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Economics
Why study economics?
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Welcome to the exciting world of economics!
Affects daily lives
Helps us to make informed decisions
Helps us become more effective citizens
Economic Reasoning: Why are We
A Nation of Couch Potatoes?
 Definition: The social science that deals with
how society allocates scarce resources
among its unlimited wants and needs by
examining alternatives and considering the
opportunity costs for each alternative
 Economic reasoning can be used to explain
a wide range of human behavior.
Key Idea #1: Scarcity
 Chief economic problem—faced in all societies
 Condition of having to choose among alternatives
 Idea of limited resources and unlimited wants and
needs
 Scarcity necessitates choices: not all of our
desires can be satisfied. People make these
choices based on their perceptions of the
expected costs and benefits of the alternatives.
 Scarce good versus free good
How Do You Know When
Something Is Scarce?
Scarcity Forces You to
CHOOSE
SCARCITY
CHOICE
Opportunity Cost:
the foregone alternative
Think: “next-best”
Scarcity IS:
Even in the face of abundance . .
.
What’s scarce when you’re
 in the Mall of America?
 at the all-you-can-eat buffet?
Key Idea #2: Choice
 Scarcity leads us to choose between
alternatives
 Choices are on an individual (micro) and
societal (macro) level
 Three economic questions
– What should be produced?
– How should goods and services be produced?
– For whom should goods and services be
produced?
People’s Choices are always
RATIONAL
 Rational choice = choosing the alternative
that has the greatest excess of benefits
over costs.
 If ALL choices are rational, then the
challenge is to understand the decisionmaker’s perception of costs and benefits.
Key Idea #3: Opportunity Cost
 Definition: the value of the best alternative
forgone when making any choice
 Most important concept in economics
 TINSTAAFL
Why are We A Nation of Couch
Potatoes?
 Which well known people do Americans
tend to admire?
 How are Americans’ exercise and diet
habits changing?
Why are We A Nation of Couch
Potatoes?
 On the one hand, Americans admire people
who look slender and physically fit.
Why are We A Nation of Couch
Potatoes?
 On the other hand, according to the Center
of Disease Control and Prevention
– ~25% of Americans are getting enough exercise
– ~35% are overweight
– Percentage of children who are overweight has
doubled since the early 1970s
Why are We A Nation of Couch
Potatoes?
 Economic Mystery: Why do an increasing
number of Americans, the same people who
admire the trim, slender look so often
featured in the media, exercise too little and
eat too much?
True or False?
 Few Americans know that exercising more and eating less
can help many people become healthier.
 Exercise and a healthful diet are free.
 In jobs that involve physical work, exercise is like a fringe
benefit.
 The price of food has been increasing.
 Passive modes of entertainment like-TV and video gamesare popular.
 Common jobs in the past-in mining, farming, and
manufacturing-were much safer than today’s jobs in
technology, law and finance.
Solve the Mystery!
 Read Activity 1 and answer the questions on
a separate sheet of paper (10 minutes).
Guide to Economic Reasoning
 People choose.
 People’s choices involve costs.
 People respond to incentives in predictable ways
(monetary, nonmonetary, positive, negative).
 People create economic systems that influence
economic choices and incentives
 People gain when they trade voluntarily.
 People’s choices have consequences that lie in
the future.
Applying Economic Reasoning to
Couch Potatoes!
 What are some of the costs associated with
failure to exercise enough and being
overweight?
 What incentives might influence people to
exercise less and eat more?
 How might you solve the mystery?
 What are some ways to change the
incentives associated with exercise and
diet?’
Article Tasks Step 1
 Please read and code your assigned article.
 Put an * by any material you think is a main
idea.
 Put an ! by any material you think is
surprising or interesting.
 Put a ? by any material you do not
understand/have questions about.
Article Tasks Step 2
 Get in groups of 4 people with the same
article and answer the questions about your
article.
Article Tasks Step 3
 Find a partner (based on article numbers)
who did not read the same article as you
and do the following:
– Summarize the article for your partner.
– Identify and explain at least one item from each
coding category (*,!, ?)
– Explain how your article relates to the Couch
Potato lesson (Does it contradict or support the
lesson? How and why?)
The Economic Way of Thinking:
What differentiates economics from
other social sciences?
 Economists emphasize the role of
opportunity costs in analyzing choice
– Opportunity cost versus opportunity benefit
(what is gained by making a particular choice)
– Expected benefits of alternatives will affect
choices
– As set of alternatives change, choices change
Opportunity Cost:
Choices impose costs; people
receive benefits and incur costs
when they make decisions.
 The cost of a choice is the value of
the next-best alternative foregone,
measurable in time or money or some
alternative activity given up.
Opportunity Cost Analysis
What was the 1st decision you
made this morning?
Opportunity Cost =
the Next-Best Alternative
 Identifying Opportunity Cost:
–What are the considered alternatives?
–Prioritize the alternatives – What is the best
and what is the “next-best”?
 What would you do – not what could you do?
 What does the decision-maker perceive to be the
benefits of each alternative?
Opportunity Cost Analysis
Decision Maker: YOU
Alternatives:
Perceived
Benefits
Choice
Opp. Cost
Benefits
Refused
Opportunity Cost Analysis
Decision Maker: YOU
Alternatives:
Perceived
Benefits
Choice
Opp. Cost
Get Up Now
Shower
bkfst
don’t rush
On time
coffee
Don’t Get Up
Now
More sleep
Opportunity Cost Analysis: Decision Maker
=Alternatives:
YOU
Get Up Now
Don’t Get Up
Now
Perceived
Benefits
Choice
Opp. Cost
Benefits
Refused
Shower
breakfast
don’t rush
On time,
coffee
X
More sleep
X
Opportunity Cost Analysis: Decision Maker =
YOU
Alternatives:
Get Up Now Don’t Get Up Now
Perceived
Benefits
Shower
bkfst
Coffee
don’t rush
On time
Choice
X
Opp. Cost
Benefits
Refused
X
More sleep
Use the concept of opportunity cost
to discuss the following questions:
 Who might choose to get bumped from
a flight?
 Should Tiger Woods mow his own
lawn?
 What is the cost of attending college?
–for LeBron James?
–for you?
The Economic Way of Thinking:
What differentiates economics from
other social sciences?
 Motivation for choices is to maximize value
of some objective/and objectives defined by
self interest
– Business owners motivation is to maximize
profit
– Consumers make choices to maximize
satisfaction (utility)
– Self interest doesn’t necessarily mean that
people are greedy/selfish
The Economic Way of Thinking:
What differentiates economics from
other social sciences?
 Motivation for choices is to maximize value
of some objective/and objectives defined by
self interest
– Economists study all sorts of choices: how
people choose life partners, voting, drug use
etc.
The Economic Way of Thinking:
What differentiates economics from
other social sciences?
 Individuals maximize choices by using
marginal decision making
– Margin—current level of activity
– Marginal decision making– deciding to do a little
more or a little less of something
People respond to incentives in
predictable ways.
 Choices are influenced by incentives, the
rewards that encourage and the punishments
that discourage actions. When incentives
change, behavior changes in predictable ways.
 Incentives may be positive or negative.
 Incentives may be monetary or non-monetary.
Microeconomics/Macroeconomics
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Microeconomics branch of economics that
examines the choices and interaction of
individuals concerning one product, firm, or one
industry (how individual producers and
consumers respond to changes in market)
Macroeconomics the branch of economics that
examines the behavior of the whole economy at
once unit of analysis not individual but
economy as a whole
Micro or macro? You decide
 Comparing unemployment rates of Germany
and the United States
 How the price of milk is determined
 The impact of preservation of wilderness
areas on the logging industry and on the
price of lumber
 Increases in US consumer demand
Importance of Economic Theory
 Theory: simplified description of reality
– Why is theory important even if it is sometimes
incorrect or can’t predict outcomes 100% of the
time?
 Model: simplified form of reality which shows
the relationship between different factors
 Economic theory simplifies reality
Ceteris Paribus Assumption
 All other things unchanged
 Assumption that only one variable changes
at a time
 Economists do this because they want to
get a general sense of the direction of
relationships
Normative versus Positive
Statements
 Normative- a statement that makes a value
judgment
 Positive-a statement of fact or a hypothesis
Normative or Positive? You decide!
 Ms. Hartsfield is shorter than most students
at SMCHS.
 Ms. Hartsfield has two of the cutest babies
ever!
 Ms. Hartsfield has two children.
 Ebenezer is a cloth snowman.
Chapter 2
Confronting Scarcity: Choices in
Production
Review
 What is the economic way of thinking?
– Scarcity forces us to choose and economists
analyze opportunity costs when analyzing
choices
– People are motivated to maximize their self
interest
– Individuals maximize choices by engaging in
marginal decision making
Factors of Production
 Definition: resources available to an
economy for the production of goods and
services
 Factors of production (FOP) create utility.
 Utility is the value or satisfaction that people
derive from the goods or services they
consume
Factors of Production
 Land (natural resources)-resources of
nature that can be used in the production of
goods and services
– Must be found in nature
– Expansion occurs through:
 Discovery of more
 Discovery of new use
 New ways of extraction
Factors of Production
 Labor-human factor in production
– Natural ability
– Human capital
– Increase labor through
 Increasing number of people available
 Increasing human capital
Factors of Production
 Capital-resources produced for use in the
production of goods and services
– Resource must have been produced
– Resource can be used to produce other goods
and services
– THIS DOES NOT MEAN FINANCIAL CAPITAL
(money)
Factors of Production
 Entrepreneurs change the way that the
factors of production are used by putting
new technologies to work
 Entrepreneur person who seeks to earn
profits by finding new ways to organize the
factors of production (sometimes classified
as the fourth factor of production)
 Technology knowledge that can be
applied to production of goods and services
Case in Point: Technology Cuts
Costs, Boosts Productivity and
Profits
 Read p. 41
 Who are the winners and losers from
technology?
– Consumers
– Producers
– Workers
Land, labor or capital?
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An unemployed factory worker
A college professor
The SMCHS library
Yellowstone National Park
An untapped deposit of natural gas
The White House
A power plant
Production Possibilities Model
 CSU Monterey Bay built on site of Fort Ord
 Shift from military use to civilian use
 Definition: Model that shows goods and
services that an economy is capable of
producing given the factors of production
and technology it has available
Production Possibilities
 Production Possibilities Alterna
tives
Schedule
 Combinations of what you
can produce limited by
Consu
current resources.
mer
Option
1
Option
2
Option
3
Option
4
10,000
7,000
4,000
0
0
300
450
1,000
Goods
(jeans)
Capital
Goods
(factori
es)
Production Possibilities Curve
 Assumes that only two goods can be
produced
 Any increase in one good means you can
produce less of the other
 Assumes that factors of production are fixed
Production Possibilities Curve
 The PPC is downward sloping
– Reflects scarcity
 The PPC is bowed out
– Curve gets steeper as we move from left to right
– “Producing an additional good on horizontal
axis requires a greater sacrifice of the good on
the vertical axis than did previous units
produced” (Tregarthen & Rittenberg, 2000, p. 57)
Production Possibilities Curve
 The PPC is bowed out
– The absolute value of the slope of any
production possibilities curve (PPC) = the
opportunity cost of an additional unit of a good
on the horizontal axis
– Steeper the slope, the greater the opportunity
cost of producing that good
– Illustrates the law of increasing opportunity cost
Calculating Opportunity Cost
 Opportunity cost = what is given up/what is
obtained
 Economy can produce either 40 houses or 20
office buildings
 OC of houses = 20 office buildings/40 houses=.5
office buildings
 OC of office buildings = 40 houses/20 office
buildings = 2 houses
 Try “Try It Yourself” 2-2 on p. 49
Production Possibilities Curve
 Law of increasing opportunity cost: As an
economy moves along its PPC in the
direction of increased production of one
good, the opportunity cost of additional units
of that good increase
– Required resources become more scarce
– The more of good “B” we produce, the
resources we transfer to producing that good
were better suited to producing good “A.”
Production Possibilities Curve
 Comparative advantage is when the
opportunity cost of producing that good or
service is lower for a particular economy
than any other
– International trade theory is based on
comparative advantage
Production Possibilities Curve
 Specialization implies that an economy is
producing goods and services in which it has a
comparative advantage
– People work and use the income they earn to
buy goods and services from people who have
a comparative advantage in doing other things
– What would life be like without specialization?
Hong Kong vs. United States
Production Possibilities Curve
 Movement along the PPC means that all factors of
production are being maximized (point B)
Efficient level of production (can’t make more of
one good without making less of another)
 Production within the curve means that factors of
production are being used inefficiently (point A)
– Idle factors of production
– Inefficient production
– Could increase production of both goods
Production Possibilities Curve
 Production outside of the PPC is
impossible without economic growth
(point C)
Applications of the PPC Model
 In order to allocate resources efficiently, then each
nation should specialize in producing products for
which they have a comparative advantage
 Nations should trade in order to get the goods and
services they need
– Trade results in more production
 Failure to specialize means that the world
economy would be producing inside the global
PPC
Production Possibilities and
Economic Growth
 An outward shift of the PPC indicates
economic growth.
 Economic growth raises standards of living,
even in the continuing face of scarcity.
 Economic growth is a sustained increase in
a nation’s production of goods and services.
Production Possibilities and
Economic Growth
 The history of world economic growth raises
important questions about the ability of
nations to deal with the ever-present
problem of scarcity.
– Rich versus poor nations
– Conditions that favor growth
– How can growth be promoted?
– How can poverty be reduced?
Production Possibilities and
Economic Growth
 Economic growth occurs through
– Increases in educational levels
– Changes in technology
– Increases in quantity or quality of labor and
capital
– Innovation (the application of inventions to
produce consumer goods and services)
Institutions Matter for Economic
Growth
 Institutional arrangements define the formal
and informal rules of the game that govern
how people interactprovide incentives
 The following foster economic growth:
– Open markets
– Property rights
– Rule of law
– Entrepreneurship and innovation
Economic growth creates
benefits throughout the economy.
 Expands a nation’s productive capacity.
 All segments of the economy have
benefitted from economic growth; hence the
rise of the middle class.