1 Module ½: The First Day of School Module ½: The First Day of School

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Module ½: The First Day of School

Module ½: The First Day of School

Course Outline

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I. Basic Economic Concepts

II. Measurement of Economic Performance

III. National Income and Price Determination

IV. Financial Sector

V. Inflation, Unemployment and Stabilization

VI. Economic Growth and Productivity

VII. International Trade and Finance

• 8-12%

• 12-16%

• 10-15%

• 15-20%

• 20-30%

• 5-10%

• 10-15%

Staying Connected

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www.edmodo.com

Staying Connected

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•http://rossgraham.woodbridge.site.eboard.com http://rossgraham.woodbridge.site.eboard.com

School Wires

• http://www.woodbridge.k12.nj.us//Domain/682

Headlines

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Understanding Economics…?

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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?

Unit OneBasic Economic Concepts

Unit OneBasic Economic Concepts

AP MacroeconomicsAP MacroeconomicsMr. GrahamMr. Graham

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Module 1:The Study of Economics

Module 1:The Study of Economics

Individual Choice:The Core of Economics

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Economics

The study of how people allocate their limited resources to satisfy their unlimited wants

The study of how people make choices

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Overview of economic “choices”Made by…

Consumers and Producers

based on…

Needs and Wants

for…

Goods and Services

obtained through…

Production (i.e. Resources)

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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.

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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.

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…for…

GoodsGoods are all things from which individuals derive

satisfaction or happiness.

ServicesTasks that are performed for someone else

Can be referred to as intangible goods

How do consumers and producers make decisions?

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…obtained through…

ProductionAny activity that results in the conversion of resources

into products that can be used in consumption

Resources (a.k.a.) Factors of ProductionInputs that are used to produce things that people want

Although “wants” are unlimited, the four major “resources” are limited…

How do consumers and producers make decisions?

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Scarcity, Choice and Opportunity Cost

Limited Resources and Unlimited Wants

Scarcity

Choices

Opportunity Cost

http://www.investopedia.com/video/play/opportunity-cost/

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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.

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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.

What resources are used to obtain these things?

What resources are used to obtain these things?

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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.

What resources are used to obtain these things?

What resources are used to obtain these things?

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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.

What resources are used to obtain these things?

What resources are used to obtain these things?

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Scarcity

Scarcity occurs when the ingredients (resources) for producing things that people desire are insufficient to satisfy all wants.

“Mathematical” Definition of EconomicsEconomics = Scarcity = Wants > Resources

The Economic Person:Rational Self-Interest

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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

The Economic Person:Rational Self-Interest

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“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

The Economic Person:Rational Self-Interest

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Question

Does the fact that some people make apparently irrational choices invalidate the rationality assumption in economics?

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Defining self-interest

The pursuit of one’s goals, does not always mean increasing one’s wealthPrestige (conspicuous consumption)FriendshipLove

The Economic Person:Rational Self-Interest

Positive vs. Normative Economics

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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

http://www.investopedia.com/video/play/positive-and-normative-economics/

When and Why Economists Disagree

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When?

Why?ModelsValues

Eventually resolved by research and data, though that has limitations…

Do Now.

• Define:– Recession– Expansion

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Module 2:Introduction to Macroeconomics

Module 2:Introduction to Macroeconomics

Microeconomics vs. Macroeconomics

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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

Microeconomics vs. Macroeconomics

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• 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 Business Cycle

1. High Employment (Low Unemployment)

2. Stable Prices (Low Inflation/Deflation)

3. Economic Growth

The 3 Goals of the Macroeconomy

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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

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/cost-graphic.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

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Module 3:The Production Possibilities Curve Model

Module 3:The Production Possibilities Curve Model

The Use of Models in Economics

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• 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…

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• 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

Our First Model:The Production Possibilities Curve

Our First Model:Production Possibilities Curve (PPC)

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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).

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Our First Model:The Production Possibilities CurveProduction Possibilities Curve (PPC)

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• The PPC does not in practice have constant trade-offs of one good for another and is typically a curve that is bowed outward.

Production Possibilities Curve (PPC)Production Possibilities Curve (PPC)

• As society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases.

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Activity 1: Scarcity, Opportunity Cost, and Production Possibilities Curves

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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.

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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.

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Economic GrowthEconomic Growth

Do Now!

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Module 4:Comparative Advantage and Trade

Module 4:Comparative Advantage and Trade

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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

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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

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Division of LaborOne 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

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• 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.

Comparative Advantage

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Activity 56: Comparative Advantage and Trade

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

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• 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

Absolute Advantage

• 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

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Comparative Advantage and International Trade

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• 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

Comparative Advantage and International Trade

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Appendix: Graphing in Economics

Appendix: Graphing in Economics

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1. Identify the title of the graph and make sure you understand the general purpose or objective of the graph.

Graphs in Economics

• Show the relationship between the given price and how much of the product a consumer would purchase.

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2. Identify each axis and note what is labeled and the measurement/units.

Graphs in Economics

• 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.

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3. Identify the slope(s) and any points on the graph. Determine whether it is a positive or negative slope.

Graphs in Economics

• The slope goes downwards to the right, reflecting an inverse relationship.

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4. Use the information to establish the economic meaning of the graph.

Graphs in Economics

• There is a negative, relationship between the price of any good or service and the quantity demanded, holding other factors constant (ceteris paribus)