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Chapter 1: What is Economics?

Key Concepts: Scarcity, Opportunity Costs, Production Possibilities Frontier, Competition, Costs and Benefits, Incentives, Micro vs. Macro, Resources, Name: _______________________________________________

Period: ____

Teacher: Mrs. Povletich

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Ten Principles of Economics

Principle What it is… What it means…

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Principle #1: People Face Tradeoffs We have to give up one thing to get another Task: As a group, make a list of the tradeoffs you’ve made recently. Discuss how tradeoffs affect your everyday life. Determine why it is important to acknowledge life’s tradeoffs.

Principle #2: The Cost of Something Is What You Give Up to Get It Decisions require comparing costs and benefits of alternatives Task: As a group, list the costs and benefits of three potential decisions you will face. Then figure out the opportunity costs. Discuss. Determine why it is important to look at opportunity costs?

Principle #3: Rational People Think at the Margin. People make decisions by comparing costs and benefits at the margin Task: As a group make a list of “black and white” decisions. Ex. Eat or Starve. Then find the margin or “grey area” for each one. Ex. Eat a small lunch and bigger dinner. Discuss. Determine what makes people choose one thing over another.

Principle #4: People Respond to Incentives Because rational people make decisions by comparing costs and benefits, they respond to incentives. Task: As a group, write down three situations where incentives affect a market. Ex. Price of apples goes up so people buy pears etc. Then think of a situation where policy affects incentives. Ex. Seatbelt law. Discuss. Determine why incentives are such an important part of Economics.

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Principle #5: Trade Can Make Everyone Better Off. People gain from their ability to trade with one another. Task: As a group, make a list of some of the clothes that you are wearing or items in your possession. Look at the tag to figure out where they were made. Try to figure out what country they come from. How does trade affect our everyday life? Discuss. Determine what the benefit is from trading.

Principle #6: Markets Are Usually a Good Way to Organize Economic Activity A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

- Households decide what to buy and who to work for - Firms decide who to hire and what to produce

Task: As a group, use the definition of market economy to create an example. Think of a specific item or company and show how the firm and the household interact. You can write it out or create a chart or graphic organizer. Discuss. Determine what role prices have in a market economy.

Principle #7: Governments Can Sometimes Improve Market Outcomes. Government policies usually aim to either enlarge the economic pie (efficiency) or to change how the pie is divided (equity). Task: As a group think of a way the government might intervene in the market to help it become more efficient. Then try to come up with ways the government might help make the market more equitable. Discuss. Determine why the government may make policy that does not help the market.

Principle #8: The Standard of Living depends on a Country’s Production of Goods and Services Standard of living may be measured in different ways:

- By comparing personal incomes - By comparing the total market value of a

nation’s production. Task: As a group, come up with a list of the benefits of a better standard of living. Considering the definition, decide what kind of polices would help raise the standard of living in a country? Discuss. Why is it important to look at a countries production?

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Principle #9: Prices Rise When the Government Prints too Much Money Inflation is an increase in the overall level of prices in the economy. Task: Why does price increase when more money is printed? Discuss this idea with your group. Create a definition that could be understood by an elementary school student. Use examples to help explain the situation. Determine why inflation is an economic problem.

Principle #10: Society Faces a Short-run Tradeoff between Inflation and Unemployment Inflation goes up; unemployment goes down and vice versa. Task: As a group, discuss this trade off. Create a flow chart that shows why this happens. How can the government affect inflation and unemployment?

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WHAT IS ECONOMICS? Chapter 1, Section 1

KEY TERMS

Want Resource Scarcity Opportunity Cost

Trade-Off Production Possibilities Frontier

Rationing Device Economics

FOCUS QUESTIONS

Why does scarcity exist? How is choice related to scarcity?

How is opportunity cost related to choice? Why are rationing devices needed?

What is the purpose of the production possibilities frontier? What activity determines how rationing devices are distributed?

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UNDERSTANDING OPPORTUNITY COST

List 5 items that you recently purchased or did

List what you could have purchased or done instead of what you did

What is the opportunity cost of the good you purchased or the activity you did?

PRODUCTION POSSIBILITIES FRONTIER - One Diagram, Three Economic Concepts o A PPF shows ALL possible combinations of TWO goods that an economy can produce in a certain period of time. o Looking at the production possibilities curve, answer the following questions…

• If this economy produces 40,000 skis per year, how many snowboards can it produce? ____________________

• If this economy produces 50,000 snowboards per year, how many skis can it produce? ____________________

o Any point on the PPF itself (A-D in the example) is

____________________ to us. o We can also have the combination of goods represented by any

point _______________ the PPF, such as point _________. o Because resources are limited, we don’t have enough to produce at

point ______ which is ______________ the PPF. o Continuing to use the example, answer the following questions

about opportunity cost… • If we narrow our choices to only points B and C. Then we make a

final decision to produce at point B, what is the opportunity cost of a set of skis over this range? ___________________

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Applying the Principles Scarcity - CHAPTER 1, SECTION 1

GUNS OR BUTTER (Military vs. Consumer Spending) Economists often speak of the way a society allocates its resources between military and consumer spending as a method for choosing guns or butter. Of course, guns represent resources allocated to a nation’s defense; butter represents resources allocated for consumer goods. Economists use the phrase “guns or butter” because scarcity mandates that we choose how to use available resources. Illustrate the relationship between guns and butter as directed in question 1. 1. Use the following data to draw a production possibilities frontier (PPF)

on the grid shown.

Guns Butter 0 15 3 14 8 11 11 7 12 4 13 0

Use the graph you created in question 1 to answer questions 2—8. 2. Can this economy produce 6 units of guns and 12 units of butter?

Explain. ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________

3. Can this economy produce 11 units of guns and 11 units of butter? Explain.

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4. What does this PPF represent?

________________________________________________________________________________________________________ 5. How does this PPF illustrate the concept of scarcity?

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6. How does this PPF illustrate the concept of opportunity cost?

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7. If the economy is presently producing 0 units of guns and 15 units of butter, what is the opportunity cost of increasing the

production of guns from 0 units to 3 units? _____________________________________________________________________ 8. If the economy is presently producing 12 units of guns and 4 units of butter, what is the opportunity cost of increasing the

production of butter from 4 units to 11 units? ________________________________________________________ The Production Possibilities Frontier and Efficiency

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The PPF represents what an economy can produce when it is using all its resources efficiently. As long as the economy is producing at a point on its PPF, it is producing at an efficient level and using all its resources. When an economy is already using all its resources efficiently, it cannot use the same resources to produce something beyond, or outside, its PPF. Therefore, economists say that a point outside an economy’s PPF is unattainable. An economy can produce at a point inside its PPF. However, if an economy is producing at a point inside its PPF, then either the economy is not using all its resources or it is using them inefficiently. Economists label a point inside the PPF underutilization because such a point indicates that the economy is underutilizing its resources. Efficiency, unattainability, and underutilization are shown on the PPF and Efficiency graph above. Use the graph to answer questions 9—11. 9. The point that represents an unattainable point is _______ 10. The point that represents underutilization is ________. 11. An economy that is using all its resources efficiently is producing at point __________. A society makes choices that determine how it will allocate its resources between guns and butter. For each of the events in questions 12-16, circle either guns or butter to indicate whether the event would cause a shift along the PPF toward producing more guns or toward producing more butter. 12. After World War I, America pursues a policy of “return to normalcy” and defense spending is cut.

Shift towards GUNS or BUTTER

13. America enters World War II. Shift towards GUNS or BUTTER

14. The Cold War escalates and the number of nuclear warheads increases. Shift towards GUNS or BUTTER

15. After the prosperous 1990s, the terrorist attacks of September 11, 2001, led the United States into wars in Afghanistan and Iraq and increased spending on homeland security.

Shift towards GUNS or BUTTER

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THE ECONOMIC WAY OF THINKING Chapter 1, Section 2

KEY TERMS

Marginal Incentive Microeconomics

Macroeconomics Theory

FOCUS QUESTIONS

How do costs and benefits affect decisions? Why are incentives important?

Explain the difference between micro- and macroeconomics. Why do economists develop theories?

Make a T-Chart reflecting the costs and benefits of continuing your education after high school.

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The Story of a Broken Window Use the story to explain why it’s important for economics to look at “what would have been.”

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Applying the Principles Incentives - CHAPTER 1, SECTION 2

Most of economics can be summarized in four words: People respond to incentives.

-Steven Landsburg, economist

Governments use economic incentives to influence the behavior of citizens in a way that benefits society. They create incentives through laws and through taxes.

For example, a government could pass a law prohibiting children from purchasing a product meant for use by adults. Such a law would make it difficult for children to obtain the product.

A government could also place a tax on a certain good to discourage its use. Such a tax would increase the cost of the good. For some people, the cost would then be greater than the benefit, and these people would decrease their consumption of the good.

A government could give tax benefits to encourage an activity. For example, it might provide a credit by giving taxpayers back a portion of a tax, or it might provide a deduction by allowing taxpayers to subtract a certain amount from their income before calculating their taxes. Such a credit or deduction would reduce the cost of the activity. For some people, the benefit will then be greater than the cost, and these people would increase their participation in the activity.

For each of the goals in questions 1-6, think of a government incentive that accomplishes the goal.

EXAMPLE Goal: Decrease the consumption of alcohol.

Incentive:

The government taxes the manufacture and sale of alcohol. Such taxation increases the cost of alcohol. For some people, the

cost is now greater than the benefit, and these people have decreased their consumption of alcohol.

1. Goal: Decrease smoking.

Incentive:

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2. Goal: Increase the level of education.

Incentive:

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3. Goal: Increase the rate of private home ownership.

Incentive:

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4. Goal: Decrease the consumption of fuel oil.

Incentive:

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5. Goal: Increase the rate of personal savings.

Incentive:

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6. Goal: Increase donations to charities.

Incentive:

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____________________________________________________________________________________________________ Refer to the goals and incentives in questions 1-6 as you answer questions 7 and 8.

7. What is the trade-off of using tax benefits as incentives?

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8. Could any of these incentives have unintended effects? Give a specific example.

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BASIC ECONOMIC LANGUAGE Chapter 1, Section 3

KEY TERMS

Tangible Intangible Goods Utility

Disutility Services Land Labor

Capital Entrepreneurship

FOCUS QUESTIONS

Choose an item in the classroom and list the materials/resources that were used to produce it.

What are the different ways that economists talk about “goods”?

What are the four types of resources or factors of production? Why are labor and entrepreneurship different categories of resources?

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Applying the Principles Resources - CHAPTER 1, SECTION 3

Use the following key to label each of the resources in questions 1-16 as land, labor, capital, or entrepreneurship. If a resource is land, identify it as either renewable or nonrenewable. If a resource is a capital good, identify it as either physical or human. (Hint: Physical capital is a tangible, human-made resource-such as tools or machinery-used to produce other goods and services. Human capital is the knowledge and skills a worker gains through education and experience. )

Ld-r = land (renewable) Ld-n = land (nonrenewable) Lbr = labor C-p = capital (physical) C-h = capital (human)

E = entrepreneurship

1. coal _______________________

2. telephone _____________________

3. natural gas ____________________

4. computer _____________________

5. truck driver ___________________

6. accountant ____________________

7. forklift _______________________

8. oak trees _____________________

9. corn _________________________

10. education _____________________

11. Bill Gates ____________________

12. cotton ________________________

13. gold _________________________

14. hammer ______________________

15. Henry Ford ___________________

16. lawyer _______________________