Transcript Scarcity: The Economic Problem

scarcity
Carol Mathias
Scarcity is the problem of economics.
• Scarcity occurs
because people’s
wants and needs
are unlimited, and
the resources
needed to produce
goods and
services are
limited.
Things that are scarce:
• Money is scarce!
(no kidding!)
Things that are scarce:
• There is only so
much oil in the
world.
Things that are scarce:
• In Japan, 96% of
all the land in the
country is being
used. Land is
scarce. Prices for
renting space in
the Ginza District
is $6,000 per
square foot.
Things that are scarce:
• Elephants are on
the critical list of
endangered
species.
Poachers kill them
for the ivory, Asian
medicines and
aphrodisiacs.
Economics
• The social science that deals with how
society allocates its scarce resources
among its unlimited wants and needs.
Economics
• Economists advise
individuals or
societies about
choosing which
needs to satisfy
and how much of
our resources we
need to satisfy
those needs.
Resources
• The factors of
production:
–
–
–
–
Natural resources
Human resources
Capital resources
entrepreneurship
There are two branches in
Economics:
• Macroeconomics
• Microeconomics
Macroeconomics:
• The branch of
economics that
examines the
behavior of the
whole economy at
once.
One Reason for Economic
Troubles in 2006: A NEW chief!
• Transition
Problems!
– New chief
macroeconomist for
the US Economy.
– Change-over from
Greenspan to
Bernanke.
– We have economic
problems.
Macroeconomics
• Alan Greenspan is a
macroeconomist. His
position at the as
Chairman of the
Federal Reserve
called for him to
control the money
supply for the
economy.
– He did a GREAT job since
1985 – 2006.
The New Chairman of the Fed:
Ben Bernanke
• Economics
degrees from
Harvard and MIT
• Professor of
Economics at
Princeton
– Wrote books, articles,
text books on
economics.
The new Chairman of the Federal
Reserve: Ben Bernanke
• Came to
Greenspan’s
attention with his
work on the
National Bureau of
Economic
Research.
– He recommended him
with others to
President Bush.
So what is wrong with the US
economy right now?
Bernanke’s BIG concern for the
US Economy is:
• INFLATION!
– Prices go up faster than
our wages do!
– WHY WOULD THIS
BE BAD????
INFLATION
• Since July 2005
inflation has
caused prices to
go up 4.1%
(counting food and
gas)
– 2.7% if you take that
out.
Why would inflation be bad for
the economy? For you?
•
•
•
•
Jobs?
Hours?
Pay?
Less for
spending?
• Less for saving?
• More incentive to
put your money in
the bank.
If inflation is happening, what do
you demand from your jobs?
•
IF inflation is happening and
employees demand more money
– what do businesses have to do?
• Raise prices!
• OR cut into profits.
– Can be QUITE
dangerous to not have
enough in savings for
the bad patches of
business!
What can Bernanke do to stop
inflation????
• Interest Rates
• Money Supply
• Slow the Velocity
of the dollar
How does Bernanke control the
economy?
• INTEREST RATES!
• Interest rates = how
much it costs to get
money.
• You ask for a loan of
$10,000. The bank
charges you 6% - or
$600 to get the
$10,000!
• Total payback to bank:
$10,600.
Bernanke orders all banks in the
country to RAISE their interest
rates …
• Money costs more to
get.
• Some people may not
be able to “afford”
money.
– Less shopping
– Less travel
– Less building businesses /
houses
– Buying less cars or goods
that depend on interest
rates.
Why would Ben Bernanke do
that to us????
If interest rates are high (which the
are) what is going to have to happen
if someone wants to sell their house?
• People have to
lower their asking
price.
– Less profit
Who benefits?
• Lower prices mean
more people might
be able to buy a
house.
• Bernanke wants
“realistic” prices.
The Housing Bubble Markets
SOURCE: http://calculatedrisk.blogspot.com/2005/06/when-bubble-will-burst.html
Higher Interest Rates slow
spending
• What does that
mean for wages?
– Lower wages
– More hours with less
people
– unemployed
IF people aren’t spending – what
do stores have to do to get you to
shop?
• LOWER PRICES!
If prices come down then
inflation is tamed.
• People shop
• People travel
• Employment goes
up, with lower
wages.
– BUT, if prices are
reasonable –
The economy is fixed!
If interest rates are high:
• People SAVE their
money.
• They can’t spend
it, so if there is
less money
available …
If less money is available …
• Businesses have
to figure out ways
to cut costs.
– Lower wages
– More efficiency moves
– “gimmicks” for
customers
• New and Improved!
• Better service
– Lower prices
If prices come down then
inflation is tamed.
• People shop
• People travel
• Employment goes
up, with lower
wages.
– BUT, if prices are
reasonable –
The economy is fixed:
Macroeconomics to the rescue!
Microeconomics
• Microeconomics is
the branch of
economics that
examines the
choices and
interaction of
individuals
concerning one
product, firm or
industry.
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Microeconomics
• Microeconomists
would be
interested in why
people prefer Coke
over Pepsi, or how
to make more
money on the
Stock Market.
Economists seek answers to:
• What to produce?
• How to produce?
• For whom are they producing for?
The Three Basic Economic
Questions!
Economists….
• Try to answer the basic economic
questions.
• Evaluate the options for production.
• Analyze the potential opportunity
costs (trade-offs) and opportunity
benefits of any decision.
Economists use theories to
explain their ideas
• A theory is a model
or a simplified
description of
reality.
– EXAMPLE OF A
THEORY:
– Wage Differential
Theory – The Glass
Ceiling
The Economic Way of Thinking
• People gain from
voluntary trade.
• Everything has a
cost.
• People choose for
good reasons.
• Incentives matter.
• People create
economic systems
to influence
choices and
incentives.
• The value of goods
or services is
affected by
people’s choices.
The Economic Way of Thinking:
• Economic thinking
is marginal
thinking.
• Economic actions
create secondary
effects.
• The test of a
theory is its ability
to predict.
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Lesson Summary
• The essence
of economics
is logic.
Steps of Decision Making Grids
• Identify the problem.
• List alternatives for answering the
problem.
• List criteria – what you want to get
out of your decision.
• Rank criteria with alternatives.
• Make the decision.
Exchange
• If consumers buy
more Blackberrys
over Sprint, what
does that tell
Sprint?
Exchange
• Producers gain
information
through a process
called an
EXCHANGE – it
which producers
and consumers
agree to provide
one type of item
for another.
Exchange takes one of three
forms:
• Barter
• Money
• Credit
Money has three functions
• Standardized item that is generally
traded for goods and services.
• A measure of value that allows both
producers and consumers to
determine and express worth.
• A store of value that can be saved
and used to purchase at a later date.
Money has VALUE
• Value is
determined
by a
product’s
UTILITY.
– Usefulness to
a person.
MOST items have DMU
• Diminished
Marginal Utility –
usefulness
decreases as it is
used more and
more.
Other Terms to know:
• Goods: Physical
objects that are
purchased.
• Services – actions or
activities done for a
fee.
• Capital Resource –
capital goods and
money.
• Capital Goods –
buildings, machinery,
tools, etc
Terms to Know
• Consumer Goods –
what people buy.
• Productivity – level
of output that
results from a level
of input.
• Efficiency – having
the least possible
input and get the
greatest output.
Terms to Know
• Credit – Third form
of exchange.
People can use
item while paying
for it.
• Self-sufficiency –
people fulfill needs
without outside
assistance.
Terms to Know
• Interdependence –
one area can
influence the
economy in
another sector or
the world.