True or False???? The best things in life are free

True or False????

The best things in life are free.

AP economics

Introduction

Topic 1: Definition of Economics

Economics

studies how scarce resources are used to fulfill society’s needs and wants

Scarcity

Scarcity

condition where wants are greater than resources

*Because scarcity exists, choices must be made

Scarcity vs. Shortages

Scarcity occurs at all times for all goods

Shortages occur when producers will not or cannot offer goods or services at current prices. Shortages are temporary.

Scarcity NOT the same as a shortage

Resources

Anything that helps produce a good or service (factors of production)

The Four Factors of Production

Entrepreneurship

Capital

Labor

Land

•Types of Resources

9

Land = natural resources (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.)

The Four Factors of Production

10

The Four Factors of Production

11

Labor = Workers (manual laborers, lawyers, doctors, teachers, waiters, etc.)

Capital: Resources that are used to create

other goods (tools, tractors, machinery, buildings, factories, etc.)

The Four Factors of Production

12

Entrepreneurship= Organizesother resources

The Four Factors of Production

Ultimate goal: Make profit

13

The Four Factors of Production

You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk.

The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Classify the Factors of Production in the following scenario:

The Four Factors of ProductionClassify the Factors of Production in the following scenario:

You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk.

The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Resources are interdependent of one another

Have to have all resources in order to make a product/service

Resources

Needs

Necessary for survival

Wants

Not necessary for survival

Types of wants

Consumer Good - goods purchased for direct consumption

Capital goods

Goods purchased for indirect consumption

(used to make other things)

In order for a product to have value, it must be scarce and provide utility (usefulness)

Conspicuous Consumption

Purchase of items to impress others

Topic 2: principles of economics

1. People Economize

People make decisions based on what THEY think will benefit them the most

2. All choices involve a cost

Opportunity Cost – highest valued alternative given up when a choice is made

There is no such thing as a free lunch

Nothing is Free!!!

3. Incentives influence people’s decisions

4. Rules influence individual choices

5. Voluntary trade creates wealth

“TRADING UP” VIDEO CLIP

6. The consequences of choices lie in the future

Sunk Cost: cost already made; should be ignored when making choices

Answer the following questions the way an economist would

1. Making a choice means:

A. deciding among many possibilities B. being able to get everything C. not thinking about future consequences D. considering a daily horoscope

2. People throughout the world usually

make decisions:

A. impulsively; choosing quickly without much thought

B. generously; thinking of the needs of others C. randomly; leaving the outcome up to chance D. purposefully; considering costs and benefits

3. Which of the following best explains the relationship between choices and incentives?

A. incentives motivate people to make certain types of choices

B. incentives rarely influence personal choices C. incentives make it difficult to predict what choice

people will make D. incentives have nothing to do with choices

4. A hungry economist decides to buy a bag of potato chips; which of the following would best explain his decision? explain his decision?

A. the chips cost less than the other snacks B. the chips came in the largest bag C. the chips offer a greater benefit to him

than the other snacks D. there are no other choices available

* In economics, decisions should always be made at the margin

a rational person will weigh theadditional benefits (MU) against theadditional costs (MC)

* Marginal utility = additional benefit from consuming one more item

Stop watch

Diminishing Marginal Utility

Squidward - too many krabby patties

When a person acquires more units of an item, ADDITIONAL UTILITY will go down

Maximizing utility Rule

MU<MC = Don’t do it

MU>MC = Do it

MU=MC * Do it and STOP (utility maximized here)

True or False???

Anything worth doing is worth doing well.

It is a good idea to make an informed decisionand stick to it.

How many movies would you see????

Thinking at the MarginThinking at the Margin

# Times Watching

Movie

Marginal Utility Price

1st 30 $10

2nd 15 $10

3rd 5 $10

Total 50 $30

Calculate Marginal Utility# of Slices

of PizzaTotal Utility

(in utils)Marginal

Utility/Benefit

0 0

1 8

2 14

3 19

4 23

5 25

6 26

7 26

8 24

43

Calculate Marginal Utility# of Slices

of PizzaTotal Utility (in dollars)

Marginal

Utility/Benefit

0 0 0

1 8 8

2 14 6

3 19 5

4 23 4

5 25 2

6 26 1

7 26 0

8 24 -2

How many pizzas would you buy if the price per slice was $2?

Marginal Cost

--

$2

$2

$2

$2

$2

$2

$2

$2

44

Calculate Marginal Utility# of Slices

of PizzaTotal Utility (in dollars)

Marginal Utility/Benef

it

0 0 0

1 8 8

2 14 6

3 19 5

4 23 4

5 25 2

6 26 1

7 26 0

8 24 -2How many pizzas would you buy if the price per slice was $2?

Marginal Cost

2

2

2

2

2

2

2

2

2

You will continue to consume until

Marginal utility = Marginal Cost

45

Maximizing utility if choosing between 2 items

Must calculate the MU/P of each item. “Bang for your Buck”

Calculating Marginal Utility Per Dollar allows you to compare products with different prices.

Maximizing Utility

You plan to take a vacation and want to maximize your utility. Based on the info below, which

should you choose?

Destination Marginal Utility Price

Tahiti 3000 $3,000

Chicago 1000 $500

Marginal Utility

Per Dollar

1 Util

2 Utils

47

Maximizing Utility if CHOOSING between items

You plan to take a vacation and want to maximize your utility. Based on the info below, which

should you choose?

Destination Marginal Utility Price

Tahiti 3000 $3,000

Chicago 1000 $500

MU/P

3000/3000= 1

1000/500= 2

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Maximizing utility if buying combinations of items:

If purchasing combinations of goods. The consumer’s money should be spent so that the marginal utility per dollar of each good equals each other.

MU 1= MU2

P1 P2

Each slice of pizza costs $2.00 and the MU

is 10. Each soft drink is $1.00. If you are

maximizing your utility, what is the MU of

the soft drink?

5

Utility Maximization with a budget constraint (combinations of items)

1. Figure out the marginal utility per price (MU/P) for each item

2. Spend $ on the item with the highest marginal utility per price until $ runs out

*The MU/P of each item should be the same!

If you only have $25, what combination of movies and go carts maximizes your utility?

Utility MaximizationUtility Maximization

# Times Going

Marginal Utility

(Movies)

MU/P(Price =$10)

Marginal Utility

(Go Carts)

MU/P(Price =$5)

1st 30 10

2nd 20 5

3rd 10 2

4th 5 1

$10 $5

If you only have $25, what combination of movies and go carts maximizes your utility?

Utility MaximizationUtility Maximization

# Times Going

Marginal Utility

(Movies)

MU/P(Price =$10)

Marginal Utility

(Go Carts)

MU/P(Price =$5)

1st 30 3 10 2

2nd 20 2 5 1

3rd 10 1 2 .40

4th 5 .50 1 .20

$10 $5

Practice: utility max with budget constraint

54

Assume apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the

combination that maximizes utility.

Apples MU/P Oranges MU/P

0 0

20 15

15 10

10 7.5 5 5 2 2.5

3 apples and 2 oranges

Practice: utility maximization

Find the Utility-Maximizing Combination of A and B, if you have an Income of $10

(1)Unit of

Product

(a)MarginalUtility,Utils

(a)MarginalUtility,Utils

(b)Marginal

UtilityPer Dollar(MU/Price)

(b)Marginal

UtilityPer Dollar(MU/Price)

(2)Product A:Price = $1

(3)Product B:Price = $2

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2

3

4

5

6

7

10

8

7

6

5

4

3

24

20

18

16

12

6

4

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8

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6

5

4

3

12

10

9

8

6

3

2

Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10

(1)Unit of

Product

(a)MarginalUtility,Utils

(a)MarginalUtility,Utils

(b)Marginal

UtilityPer Dollar(MU/Price)

(b)Marginal

UtilityPer Dollar(MU/Price)

(2)Product A:Price = $1

(3)Product B:Price = $2

1

2

3

4

Fifth

Sixth

Seventh

10

8

7

6

5

4

3

24

20

18

16

12

6

4

10

8

7

6

5

4

3

12

10

9

8

6

3

2

Purchase 2 of Item A and 4 of B

Topic 3 : Types of Economics

studies specific segments of the economy

Example: profits at McDonalds

microeconomics

Studies the economy as a whole; more generaltopic

Examples: unemployment rate in the U.S.

macroeconomics

Positive Economics - Collects and presents facts; concerns what the economy is really like

Example???

Normative Economics - Involves value judgments about what the economy should be like

Example??

Topic 4: Production Possibilities Curve/Frontier

• A production possibilities curve (PPC) is a model that shows alternative ways that an economy can use its scarce resources

• This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.

63

PPC Each point represents a specific

combination of goods that can be produced given resources available.

A B C

boats 9 7 4

trucks 4 7 9

PPC

4 Key Assumptions• Only two goods can be produced • Full employment • All resources being utilized • All technology being utilized

PPC Each point represents a specific

combination of goods that can be produced given resources available.

A B C

boats 9 7 4

trucks 4 7 9

The Production Possibilities Curve and Efficiency

67

1. Productive Efficiency• Products are being produced in the least

costly way. - any point on curve

2. Allocative Efficiency• The products being produced are the ones

most desired by society- Any point on curve

PPC illustrates two Types of Efficiency

68

PPC Point inside (D) =

unemployment

Point outside (E) = unattainable given current resources

Points on curve (A,B,C) = efficient

All resources being utilized Economy at full employment

2 Bikes

2.The opportunity cost of moving from b to d is…

4.The opportunity cost of moving from c to b is…

3.The opportunity cost of moving from d to b is…

7 Bikes

4 Computers

2 computers

1. The opportunity cost of moving from a to b is…

Example:

Opportunity Cost

70

Calzones 0 1 2 3 4Pizza 4 3 2 1 0

• Opportunity Cost of moving from a-b, b-c, c-d, and d-e?

Constant opportunity cost: Opportunity cost is always the SAME

A B C D E

71

Constant opportunity cost

Resources are easily adaptable for producing either good

Ex: pizza and calzones

Results in a straight line PPC

PIZZA 20 19 16 10 0

ROBOTS 0 1 2 3 4

• Opportunity Cost of moving from a-b, b-c, c-d, and d-e?

A B C D E

Increasing opportunity cost: Opportunity costs increase as more of a

good is produced

As you produce more of any good, the opportunity cost will increase

Why??? Resources are NOT easily adaptable to producing both goods

Results in a BOWED OUT PPC

Constant vs. Increasing Opportunity Cost

Corn

Wheat

Cactus

Pineapples

Per Unit Opportunity Cost

Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt?

$10 per shirt

Take money out of the equation. Instead of producing 5 shirts you could have made 10 hats.

1. What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up?

1 shirt costs 2 hats 2. What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts

given up? 1 hat costs ½ of a shirt

76

= Cost Gain

Per Unit Opportunity Cost

Per Unit Opportunity Cost

Ron can produce 20 pizzas or 200 burgers

1. What is Ron’s opportunity cost for one pizza in terms of burgers given up? 1 P = _________ B

2. What is Ron’s opportunity cost for one burger in terms of pizza given up?1 B = _________ P

John can produce 100 pizzas or 200 burgers

1. What is John’s opportunity cost for one pizza in terms of burgers given up? 1 P = _________ B

2. What is John’s opportunity cost for one burger in terms of pizza given up? 1 B = __________ P

77

1 Bike2.The PER UNIT opportunity cost of moving from b to c is…

4.The PER UNIT opportunity cost of moving from d to e is…

3.The PER UNIT opportunity cost of moving from c to d is…

3/2 Bikes

2 Bikes

5/2 Bikes

= Cost Gain

1. The PER UNIT opportunity cost of moving from a to b is…

Example:

PER UNIT Opportunity CostHow much each marginal

unit costs

78

Practice WS per unit costs

Practice per unit Opportunity cost

A B C D E

Autos 0 2 4 6 8

missiles 30 27 21 12 0

1.What is the per unit cost of moving from point D to point E? 12/2= 6 missiles

2.What is the per unit cost of moving from point C to point B?  2/6 = 1/3 autos

3.What is the per unit cost of moving from point C to point D?  9/2 missiles

4.What is the per unit cost of moving from point B to point A? 2/3/ autos

Shifting the Production Possibilities Curve

81

4 Key Assumptions Revisited• Only two goods can be produced • Full employment of resources• Fixed Resources • Fixed Technology

3 Shifters of the PPC/PPF1. Change in resource quantity or quality

2. Change in Technology3. Change in Trade

82

Production Possibilities

Shifts in PPC

Inward Shift

Indicates economic decline

Happens due to:

- destruction of resources- Less trade - Decline in quality of

resources

Shifts in PPC

Outward Shift

Indicates Economic growth

Happens due to:

-increase in #/quality of resources

- Technology

- More Trade

85

AB is original PPC…What happens???1. BP Oil Spill in the Gulf2. Better technology in

producing both items3. Many workers

unemployed4. Significant increases in

education5. Full employment

Panama – Favors Consumer Goods

Mexico – Favors Capital Goods

Consumer goods

Cap

ital

Goo

ds

Current PPC

Future PPC

Consumer goods

Cap

ital

Goo

ds

Future PPC

Current PPC

Capital Goods and Future Growth

MexicoPanama86

Countries that produce more capital goods (as opposed to consumer goodswill have more growth in

the future.

2 types of problems:

Output problems - look at total items being produced

Input problems - look at resources that go into making a product

Topic 5: PPC, trade and opportunity cost

Input or Output Question?

Number caught per day

Deer Antelope

Henry 4 6

John 24 12

88

Input or Output Question?

Months to produce one

Car Plane

Canada 8 10

Japan 15 12

89

Absolute advantage

• Output problem: person/country can make more of the item than other country

• Input problem: person/country can make item using less resources (time, land etc) than other country

Absolute Advantage?

Number caught per day

Deer Antelope

Henry 4 6

John 24 12

91

Absolute Advantage?

Months to produce one

Car Plane

Canada 8 10

Japan 15 12

92

2. Comparative advantage

** Comparative advantage Is gained through specialization To figure comparative advantage, must first:

Must calculate the PER UNIT opportunity cost

* This will be different for INPUT and OUTPUT problems

The country that can produce the item at a lower opportunity cost should specialize in that item

Comparative advantage in an output problem

To figure opportunity cost - Cost/Gain The following chart illustrates the number of CDs and pounds of beef that Japan and Canada can produce in a day

CDs beef Japan 4 2

Canada 4 6

Japan 1 CD = _____ 1 B = ______ CD

Canada 1CD = _____ B 1 B = ______ CD Japan should produce __________ Canada should produce _________

Answers: Comparative advantage in an output problem Output Questions: CDs beef

Japan 4 2

Canada 4 6

• In Japan, 1 CD = 1/2 B, 1 B = 2 CD• In Canada 1CD = 3/2 B, 1 B = 2/3 CD

Japan should produce CDs

Canada should produce Beef

Comparative advantage in an input problem

Input Questions:ICU= Input Cost goes Under The following chart illustrates the number of hours it takes the U.S. and France to make

one loaf of bred and one bushel of corn Bread Corn

U.S. 4 2 France 4 6

In the U.S. 1 B = _________ C, 1C = __________ B

In France 1 B = ________C, 1 C = __________B

The U.S. should produce ________________France should produce __________________

Answers to comparative advantage in input problem

Bread Corn U.S. 4 2

France 4 6

In the U.S. 1 B = 2 C, 1C = 1/2 B In France 1 B = 2/3 C 1 C = 3/2 B

The U.S. should produce Corn France should produce Bread

Practice: Who has the Comparative Advantage?

Number caught per day

Deer Antelope

Henry 4 6

John 24 12

98

Henry 1 D = _____ A 1A = ______D

John 1D = ______A 1A = ______D

Comparative Advantage?Number caught per day

Deer Antelope

Henry 4 6

John 24 12

99

Henry 1D = 3/2 A 1 A = 2/3 D

John 1 D = ½ A 1A = 2 D

Comparative Advantage?Number caught per day

Deer Antelope

Henry 4 6

John 24 12

100

Henry 1D = 3/2 A 1 A = 2/3 D

John 1 D = ½ A 1A = 2 D

Practice: Who has the Comparative Advantage?

Months to produce one

Car Plane

Canada 8 10

Japan 15 12

101

Canada 1C = _____ P 1 P = _____C

Japan 1C = ______P 1P = _____C

Comparative Advantage?

Months to produce one

Car Plane

Canada 8 10

Japan 15 12

ICU

102

Canada 1 C = 4/5 P 1 P = 5/4 C

Japan 1 C = 5/4 P 1P = 4/5 C

Comparative Advantage?

Months to produce one

Car Plane

Canada 8 10

Japan 15 12

ICU

103

Canada 1 C = 4/5 P 1 P = 5/4 C

Japan 1 C = 5/4 P 1P = 4/5 C

PRACTICE 1. The following table gives the number of hours it takes in

the United States and Scotland, using the same amount of resource, to produce a ton of oats or one bagpipe.

• Oats Bagpipes• U.S. 2 hours 3 hours • Scotland 5 hours 4 hours

a. Output or input problem?? WHY??b. Who has the absolute advantage in oats?

Bagpipes? WHY??c. Who has the comparative advantage in Oats? Bagpipes?

WHY??

A. Input problem; looks at TIME making ICU

B. Absolute advantage: Oats = U.S. (takes less time to make)

Bagpipes = U.S. (takes less time to make)

C. Comparative Advantage: U.S. Scotland 1 O = 2/3 BP 1 O = 5/4 BP 1 BP =

3/2 O 1BP = 4/5 O

U.S = OATS Scotland = BAGPIPES

PRACTICE2. The table below gives the total number of pens and paper

that country X and country Y can produce.

Country X Country Y A B C D E F A B C D E F

Pens 0 4 8 12 16 20 Pens 0 3 6 9 12 15Paper 40 32 24 16 8 0 paper 60 48 36 24 12 0

In other words: Country X: 4 pens 8 paper

Country Y: 3 pens 12 papera. Output or input problem???WHY???b. Who has the absolute advantage in producing pens? paper ? WHY???c. Who has the comparative advantage in producing pens? paper? WHY???

A. Output problem B. Absolute advantage:

• Pens = X • Paper = Y

•Comparative Advantage: Country X Country Y

1 Pen = 2 paper 1 pen =4 paper 1 paper = 1/2 pen 1 paper = ¼ pen

Practice WS

“Introduction: absolute and comparative advantage”

Possible comparative advantage questions

* Go to mimio

Topic 6: Economic Systems

All societies must answer 3 economic questions

1. what will be produced 2. how will it be produced 3. who will get what *the way the questions are answered

determine a country’s economic system

Traditional economies

economic questions answered by past

111

Command Economies

economic questions answered by government

(communism and socialism)

Video clip

“command vs market”

Command Economies Advantages

1.Economic equality

2.Capable of quick change

Disadvantages

1.No incentive to work harder

2. No Competition = poor quality, little choices

Market Economy

economic questions answered by people

Market Economies

Advantages

1.Economic freedom

2.Competition = better quality, more choices

3.Incentive to make a profit

Disadvantages

1.Unequal distribution of wealth

2.Economic loss

CONSUMER SOVEREIGNTY

Consumer “power”

Consumers determine the success of a product

The Invisible hand - Adam Smith The concept that society’s goals will be met as individuals seek

their own self-interest.

Example: Society wants fuel efficient cars…• Profit seeking producers will make more.

• Competition between firms results in low prices, high quality, and greater efficiency.

• The government doesn’t need to get involved since the needs of society are automatically met.

Competition and self-interest act as an invisible hand that regulates the free market.

The invisible hand: Adam Smith Video clip:

“I, Pencil” “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 self-interest.”

Mixed Economy

elements of the all economic systems together (government and people answer economic questions)

Circular Flow of a market economy Shows the interdependence between

business and households

The Circular Flow Model

The Product Market-• “place” where goods are produced by businesses and sold to households.

The Resource (Factor) Market-• “place” where resources are sold to businesses.

122

123Product Market

Resource Market

Businesses IndividualsGoods and Services$$$ Revenue $$$ $$

$ Spen

ding $

$$Goods a

nd

Service

s

$$$ Costs

$$$

Resourc

es

$$$ Income $$$Resources

(Factors of

Production)