING
PRESENT GOODS
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
PRODUCTION POSSIBILITIES
Two Examples of Economic Growth
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
FAVORING
FUTURE GOODS
Goods for the Future
Goods for the Future
FAVORING
PRESENT GOODS
CONSUMPTION
FUTURE
CURVE
CURRENT
CURVE
Goods for the Present
Basic Review – Chapter 2
• 5 point Bonus Chapter 1
for Monday 9/13; 10 Point
Bonus Chapter 2
Wednesday 9/15
• Unlimited wants v limited
resources
• Primary v Secondary
• Land, Labor, Capital,
Entrepreneurial
• Choice
• Scarcity
• Opportunity Cost
• Absolute & Comparative
Advantage
• What, How, and For Whom
• Economic Systems: Traditional,
Command, Market, and Mixed
• Construction of a Circular
Flow & PPC curves
• Efficiency????
PRODUCTION POSSIBILITIES
Applications....
• Wartime Production
• Discrimination
• Land-Use Controversies
• Destruction from War
• Growth: Japan vs. United States
• Famine in Africa
• Emerging Technologies
On the back of your quiz:
• Draw a simple circular flow with Households &
Businesses, The Factor Market with CELL &
WPiR, & the Product Market with Goods &
Services and Cash Flow.
• Draw and Label PPC curves on a single graph for
Pesto and Pasta Lands labeling: Absolute
Advantage(AA) and Comparative Advantage(CA)
– Pesto land produces 40 Lasagna and 20 Pizzas
– Pasta land produces 30 Lasagna and 30 Pizzas
The Macro Economy
•
•
•
•
•
•
•
Consumer Purchases
Business Investments
Government Purchases
Exports
Imports
GDP = C + I + G + X – M (demand side)
GDP = W + i + R + P + Inbt + Dep (income side)