Transcript The Economic Way of Thinking - mrvernocyspage

The Economic Way of
Thinking
Chapter 1
Sections 1,2,3,4
What is Economics?
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Economics- The study of how individuals
and societies satisfy their unlimited wants
with limited resources.
What do you think all of this means?
Why is it important to understand
economics as a young adult and as you
grow older?
Wants
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Wants- desires that
can be satisfied by
consuming a good or
service
Ex. A new car or PS3
Do you really need
these things or are
they luxuries?
Needs
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Things that
are essential
for survival
Ex. Food,
clothing,
shelter, water
Wants Are Unlimited
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We are always going to
want new and better
things.
We only have so many
available resources to
meet those wants.
Ex. I want a new suit,
but right now I do not
have the funds to pay for
one.
Lack of Resources Leads to
Scarcity
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Our wants are unlimited and we have
limited resources
This leads to Scarcity- exists when there
are not enough resources to satisfy human
wants ex. Oil, gold, diamonds
Scarcity affects all people, businesses, and
gov’ts
The study of these scarce resources leads
us to the study of economics
Life Is About Choices
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Everyday we make choices
that affect our lives
We make choices about
what to buy, eat, or who to
hang out with
Since we face the problem
of scarcity, sometimes our
choices can be very
important, even without
our knowing it.
People Make Choices About Needs
and Wants
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Should I buy a home on three acres in the
country or a home on a ½ acre in the
city?
Rural home is $130,000 and the Urban
home is $125,000.
Should I purchase a PS3 or a new MP3
Player?
Want or Need?
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Wants are not
only unlimited,
but they are
constantly
changing
What influences
these changes in
wants?
Scarcity Affects Everyone
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Scarcity leads us to make choices on how
best to use our available resources
What types of resources are most scarce
today in our society?
Water, Oil, Time, Money
Scarcity affects prices of goods, what
types of goods that are made, and types
of services provided to people
Goods and Services
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Goods- Physical objects that can be
purchased such as food, clothes, and
furniture
Services- Work that one performs for
another in return for money or payment.
Ex. Mechanic, lawyer, doctor
How does the issue of scarcity (lack of
resources) affect these three jobs?
Scarcity Affects Consumers and
Producers
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Consumers- a
person who
buys a good
or service for
personal use
Producer- a
person who
makes goods
or provides
services
How does scarcity affect
consumers, producers, and gov’ts?
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Create a list of ten wants you have as a
group and determine how scarcity affects
your ability to satisfy these wants
Three Essential Economic
Questions
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Question 1- What and
how much will be
produced?
What mix of goods and
services will a society
provide? Cars, Oil,
Steel?
This all depends on
natural resources
available within a
society.
Ex. To make steel you
need coal and iron ore
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Consumers can also
decide what will be
produced
Ex. Japan lacks iron ore
to make steel, yet they
are one of the largest
producers of steel in the
world.
Governments Also Decide What to
Produce
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Communist nations
do not use
consumer want, but
the party itself
decides what to
produce
They control all
aspects of the
economy
Societies Wants Change
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Time changes societies
wants
Social conditions and
situations change
societies wants
Ex. In time of war a
society will produce
more weapons and
machinery of war
Elements of What to Produce
1.
2.
3.
4.
Natural Resources Available
Consumer wants (High demand for
Japanese cars)
Government’s demands (Communism)
Societal wants at the time (war)
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Question 2- How will a good or service be
produced?
Societies or companies want to produce a
good or service as efficiently as possible
Make a good or service at a cheap price
and still make a quality product
These also depend on natural resources
(Rivers, forests, minerals), and human
resources (workers skill and education).
Ex. More wealthy and educated a society,
the more technology used in the economy
Question 3- For whom will the good or
service be produced?
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This involves two questions
a. How will goods/services be distributed
b. How will goods/services be transported
Will people received equal share or by how
much they are willing to pay?
Distribution Systems- Will you transport it by
sea, river, air, rail, or by truck?
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Four Factors of Production
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Land
Labor
Capital
Entrepreneurship
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All factors are needed to produce goods
and services
Each of the for factors relates to the first
two essential economic questions- What
and how will a good/service be produced
Factor 1- Land
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All natural
resources taken
from the earth to
produce
goods/services
Ex. Oil, lumber,
minerals
Factor 2- Labor
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Human time, effort,
and talent to
produce a
good/service
Ex. Mechanic fixing
car
Factor 3- Capital
All resources used and made by people
to produce and distribute goods
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Two types of capital
a. Physical Capital- tools and machines
b. Human Capital- College degree or job
training
Businesses invest in physical capital and
people invest in human capital
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Factor 4- Entrepreneurship
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Willingness, risk,
inventiveness, to
create and run a new
business
Entrepreneurs look at
consumer wants and
invent a good or
service that is new to
meet those wants
Section 2- Economic Choice
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What influences us to make an economic
choice or any choice in our lives?
Incentives- methods used to encourage
people to take certain actions
Ex. Higher PSSA scores will get me a
$1,000 bonus
Types of incentives- bonus pay, higher
pay, promotion, praise, a trophy
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We make
economic
decisions that
are monetarily
valuable and
worthwhile, we
economize.
Economizemake decisions
according to the
best combination
of costs and
benefits
Cost and Benefit Lead Us to Make
Choices
Cost- the price you pay for
a good or service
 Benefit- the positive you
receive in return for the
price you paid.
ex. You pay $1,300 dollars
for a new laptop, but this
laptop allows you to get
better grades and to
network with friends.
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Gives examples of cost and benefit
Two Factors of Economic Choice
#1- Motivations for Choice
Each choice can lead to
different benefits
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Ex. Going to optional
Saturday baseball practice
or a date with someone
really good looking?
What to do???
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You are motivated by what you see to be
your most beneficial and valuable choice,
or utility.
Utility- benefit of making your choice
motivates you to your decision
What would be the benefits of going to
practice or going out on the date?
Factor of Choice # 2
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No Free Lunch- Every choice has some
cost
What would be the cost of going on the
date instead of practice?
What would be the cost of going to
practice instead of going on the date?
Trade Offs and Opportunity Cost
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Trade off- part of cost, what you give up
when you decide to do something else
Opportunity Cost- the value of what you
gave up when making an alternative
choice
Trade Off/Opportunity Cost
Example
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You are a carpenter and are offered 5
hours of overtime on a Friday evening.
You also have plans to go out for a night
on the town with friends. You can either
work overtime a double pay or go out with
your friends. What would be the
Opportunity Cost and Trade offs for both
choices?
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In making choices,
we decide to do
what we want
most.
No matter what we
decide to do there
is opportunity cost
to be paid and a
trade off
How do we decide which choice is
the most economical?
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Cost/Benefit Analysis- weighing the
benefits of a choice against the cost
Cost/Benefits change overtime according
to social and societal situations
What are your priorities in life or business
at the time?
Refer to figure 1.2 in the text on page 15
Economist Measure Choice Using
Marginal Cost and Marginal Benefit
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Marginal Cost- the actual cost of time or
money when using one or more unit of a
product
Marginal Benefit- satisfaction from using
one or more units of a product or choice
Section 3- Analyzing Production
Possibilities
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How do we measure economic choices
and trade offs?
Economists use economic modelssimplified representations of complex
economic activities, systems, or problems,
to clarify trade offs.
Ex. Charts, Graphs
Production Possibilities Curve
(PPC)
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A graph used by
economists to
show the impact
of scarcity on an
economy
PPC is based on
assumptions
that simplify
economic
interactions
PPC Assumptions
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3.
4.
We assume that
Resources are fixed- No way to increase
land, labor, capital, and entrepreneurship
All resources are being used- no waste of
the four factors of production
Only two goods/services are being
produced
Technology is fixed- no new technology
is being used to up production
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Refer to interactive graphs
Measuring Efficiency
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When measuring data on the Production
Possibilities Frontier we are using our
resources efficiently
Efficiency- producing the maximum
amount of goods/services that are
economically possible.
This means you are working right on the
PPC Curve
Measuring Working Under and
Over Production Capability
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When your data shows points under the
PPC curve, you are working below what
you are capable of producing
Underutilize- producing fewer goods and
services than possible
When your data shows points outside of
the PPC Curve, you are producing over
you capable level of production
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As production shifts towards making one
or more of a good or service, your
opportunity cost increases
Law of increasing opportunity cost- as
production shifts from one product to
another, increasing amounts of resources
are needed to increase the production of
the second product
Example- North Korea
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After the Korean
Conflict, the
Communist
government
decided to spend
most of its money
on the military,
which lead to vast
amount of
starvation and
poverty.
Can Production Possibilities
Change?
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Yes, new technology, better workforce,
new natural resources can improve
production.
This causes the original frontier to move
outward
A nation can produce more due to better
resources
PPC Frontier Could Also Turn for
The Worse
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Unemployment,
natural disasters,
and other
catastrophic
events could
decrease the
production of a
good or service
Questions
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How does the PPC relate to the issue of
scarcity?
Answer- It shows what can be produced
with the limited resources we have
available.
Why is the PPC Curve bowed?
Answer- the more you use on one
good/service, the cost to do so increases
Section 4- Economists Tool Box
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Govt’s , people, and businesses use many
tools to see the value of choices
Economists use statistics (numerical data)
to understand economic behavior
They collect data and display it using
economic models
Economists use models in words, graphs,
and equations
Line Graph
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Economists use
graphs to
interpret economic
trends
Line graphs are
used to interpret
changes over time
Bar Graphs
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They are used
for comparison
Pie Graphs
They are used to
compare
particular
numbers or data
to the whole of
the subject
being studied
Microeconomics
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Study of the
behavior of
individuals,
families, and
businesses in an
economy
It deals with
price, cost, profit,
competition,
consumers, and
producers
Macroeconomics
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Study of the economy as a whole, large
scale look. Macroeconomics deals with
inflation, unemployment, aggregate supply
and demand, international trade, business
cycles.
It brings a national or global look at
economics.
Positive and Normative Economics
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Positive Economics- studies economic
behavior by looking at raw data and facts
Can either prove or disprove an idea using
data or numbers
Positive Economics uses science and
numbers to solve problems or predict
outcomes
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Ex. Whether Casino
revenues will help to
improve education
system
We will look at
numbers from other
states that have
legalized gambling
to see whether this
increased funding
helps school
performance or not.
Normative Economics
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Involves making judgments based on
values and ethics to state what economic
behavior should be.
Goes beyond facts and decides through
value judgment whether an economic
decision is good or bad for a nation
Example
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Raising taxes on people who make
$50,000 or more a year.
One economist may say it will help the
poor with social programs and another
may say it will increase the cost of living
for the middle class.
Father of Modern Economics
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Adam Smith- Scotland
18th century
Author of, Wealth of
Nations
In his book he criticizes
mercantilism and says
free trade and individual
choice will lead to more
wealth
Father of capitalism