Transcript Unit 1 PPT

Module ½:
The First Day of School
1
Course Outline
I.
Basic Economic Concepts
•
8-12%
II.
Measurement of Economic Performance
•
12-16%
III. National Income and Price Determination •
10-15%
•
15-20%
Inflation, Unemployment and Stabilization •
20-30%
IV. Financial Sector
V.
VI. Economic Growth and Productivity
•
5-10%
VII. International Trade and Finance
•
10-15%
2
Staying Connected
www.edmodo.com
3
Staying Connected
•http://rossgraham.woodbridge.site.eboard.com
4
School Wires
• http://www.woodbridge.k12.nj.us//Domain/6
82
Headlines
6
Understanding Economics…?
7
Homework
• Sign up for Edmodo, join our group
• Group code-dvjrd8
• Have all class materials and cover your books
Do Now.
• At many cash registers there is a little basket full of pennies.
People are encouraged to use the basket to round their
purchases up or down. If an item costs $5.02, you give the
cashier $5.00 and take two pennies from the basket to give to
the cashier. If an item costs $4.99, you pay $5.00 and the
cashier throws a penny into the basket. It makes everyone’s
life a bit easier. Of course, it would be easier still if we just
abolished the penny, a step that some economists have urged.
• But why do we have pennies in the first place? If it’s too small
a sum to worry about, why calculate prices that precisely?
AP Macroeconomics
Mr. Graham
Unit One
Basic Economic Concepts
Module 1:
The Study of Economics
11
Individual Choice:
The Core of Economics
 Economics
 The study of how people allocate their limited
resources to satisfy their unlimited wants
 The study of how people make choices
12
Overview of economic “choices”
Made by…
Consumers and Producers
based on…
Needs and Wants
for…
Goods and Services
obtained through…
Production (i.e. Resources)
2-13
Who makes economic choices?
Made by…
 Consumers
 The people who decide to buy things.
 Producers
 The people who make the things that satisfy
consumers’ needs and wants.
2-14
How do consumers and producers
make decisions?
…based on…
 Needs
 To economists, the term need is not objectively definable.
 Perhaps the best way to view needs is as an absolute necessity
to stay alive.
 Wants
 (Desired) goods and services on which we place a positive value
 People have unlimited wants.
2-15
How do consumers and producers
make decisions?
…for…
 Goods
 Goods are all things from which individuals derive
satisfaction or happiness.
 Services
 Tasks that are performed for someone else
 Can be referred to as intangible goods
2-16
How do consumers and producers
make decisions?
…obtained through…
 Production
 Any activity that results in the conversion of resources
into products that can be used in consumption
 Resources (a.k.a.) Factors of Production
 Inputs that are used to produce things that people want
 Although “wants” are unlimited, the four major
“resources” are limited…
2-17
Scarcity, Choice and Opportunity Cost
Limited Resources and Unlimited Wants
Scarcity
Choices
Opportunity Cost
2-18
http://www.investopedia.com/vide
o/play/opportunity-cost/
What resources are used
to obtain these things?
1. Land
– Land is often called the natural resource and
consists of all the gifts of nature.
– It is a scarce resource because there is only a
limited amount of land available.
2-20
What
used
What resources
resources are used
toobtain
obtain these things?
to
things?
2. Labor (a.k.a. human capital)
– Labor is the human resource that includes all
productive contributions made by individuals
who work involving both mental and physical
activities.
– It is a scarce resource because there is only a
limited amount of people available to work.
2-21
What
used
What resources
resources are used
toobtain
obtain these things?
to
things?
3. Capital
– Capital is all manufactured resources that are
used for production (i.e. equipment, machinery,
factories).
– In economics, money is NOT considered
capital—it doesn’t produce anything!
– It is a scarce resource because there are a
limited number of machines, equipment and
factories.
2-22
What
used
What resources
resources are used
toobtain
obtain these things?
to
things?
4. Entrepreneurship
– An entrepreneur is an individual who is willing
to take a risk to start a business.
– It is a scarce resource because there is a limited
amount of individuals who want to start his or
her own business.
2-23
Scarcity
 Scarcity occurs when the ingredients
(resources) for producing things that people
desire are insufficient to satisfy all wants.
 “Mathematical” Definition of Economics
Economics = Scarcity = Wants > Resources
2-24
The Economic Person:
Rational Self-Interest
 Economists assume that individuals act as if
motivated by self-interest and respond
predictably to opportunities for gain.
 Rationality Assumption
 The assumption that people do not intentionally make
decisions that would leave them worse off
25
The Economic Person:
Rational Self-Interest
“It is not from the benevolence of the butcher, the
brewer, or the baker that we expect our dinner, but
from their regard to their own interest.”
—Adam Smith, An Inquiry into the Nature and Causes of
the Wealth of Nations, 1776
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The Economic Person:
Rational Self-Interest
 Question
 Does the fact that some people make
apparently irrational choices invalidate the
rationality assumption in economics?
27
The Economic Person:
Rational Self-Interest
 Defining self-interest
 The pursuit of one’s goals, does not always
mean increasing one’s wealth
 Prestige (conspicuous consumption)
 Friendship
 Love
28
Positive vs. Normative Economics
 Positive Economics (most economics focus on this)
 Purely descriptive statements or scientific
predictions; “If A, then B,” a statement
of what is (objective policy analysis)
 Normative Economics (political slant)
 Analysis involving value judgments; relates to
whether things are good or bad, a statement of what
ought to be (subjective beliefs of policymakers)
 Red Flags: good/bad, desirable/undesirable,
better/worse
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http://www.investopedia.com/vide
o/play/positive-and-normativeeconomics/
When and Why Economists Disagree
 When?
 Why?
 Models
 Values
 Eventually resolved by
research and data,
though that has
limitations…
31
Do Now.
• Define:
– Recession
– Expansion
Module 2:
Introduction to Macroeconomics
33
Microeconomics vs. Macroeconomics
 Microeconomics
 The study of decision making undertaken by
individuals (or households) and by firms
 Like looking though a microscope to focus on the
smaller parts of the economy
 Macroeconomics
 The study of the behavior of the economy as whole
 Deals with economy-wide phenomena
34
Microeconomics vs. Macroeconomics
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The Business Cycle
• GDP tends to grow at about 1-2% per year.
• This does not mean that at every point in time
the GDP is increasing at 1-2%.
• The ups and downs in business activity
throughout the economy are called the
business cycle.
The Business Cycle
The 3 Goals of the Macroeconomy
1. High Employment (Low Unemployment)
2. Stable Prices (Low Inflation/Deflation)
3. Economic Growth
Unemployment
• The percentage of the measured labor force
that is unemployed.
– Total number of adults (aged 16 years or older)
willing and able to work and who are actively looking
for work and have not found a job
• Remains the most closely watched and highly
publicized labor statistic
– Increases in times of recession
– Decreases in times of expansion
7-39
The U.S. Unemployment Rate and the
Timing of Business Cycles, 1989-2009
Prices
• Inflation
– The situation in which the average of all prices of
goods and services in an economy is rising.
• Deflation
– The situation in which the average of all prices of
goods and services in an economy is falling.
Economic Growth?
• Increase in per capita real GDP measured
by its rate of change per year
Economics USA
http://www.learner.org/vod/vod_window.html?pid=2466
Do Now.
• http://www.nytimes.com/interactive/2011/09
/08/us/sept-11-reckoning/costgraphic.html?_r=0
• Identify something that you did not know
before reading this article
• Identify an interesting fact
• Write down one question about the article
Module 3:
The Production Possibilities Curve Model
45
The Use of Models in Economics
• Simplified representations of the real
world used as the basis for predictions
or explanations.
• A good economic model can be a tremendous
aid to understanding…
46
Our
Model:
Our First Model:
The Production
Possibilities
Production
Possibilities
CurveCurve
(PPC)
• Helps economists think about the trade-offs
every economy faces.
• Helps us understand 3 aspects of the economy:
1. Efficiency
2. Opportunity cost
3. Economic growth
2-47
Production Possibilities Curve (PPC)
• Represents all possible combinations of two
goods or services that can be produced within a
stated time period.
– Assumes a fixed amount of resources.
– Assumes that all resources are being used in the most
efficient manner possible
• A movement from one point to another on the
PPC shows that some of one good must be given
up to have more of another (See Figure 3-1).
2-48
Our First Model:
Production Possibilities Curve (PPC)
The Production Possibilities Curve
2-49
Production
ProductionPossibilities
PossibilitiesCurve
Curve(PPC)
(PPC)
• The PPC does not in practice have constant
trade-offs of one good for another and is
typically a curve that is bowed outward.
• As society attempts to
produce more of a good,
the opportunity cost of
additional units of that
good generally increases.
2-50
Activity 1: Scarcity, Opportunity Cost, and
Production Possibilities Curves
2-51
Production Possibilities Curve Review
• Trade-offs are represented graphically by a PPC showing
the maximum quantity of one good or service that can
be produced, given a specific quantity of another, from
a given set of resources over a specific period of time.
• A PPC is drawn holding the quantity and quality of all
resources fixed over the time period under study.
• Points outside the PPC are unattainable; points inside
are attainable but represent an inefficient use or
underuse of available resources.
• Because many resources are better suited for certain
productive tasks than for others, society’s PPC is bowed
outward, following the law of increasing relative cost.
2-52
Economic Growth
• Increases the production possibilities
of, for example, coconuts and fish.
• Occurs over a period of time
• Is illustrated by an outward shift
of the production possibilities curve
• Scarcity still exists, however, no matter how
much economic growth there is.
2-53
Economic Growth
Economic
Growth
2-54
Do Now!
Module 4:
Comparative Advantage and Trade
56
Trade
• Each person provides a good or service that
other people want in return for different goods
or services that he or she wants.
– People can get more of what they want than they
could get by being self-sufficient.
– The increase in output is due to specialization
2-57
Specialization
• By dividing tasks and trading, two people (or 7
billion people) can each get more of what they
want than they could be being self-sufficient.
• Leads to greater productivity
• For example…
– An individual may specialize in law or medicine
– A nation may specialize in the production of coffee,
computers, or cameras
2-58
Division of Labor
One man draws out the wire, another straights it, a third cuts it, a
fourth points it, a fifth grinds it at the top for receiving the head;
to make the head requires two or three distinct operations; to put
it on, is a particular business, to whiten the pins is another; it is
even a trade by itself to put them into the paper; and the
important business of making a pin is, in this manner, divided into
about eighteen distinct operations.… Those ten persons, therefore,
could make among them upwards of forty-eight thousand pins in
a day. But if they had all wrought separately and independently,
and without any of them having been educated to this particular
business, they certainly could not each of them have made twenty,
perhaps not one pin a day.…
--Adam Smith, The Wealth of Nations
2-59
Comparative Advantage
• The ability to produce a good or service at a
lower opportunity cost compared to other
producers (i.e. individuals or nations)
• Is always a relative concept
• It allows for specialization.
2-60
Activity 56: Comparative Advantage and Trade
2-61
Comparative Advantage
Is this the best they can do?
Given that the two castaways have different opportunity costs,
they can strike a deal that makes both better off.
Comparative Advantage
Comparative Advantage
Comparative Advantage
http://www.youtube.com/watch?v
=xx9xNJlPOJo
Absolute Advantage
• Notice that in our example Tom is actually better
than Hank at producing both goods.
• Absolute Advantage: The ability to produce a
good or service at an “absolutely” lower cost
• Measured by
– producing more units of a good or service using a
given quantity of labor or resource inputs
– producing the same quantity of a good or service
using fewer labor or resource inputs
2-67
Comparative Advantage and
International Trade
• Specializing in producing goods for which a
nation has a comparative advantage allows for
greater efficiency
• Production capabilities increase, making possible
greater worldwide consumption through
international trade
Comparative Advantage and
International Trade
2-69
Comparative Advantage and
International Trade
• When nations specialize where they have a
comparative advantage and then trade with the
rest of the world…
– Economic efficiency improves
– Output increases
– Average standard of living rises
2-70
Appendix:
Graphing in Economics
71
Graphs in Economics
1. Identify the title of the graph and make sure
you understand the general purpose or
objective of the graph.
• Show the relationship between the given price and how
much of the product a consumer would purchase.
2-72
Graphs in Economics
2. Identify each axis and note what is labeled and
the measurement/units.
• x-axis is the Quantity Demanded, y-axis is the Price
• In economics, the y-axis is always price, despite price
being the independent variable.
2-73
Graphs in Economics
3. Identify the slope(s) and any points on the
graph. Determine whether it is a positive or
negative slope.
• The slope goes downwards to the right, reflecting an
inverse relationship.
2-74
Graphs in Economics
4. Use the information to establish the economic
meaning of the graph.
• There is a negative, relationship between the price of
any good or service and the quantity demanded,
holding other factors constant (ceteris paribus)
2-75