Transcript Economics

Economics CIA4U
Chapter 1 Class 1
Mr. Redmond
Expectations
1.
2.
3.
4.
5.
Show up on time
Help each other learn
Show Respect
Get involved in classroom discussion
Do your best to reach your goals!
THIS IS A GRADE 12 U LEVEL CLASS!
Therefore…
Let me get to know you
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On a piece of paper
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Write your name
Why you chose to take this course?
Your interests (at least 3)
What your goals are for this course (at least 2)?
What action will you take to achieve your goals?
What are your plans after school (at least 2-3
sentences)?
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Handout Textbooks
Course outline
Economics? Who cares?
What’s In It For Me?
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Why study economics?
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Understand the world
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Why do governments make the decision they do?
Why do businesses succeed or fail?
Why do I pay so much for my cell phone?
Help you make good choices to maximize your scarce
resources $$$$$$$$
Better informed for voting
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Understand economic policy/platform
Agenda
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Go over course outline
What is economics?
What is an economy?
What is the goal of economics?
What do we want the economy to provide us?
Analytical Economics vs Normative Economics
What is Economics?
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Geopolitics
Money
Stock market
Government
Trade
Supply and Demand
Article
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article on debt
What is Economics?
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Definition: The study human activity,
involved in making decisions about the
use of scarce resources to satisfy
human wants and needs
Origin - Greek Word oikonomia
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Oikos: House
Nemo: Manage
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Wise management of one’s own household
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What is an Economy?
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?
What is an Economy?
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A self-sustaining system in which many
independent transactions (often triggered
by self-interest) create distinct flows of
money and products and services
What is an Economy?
Consumer
Goods
$$$$
Retailer
What is an Economy?
Consumer
Goods
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Retailer
Goods
$$$$
Manufacturer
What is an Economy?
Consumer
Goods
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Retailer
Goods
$$$$
$$$
Manufacturer
Goods
Service
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Employees
What is an Economy?
Consumer
Goods
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Retailer
Goods
$$$$
Government
$$$
Manufacturer
Goods
Service
$$$$
Employees
What is an Economy?
Consumer
Goods
$$$$
Retailer
Goods
$$$$
Government
$$$
Manufacturer
Goods
Service
$$$$
Employees
What is an Economy?
Consumer
Goods
$$$$
Retailer
Goods
$$$$
Manufacturer
Service
$$$$
Employees
It can get a little complicated…
What is the Goal of Economics?
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Maximize the satisfaction of human
WANTS (goods and services) with the
minimum use of resources
Effective: Use of resources that achieves
what we want (the right goal)
Efficient: Use of the minimum amount of
resources that achieves what we want
(the right way)
What do we want?
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GOODS: tangible things that satisfy
human wants
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iPhone, Hockey Stick, Car etc…
SERVICES: items that satisfy human
wants, that are intangible, lasting only for
the time of its production
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Haircut, taxi ride, massage etc…
Analytical (positive) Economics
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Facts about the world
Descriptive: Describes things the way
they are or were
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Ex Automobile sales are up 7% from last
year
Conditional: Forecasts based on analysis
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Ex If x occurs then y will follow
Ex If the U.S attacks Saudi Arabia, gasoline
prices will increase
Normative Economics
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Deals with statements that contain value
judgments or opinions
A.K.A. Policy Economics
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Should gambling be legalized?
Should the city set up shelters to support
homeless people?
Should we legalize prostitution? Marijuana?
Building an Economy
What is an Economic Event?
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Something that has had an impact on the
economy?
What is the economy?
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Businesses
Consumers
Households
Review
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What is economics?
What is an economy?
What is the goal of economics?
Goods vs Services
Vending Machine Economy
Analytical vs. Normative
Economics is a Social Science
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How do we know what is the best decision
to maximize our scarce resources?
Understanding human behaviour (decisions)
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Complicated because of …
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Needs and wants of different groups differ
Needs and wants are based Values and Belief
Societal Values and Beliefs are changing
Predicting Human Behaviour
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Individual Behaviour is hard to predict
Group Behaviour is easier to predict
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On a hot sunny day more people will:
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Buy ice cream
Go to the pool
Not come to class
Use of statistics and probabilities
Key assumption
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Humans are rational, social and self-interested
Scarcity
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Human needs and wants are unlimited
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Needs: Needed to survive
Wants: Non-essential items
Resources (land, labour, capital) are limited
Needs and Wants > Resources = Scarcity
Dealing with scarcity dominates Economics
We need to make choices
Opportunity Cost
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The sum or true cost of all that is lost in order to produce or
consume what we decide we want the most.
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In other words, opportunity cost is the cost of spending your
money, time and energy on one thing, instead of another thing.
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For every decision that we make, an alternative decision is
possible, and the difference in outcomes is the opportunity cost
that we face
Every decision has consequences
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What do you gain?
What do you loose?
Opportunity Cost
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Video games vs. Studying
Working a second job to pay down my
mortgage – opportunity cost?
Think about the opportunity costs of every
dollar that you spend, and what else you
could have done with it instead.
Think like our good friend Warren.
Opportunity Cost
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Warren Buffet
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World renown investor
One of the richest people in the world
Is frugal with his money
His perspective.
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For him, spending $4 on a cappuccino doesn’t
merely mean $4 lost today; it also means a
potential $40 or more in foregone future
earnings and capital growth.
Opportunity Cost
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What would you do with $2000
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What are your priorities?
List at least three alternatives?
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Spring Break Trip to Cancun
Blu-Ray home theatre system
Save for college or university
How would you evaluate the alternatives?
Opportunity Cost
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NOTE: Opportunity cost of a decision is
only the next best option not all of them
Ex If you choose to spend $2000 on a trip the
opportunity cost of the $2000 is either
 enjoyment of the Blu-Ray system OR
 the savings for school (+ interest)
Does Opportunity Cost Always
have to do with money?
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Opportunity cost is not just restricted to
monetary or financial costs but anything
that has value (ex. pleasure, time, etc.)
Ex. Take the family to the carribean vs
renovate your kitchen
Opportunity cost?
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Opportunity cost
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The enjoyment of cooking in a new kitchen
What if the scenario was vice versa?
What would the opportunity cost(s) be?
Opportunity Cost
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Sarah decides to enroll in university?
What is her opportunity cost?
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Sarah’s total cost of the school year
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Tuition, books, living expenses AND….
Money she would have made from working
instead of going to school
Opportunity Cost and Political
Decisions
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Minimum wage – opportunity cost?
Discussion
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What are you going to do after grade 12?
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College
University
Work
Travel
Work Abroad
Grade 13
What is the opportunity cost for you? (Next
Best)
Decision Making Criteria p9
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9.
Define the problem
Clarify goals and priorities
List possible alternatives
Establish criteria to judge alternatives
Weight each criterion based on goals and
priorities
Evaluate each alternative
Make a decision
Act on the decision
Assess effectiveness
Decision Making Matrix
Priority
Weight
Alternative 1
Alternative 2
Alternative 3
Priority 1
Priority 2
Priority 3
Total
Weighted
Value
Decision Making Matrix
Priority
Getting good
marks
Getting ready
for post
secondary
Income
Fun with
friends
Weight
High (3x)
High (3x)
Moderate (2x)
Low (1x)
Spring Break
Trip to Cancun
-3
-3
-2
+1
Blu-Ray home
theatre system
-3
-3
-2
+1
Save for college
or university
+3
+3
+2
-1
Total Weighted
Value
-8
+1
-8
+1
+8
-1
Who Stays?
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You are a passenger on the
Costa Concordia (see
below). Your captain has
was showing off his
navigating skills and ran the
ship aground. The ship is
sinking and all but one of
the life boats is damaged.
There are 25 people left on
board Only 5 can get in the
life boat. Who gets to go on
the life boat? Who gets to
tread water with the sharks
(you are 20 miles off shore)?
Goals
1.
2.
3.
4.
Survival
See your family again
Wealth
Save the most needy
Criteria
1.
Make a contribution to the boat (x3)
1.
2.
2.
Contribute to you after (x1)
1.
2.
3.
Physically Fit
Age (Young is good - but no kids)
Status Famous
Rich
Impact on society (x2)
1.
2.
Education
Status
Decision Making Matrix
Priority
Make a
contribution to
the boat
Contribute to you
after
Impact on society
Weight
x3
x1
x2
Professional
Athletes. Free
autograph anyone?
Save the kids!!
Oh they’re sooooo
cuuute!
Gramps and
Grams
(sorry no walkers
allowed in the boat)
Doctors
Free pec implants?
Your High School
Economics
Teacher Can you
say A++??
Total Weighted
Value
Opportunity Cost
Production Possibility Curve
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Production Possibility Curve (PPC)
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The 4 Assumptions of PPC
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Illustrates the concept of opportunity cost
Each point on the curve illustrates the trade off that must be made
PPC only demonstrates what happens when a society moves from one
level of production to another
1)
2)
3)
4)
there is a limited supply of resources/fully employed
technology is also limited
the economy is running efficiently
there exists an only “two good” world
Production Possibilities – are the amounts of goods or
services a firm or society could produce, given a fixed amount of
land, labour, technology and other inputs.
Constant Opportunity Cost
Production Possibility Curve 1
Production
Possibilities
A
B
C
D
E
F
Ploughs
0
1
2
3
4
5
Opportunity/
Relative
Loaves of
Cost
Bread
(Bread)
15000
12000
3000
9000
3000
6000
3000
3000
3000
0
3000
Opportunity Cost
Production Possibility Curve
Opportunity Cost
A
16000
14000
B
12000
C
Bread
10000
H
8000
D
6000
G
4000
E
2000
F
0
0
1
2
3
Ploughs
4
5
6
Production Possibility Curve PPC
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The Opportunity cost is expressed in the
good given up (i.e. 3000 loaves of bread)
not dollars
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A.K.A. The relative cost
PPC shows the maximum output or
frontier
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What happened at point G?
What happened at point H?
The law of increasing relative
cost
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When an economy focuses more of it’s
resources on a single product the relative cost
increases
Why? Resources are not 100% interchangeable.
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Can a blacksmith bake bread?
Can she do it as well as a baker?
What does this mean?
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The trade offs faced by society are not fixed
If society produces a few ploughs it will use
those resources – people and machines- that
are best equipped for building ploughs. But as
more ploughs are being produced, more
resources are needed and doing so becomes
difficult. It will result on those being less skilled
at making ploughs.
Opportunity Cost
Production Possibility Curve 2
Production
Possibilities
Opportunity/
Relative
Cost
Loaves of
Bread
Ploughs
A
0
15000
B
1
14000
1000
C
2
12000
2000
D
3
9000
3000
E
4
5000
4000
F
5
0
5000
Opportunity Cost
Production Possibility Curve 2
Opportunity Cost
A
16000
B
14000
C
Bread
12000
D
10000
8000
E
6000
4000
2000
F
0
0
1
2
3
Ploughs
4
5
6
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As more ploughs are produced, the most
convertible resources are consumed/used
first, the resources remaining are less
productive in making ploughs and
therefore the cost of producing ploughs
increases (outputs) – Law of increasing
relative costs (AKA Increasing
Opportunity Cost)
The Law of Diminishing Returns
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Law of Diminishing Returns deals with
inputs (Resources – Labour)
Definition: Outputs will increase when
ONE input is increased but only to a
certain point
The Law of Diminishing Returns
Year
Cultivated Land
1
2
3
4
5
6
7
10
10
10
10
10
10
10
Labour force
(Workers)
Total Production
(Bushels of Corn)
1
2
3
4
5
6
7
1000
2000
2800
3400
3800
3900
3900
Increase in
Yield
(Extra Bushels)
1000
800
600
400
100
0
Law of Diminishing Returns
Law of Diminishing Returns
4500
4000
Bushels of Corn
3500
3000
Total Production
(Bushels of Corn)
2500
2000
Increase in Yield
(extra Bushels)
1500
1000
500
0
0
1
2
3
4
5
Number of Workers
6
7
8
The Law of Increasing Returns to
Scale
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AKA Economies of Scale
Law of Increasing Returns to scale deals
with inputs (Resources – land, labour)
Definition: The RATE of output will
increase when ALL inputs in production
are increased
Why? Teamwork and specialization
The Law of Increasing Returns to
Scale
Cultivated
Land
Year
Labourforce
(Workers)
Total Production
(Bushels of
Corn)
Increase in Yield
(extra Bushels)
1
10
1
1000
2
20
2
2000
1000
3
30
3
3200
1200
4
40
4
4600
1400
5
50
5
6200
1600
6
60
6
8000
1800
7
70
7
10000
2000
The Law of Increasing Returns to
Scale
Law of Increasing Returns to Scale
12000
Bushels of Corn
10000
8000
Total Production
(Bushels of Corn)
6000
Increase in Yield
(extra Bushels)
4000
2000
0
0
1
2
3
4
5
6
Number of Workers and ha of land (x10)
7
8
Agenda
Review laws
 Falicies
Review Laws
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Law of Increasing Relative Cost
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Law of Diminishing Returns
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Opportunity/Relative cost increases with
specialization
Outputs will increase when ONE input is
increased but only to a certain point
Law of Increasing Returns to Scale
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The RATE of output will increase when ALL
inputs in production are increased
What is a Fallacy?
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A hypothesis that has
been proven false
still accepted by
many people
because it appears,
at first glance, to be
right.
The Fallacy of Composition
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Belief that individual benefit automatically
translates into social benefit
“If it works for me that it must work for
the rest of society”
The Fallacy of Composition
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Death of the commons
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What happens if one farmer puts one extra cow
on common land?
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One extra fat cow
What happens if many farmers put just one extra
cow on common land?
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Commons were ruined for everyone
The Fallacy of Composition
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ex. Farmer decides to produce
more corn = more money for him
BUT … if every farmer that year
decided to produce more corn the
price of corn would drop and
farmers could not recover
operating expenses
Can also work the other way belief that what is good for society
is good for individual
Wrong - free trade may benefit
many - but some people have lost
jobs
Fallacy of Composition
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Every player on the team is a superstar and a great player, so the team is
a great team.
The best action for a business during a time of recessions might be to lay
layoff staff and reduce production.
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An individual business can increase profits by reduce expenses.
However, one businesses expense is another businesses sale, so if
all firms try to increase their profits by reducing expenses, they
might all experience a reduction in profits, as sales decline.
The Post Hoc Fallacy (Causeand-effect fallacy)
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Example: the alarm clock rang (a) and
then Mr. Hoey got out of bed (b)
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(A) did cause (B)
Example: the alarm clock rang (a) and
then the sun came up (b)
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Even though (b) happened after (a), (a) did
not cause (b) to happen
The Post Hoc Fallacy (Causeand-effect fallacy)
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"post hoc ergo propter hoc”
Translation “after this therefore because
of this”
people sometimes assume because event
B took place after event A, it must have
been caused by event A
Post-Hoc Fallacy
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Samson is scratched by a cat while visiting her friend. Two days later she
comes down with a fever. Joan concludes that the cat's scratch must be
the cause of her illness.
Most people who are read the last rites die shortly afterwards.
Therefore: Priests are going around killing people with magic words!
The Fallacy of Single Causation
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Closely linked to Post Hoc Fallacy
A single person/event caused a particular
event
ex. The great depression was caused by
the 1929 stock market crash –WRONG numerous things caused the Great
Depression
Single Causation Fallacy
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The Conservatives pass a new tax reform law that
benefits wealthly Canadians. Shortly thereafter the
economy takes a nose dive. The Liberals claim that the
tax reform caused the economic woes and they push to
get rid of it.
Review for Quiz Monday
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Review Key Terms on p25
Decision Making Model
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Cruise ship
Know laws and fallacies
Be able to graph a production possibility curve
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Law of Increasing Relative Cost
Law of Increasing Returns to Scale
Interchangeable resources
Class work
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Write your own fallacies
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Post hoc
Single causation
Composition
P 24 #6
P24#6
a)
b)
c)
d)
e)
f)
Single Causation
Composition
Post hoc
Composition
Single Causation
Composition
g)
h)
i)
TRUE
Post hoc / Single
Causation
Post hoc / Single
Causation
END OF CHAPTER 1