Transcript Economic goods and services

What is Economics? Chapter 1
Economics: is the commonsense science of
how and why people, businesses, and
governments make the choices they do.
 Economics is Scientific: a. Observation:
Economists observe how and why choices are
made. b. Economists use these observations as
a basis to predict cause-and-effect relationships.
c. Economists attempt to control future events
through altering important variable.
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Why do we make choices?
Insatiability: refers to the fact that everyone has
unlimited “wants” (Prov. 27:20) (Ecc. 5:10) page 4
textbook
 What does God through the Bible say about our choices?
(Matt. 6:24), (Matt. 6:33) (Col.3:2) page 3 textbook
 What should we desire to choose (or not to)? (Prov.
8:11)- wisdom (Prov. 23:4) labor not to be rich (1 Tim.
6:6-11) page 4 read
 Scarcity: Everything is “finite”, or limited in quantity
(time, labor, money, and natural resources are scarce or
limited in quantity)
 Because of the conflict between insatiability and scarcity,
choices become necessary!!!
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Contentment and Stewardship
Contentment: Internal (psychological)
Satisfaction with what you have or own and who
you are, regardless of the circumstances. (Heb.
13:5) pg 5
 Stewardship: Using wisely and well what God
has given you. (Luke 12:48) God will hold you
accountable for what He has given you.
 Oikonomos: Greek word for Steward and
Economics. (1 Cor. 4:1-2)
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The Cost of Choice
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Economic cost: the value people place on a good or service
Goods: is any tangible thing that has a measurable life span (Ex/
shoes, clothing, car, glasses, etc.)
Services: intangible items (Ex/ labor of an accountant, singer or
teacher)
Economic goods and services: goods and services that bear a
positive economic cost (a price tag higher than zero)
Nuisance goods: goods that consumers pay to have removed and
have a negative economic cost (Ex/ trash, sewage, toxic waste,
etc.)
Recycling: the service of turning nuisance goods into economic
goods (recycling is an application of the stewardship principle).
Free goods and services: goods and services with a price tag of
“zero” (Ex/ wind for a windmill, geothermal steam, air and water).
Intrinsic vs. Subjective Value
Opportunity Benefit vs. Opportunity Cost
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Diamond-Water Paradox: What has more value a handful of diamonds
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Intrinsic Value: This principle holds that a thing is valuable because of the
nature of the product, such as its scarcity or the amount of labor and
natural resources that goes into its production.
Subjective Value: states that it is an object’s usefulness to the buyer that
determines its worth. (Carl Menger proposed this as the solution the
diamond-water paradox)
Utility: usefulness. The amount of satisfaction the good or service provides
the buyer.
Opportunity benefit: the satisfaction you receive form the choice that
you make
Opportunity cost: the satisfaction that you “give up” or the regret you
experience for not choosing differently.
The Broken Window story: pg 10 read and list what is the one economic
lesson that Hazlitt proposes and what you believe he is saying?
Util: is an economic term for an imaginary unit of satisfaction. Fig. 1.1 pg
11.
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or a single glass of water?
The Scope and Purpose of Choice
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Microeconomics: deals with the choices made by “individual” units:
individual people, households, or business firms.
Macroeconomics: examines large-scale economic choices and issues
(government)
Positive Economics: observing economic choices and predicting economic
events. (Ex/ An economist predicts that the stock market will rise again this
year)
Normative Economics: refers to making value judgments about existing
or proposed economic policies (Ex/ “Everyone “should” save 10% of their
income”, “It is “unpatriotic” to buy foreign made clothing”, “Illegal
immigrants are taking all our jobs”
Carl Menger: Founder and “Father” of the Austrian School of Economics.
He advocated personal financial freedom, and that a person makes his
decisions more efficiently than the government because the individual’s
decisions are based on personal utility. Menger explained that it is “utility”
that gives value to anything.
Chapter 1 Review pg 15
Personal Finance: Budgeting
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Budget: is a tabulation of income and planned expenditures
Impulse buying: purchasing things that we think that we need at the
moment or that merely strike a fancy
Fixed expenses: expenses that do not rise or fall as the family’s income
increases in the short term (Ex/ rent or mortgage payments, food expenses,
utilities and property taxes).
Variable expenses: those costs that rise and fall as the family’s income
changes (Ex/ vacations, gifts, entertainment, new clothes and allowances).
Engel’s Law: observes that as a family’s income increases: the % of
income spent on food decreases, the % spent on clothing, rent, fuel, and
electricity stays about the same, and the % spent on education and
recreation increases.
Budget Categories: pg 18-21
Escrow Account: an account set up by the mortgage holding company for
the home buyer to pay property taxes and property insurance.
Contingency: is an uncertain event (Ex/ loss of a job)
Economic Models: Chapter 2
Circular Flow Model
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Tabular model or schedule: explains simple relationships
between pairs of variables (Figure 2-1) pg 25. The info is limited
to a few observations
Line Graph: provides significantly more data and can tell
economists approximately how much of a product will be sold at
any given price on the graph (Figure 2-2) pg 25
Production Possibilities Curve (PPC): enables the economist
to see the “maximum” feasible amounts of two commodities that
a business can produce when those items are competing for that
business’s limited resources (Figure 2-3) pg 26
Circular Flow Model: a visual explanation of how a complete
national economic system functions. (Figure 2-5 pg 28)
Consumption Expenditures: the total amount of money that
households spend on goods and services
Factors of Production
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Factors of Production: The resources that businesses need/use to
produce their goods and services.
4 factors of production: Land, Labor, Capital and Entrepreneurship.
Land: all of the natural resources that go into the production of goods
(animal, vegetable or mineral resource).
Labor: all of the human “effort” (physical and mental) that goes into
the creation of goods or services.
Capital: refers to the goods used to produce other goods. Two
categories of Capital: Financial and Real.
Financial capital: is all the money the household sector loans to the
business firms
Real Capital: Business firms use the financial capital to purchase real
capital: the tools they use to produce their goods and services.
Entrepreneurship: the activity of creatively combining natural
resources, human labor, and capital in unique ways to produce new
goods and services. Entrepreneurship is the most important factor of
production because it directs, organizes and plans the production
process.
Factor Costs
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4 Factor Costs: Rent, Wages, Interest and Profit and
are the payments business firms make in exchange for
the four factors of production.
Rent: includes all payments for the use of an owner’s
property (buildings, land, royalties to an author, etc.)
Wages: all payments for labor used to produce goods or
services (salaries, hourly wages, bonuses, etc.). Wages
make up the largest portion of all the factor costs.
Interest: the payment business firms make on
borrowed money (Ex/ corporate bonds)
Profit: the difference between the revenue received
from the sale of a product and the cost of the land,
labor, and capital that went into its production.
Government as an economic entity
Transfer payments: payments of money or goods to
persons for which the government expects no specific
economic repayment (Ex/ welfare benefits, food stamps,
social security, and unemployment compensation)
 Budget deficit: when government spending exceeds
the amount it receives in taxes
 Budget surplus: the government receives more in
taxes than it spends
 Taxes: government imposes taxes to pay for its
spending. Households pay sales, income and property
taxes (etc.). Businesses pay corporate, social security,
unemployment, and many other taxes.
 Government in the Circular Flow: Figure 2-8 pg 33
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The Financial Market: The Heart of
the Economy
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Financial Market: the 4th player in the circular flow model and is
the collection of a nation’s financial institutions that receive deposits
of excess funds from households and lend those funds to business
firms. (Ex/ commercial banks, insurance companies, finance
companies, and stock brokerage firms) See Figure 2-9 pg 35.
Principal function: to circulate money from households to
business firms.
Dissaving: any time households withdraw money form an account
or borrow it.
Crowding Out: Our Government borrows money by selling bonds
(with very attractive interest rates), treasury bills and treasury
notes. Crowding out occurs because every dollar borrowed by the
government means one less dollar is available to business firms to
borrow
Ludwig Von Mises: Advocate of Free Markets. Author of “Human
Action” the most complete and persuasive exposition and defense of
the free market (pg 34).
Principles of Purchasing
Caveat Emptor: “let the Buyer Beware”
 Bait and Switch: Ex/ any product used
to entice you to come to the store to
purchase but when you arrive…
 Eight principles of purchasing: pg 3840 textbook.
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Consumerism
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Era of Consumerism: the drive for the enforcement of consumer
rights
Redress: the right to be heard in court and receive reasonable
compensation (Ex/ consumer buys a defective product or service).
Cease and desist order: prohibits firms from continuing a
deceptive practice
Counter-advertising: advertising that a firm must produce at its
own expense to correct any false claims that its earlier advertising
promoted
Ralph Nader: America’s first and most vocal consumer advocate
pg 42
Federal Agencies that enforce consumer rights: FDA (Food and Drug
Administration), FTC (Federal Trade Commission), CPSC (Consumer
Product Safety Commission) pg 41 textbook
Value and Demand Chapter 3
Principle of Diminishing Marginal
Utility: states that people tend to receive
less and less additional satisfaction from
any good or service as they obtain more
and more of it during a specific period of
time.
 William Stanley Jevons: developer of
the Law of Diminishing Marginal Utility
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The Function of Prices
Marginal Utility Schedule
 Marginal Utility Table
 Scripture and DMU: pg 48 textbook.
Eccles. 5:10-11 and the rich fool (Luke
12:16-21)
 How Demand Works: Cartoon pg 49
textbook
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Demand
The Law of Demand: everything else being held constant,
the lower the price charged for a good or service, the greater
the quantity of it people will demand, and the higher the
price, the lower the quantity they will demand.
 Fig 3.3 Subjective Value pg 51
 Fig 3.4 Demand Schedule and Fig. 3.5 Demand Curve pg 51
 Change in Demand: when a demand curve shifts. A
Rightward shift indicates an increase in demand . A
Leftward shift indicates a decrease in demand. See Fig.
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3-6, 3-7 and 3-8 for examples.
Change in Income
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One of the most important causes of shift in demand is a change in people’s incomes.
Normal goods: goods that experience an increase in demand because of an increase in
consumers’ income.
Inferior goods: goods that experience a decrease in demand due to an increase in
consumers’ income (Ex/ powdered milk, recapped tires, used cars, secondhand clothing).
Substitute goods: goods that households use in place of others. As the price of one of
the goods rises, consumers tend to buy more of the substitute (Ex/ chicken for beef, hot
dogs instead of hamburgers, etc) pg 55 Fig. 3-9. Category: Change in the price of related
goods.
Complementary goods: goods that are usually purchased or used together (Ex/ cameras
and memory cards, French fries and ketchup, gas and cars, peanut butter and jelly). Fig.
3-10. Category: Change in tastes and preferences.
Change in expectations: a shift in the demand curve due to a change in people’s
expectations of future prices. If people expect the price of a good to increase they will buy
more of it ASAP (Ex/ food, gas, . If people expect the price to decrease in the future they
postpone their purchase until the price has gone down (Ex/ housing market, computer,
etc.).
Personal Finance: Insurance
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Homeowner’s insurance: liability and comprehensive.
Liability insurance: pays for property damage and bodily
injury incurred by any visitor on the insured person’s
property.
Comprehensive insurance: protects the homeowner from
heavy loss due to misfortunes such as fire, theft, windstorms,
hail and lightning damage.
Automobile insurance: Collision insurance, deductible.
Collision insurance (full coverage): will pay to replace or
repair the policyholder’s car (medical payments, uninsured
motorist, no-fault insurance, .
Deductible: the amount the policyholder must pay before
the insurance company will cover the remainder.
Insurance: Life and Health
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Life insurance: (Cor. 12:14 pg 59) insurance to cover the responsibilities
(family, burial, etc.) due to the death of a person.
Types of Life insurance: Term, Whole, Universal
Term life insurance: provides only death protection for a specified period
of time.
Beneficiary: the person(s) who receive the proceeds of the insurance
Premium: a monthly payment given in exchange for a fixed death benefit
Whole life insurance: provides a savings component along with a death
benefit. Premiums are level over the lifetime and the savings value of a
whole life policy are called its “Cash Value”.
Universal life insurance: hybrid form that provides policyholders with a
term life insurance but includes a flexible savings plan. Premiums are called
“contributions”
Health Insurance: disability income insurance, major medical insurance,
hospitalization, group health insurance
Supply and Prices Chapter 4
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Proverbs 11:24-26 and Philippians 4:19
Supply: is the amount of goods and services business firms are willing and
able to provide at different prices.
Law of Supply: holds that the higher the price buyers are willing to pay,
other things being held constant, the greater the quantity of a product a
firm will produce and that the lower the price consumers are willing to pay,
the smaller the quantity the supplier will produce.
Supply schedule: Figure 4-1
Supply Curve: Figure 4-2 are positively sloped, meaning that if prices rise
producers will increase supply, and vice-versa: prices decrease: supply will
decrease.
Change in quantity supplied: Whenever a change in the price
consumers are willing to pay causes a change in the number of goods
produced and sold.
Changes in Supply
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Changes in supply: Figure 4-3
Decrease in supply: a leftward shift in the supply curve, a situation in which
suppliers produce less of their product at any given price. Figure 4-4
Increase in supply: a rightward shift of the supply curve, demonstrates the
willingness of business firms to produce more of their product at any given
price. Figure 4-5
Why a Change in Supply? Economists have pinpointed three reasons:
1. Changes in Technology: advances in the tools used to produce goods and
services (Ex/ computer, automation) Ex/ calculator: pg 68 Fig. 4-6
2. Changes in Production costs: Companies must pay for the natural
resources, labor, and capital that goes into their products. If a firm’s costs rise,
it must decrease the quantity of what it provides at the same price. Fig. 4-7
3. Changes in the price of related goods: as the price people are willing to
pay for a substitute rises, business firms naturally become willing to sell more of
that good or service and (normally) decrease their supply of the original good.
Fig 4-8
Determining Prices Chapter 4b
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Market Equilibrium Point: it represents the price at which consumers are
willing to take from the market the exact quantity of a product that
suppliers are willing to put into the market. Figure 4-9 pg 71
Market Equilibrium Price: The price at which supply meets demand.
Alfred Marshall: Architect of the Demand and Supply Model pg 70
Surplus: If a supplier raises the price of his product above the market
equilibrium price, the law of supply will motivate him to increase the
quantity of the product he puts into the market. At the same time,
however, the law of demand will compel consumers to buy less of his
product. The combined effect of the two opposite laws will result in a
surplus. Figure 4-10 pg 72. Figure 4-11 and 4-12 pg 73
Price Floor: a barrier intended to prevent the prices of those items from
falling below the market price.
Demand solution to a surplus: decrease price increase demand
Supply solution to a surplus: decrease supply
Simplest solution: allow the market to work: supplier will lower price until
supply meets demand and surplus is gone. Figure 4-13
Shortage
Shortage: whenever various factors hold the price of a good lower than its
market equilibrium price. Figure 4-14.
 Price Ceiling: usually a mandate by government that prevent prices from
rising to the market equilibrium price. Imposing a price ceiling will always
cause shortages when the market price is higher. If the market price is
lower then that business will “die” because they will not be able to sell their
products.
 “3” Solutions to a shortage: decrease demand Figure 4-15, increase
supply Figure 4-16, or allow price to rise to the market equilibrium point
Figure 4-17.
 Seven Good Years Followed by Seven Lean Years: Genesis 41:4657 and 47:13-20. Biblical example of surplus and shortage.
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Personal Finance: The Christian
and Debt
Christian Debt Philosophies: Deut: 15:6, Romans 13:8, Lev. 25:35-36,
Matt. 5:42 and Luke 19:23 pg 80
 Scripture associates debt with bondage, and may limit a Christian’s mobility,
debt presumes upon an uncertain future or seeing the Lord’s provision or
protection, or giving to charity or the Lord,
 Default: fail to pay a loan on time
 Garnish: when a lender gets permission to take a part of a borrower’s
wages
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