ECONOMICS

IS STUDYING THE WAY WE ACQUIRE

WHAT WE NEED AND WANT!!!

HOW WE GET STUFF!

SCARCITY

2

ECONOMICS COURSE SYLLABUS

I CHAPTER 1 BASIC TERM AND IDEAS

I I CHAPTERS 4&5 DEMAND, PRODUCTION & SUPPLY

III CHAPTER 2 ECONOMIC SYSTEMS

IV CHAPTER 3 ECONOMIC INSTITUTIONS

V CHAPTER INVESTMENT & PROJECT

ECONOMICS WHY STUDY ECONOMICS?????

I KNOW…

IT’S A REQUIRED COURSE!!!

DO ANY OF THESE RING A BELL?

MARTHA

BEN BERNANKE

BEN BERNANKE???.

1986

CHERNOBYL

**

*

1989**

*

PRINCE WILLIAM SOUND

• QUESTIONS? WHY ARE GAS PRICES SO HIGH? OPEC? OIL COMPANIES? DEMAND??????? KATRINA?

• How high could they go? WHO KNOWS???

• What can the government do?

PRICE CONTROLS? INCENTIVES?

• What can be done to reduce U.S. dependence on foreign

oil? ENVIRONMENTALISTS … GOING GREEN! HYBRIDS, DIESELS, FUEL CELL TECHNOLOGY

CHAPTER 1 INTRODUCTION

WHAT IS ECONOMICS?

SECTION 1 Scarcity and the Science of Economics

SECTION 2 Basic Economic Concepts

SECTION 3 Economic Choices and Decision Making

The Fundamental Economic ProblemWhether they are rich or poor, most

people seem to want more than they already have.

The fundamental economic problem facing all societies is that of scarcity.

Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have.

*

The Fundamental Economic Problem (cont.)

• Scarcity affects almost every decision we make.

Economics

is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources.

Figure 1.1

Basic Terms and Concepts Economics can be broken down into two categories:

Macro-Economics- deals with the impact of choices on the TOTAL level of economic activity

 FEDERAL RESERVES DISCOUNT RATE TO ALL BANKS

Micro-Economics - focuses on choices made by individual consumers and firms and their impact on SPECIFIC markets

THE INTEREST RATE ON YOUR CHECKING ACCOUNT

 

Needs and Wants• Economists often talk about people’s needs

and wants.

– A need is a basic requirement for survival and includes food, clothing, and shelter.

(Higher Order:, love, acceptance, hope, knowledge,

accomplishment)

– A want is a way of expressing a need.

WANT- the means of expressing a need

Need = food Want = pizza

(advertising presents wants as needs)  

 NEED = TRANSPORTATION

WANT= LAMBORGHINI 

BIOLOGICAL

SAFETY

ATTACHMENT

ESTEEM

COGNITIVE

ESTHETIC

SELF ACTUALIZATION

TRANSCENDENCE

FOOD WATER OXYGEN REST SEXUAL EXPRESSION RELEASE FROM TENSION

SECURITY COMFORT TRANQUILITY FREEDOM FROM FEAR

TO BELONG AFFILIATE TO LOVE AND BE LOVED

CONFIDENCE SENSE OF WORTH COMPETENCE RESPECT

KNOWLEDGE UNDERSTANDING NOVELTY

ORDER BEAUTY

FUFILL POTENTIAL MEANINGFUL GOALS

SPIRITUAL NEED FOR COSMIC IDENTIFICATIONHIGHER ORDER

BASIC

NEED - BASIC requirements for survival: food, clothing, shelter

16

“There Is No Such Thing as a Free Lunch”

• Virtually everything we do has a cost–even when it seems as if we are getting something “for free.”

• Unfortunately, most things in life are not free because someone has to pay for the production in the first place.

In life, some things SEEM to be free! This idea is known as the …

“FREE LUNCH CONCEPT”

“There Is No Such Thing As A Free Lunch”

But, eventually, someone must pay! WHO? .......

YOU! CONSUMERS AND BUSINESSES

Who pays for a "free" school lunch? ... TAXPAYERS*****So... remember..... “ T I N S T A A F L"

EXAMPLE= …. A FREE LUNCH! ……

(IN HOLLYWOOD… THEY DO LUNCH! ???)

There are COSTS involved.

They can include : production / farmers; transportation; chef/cook; waiter/waitress etc. Who pays for a "free

business" lunch?

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WHAT to Produce

• The first question is that of WHAT to produce.

• A society cannot have everything its people want, so it must decide WHAT to produce.

• Because we live in a world of relatively scarce resources, we have to make wise economic choices.

Three Basic Questions• We make decisions about the ways our

limited resources will be used.

HOW to Produce• A second question is that of HOW to produce.

• Should factory owners use mass production methods that require a lot of equipment and few workers, or should they use less equipment and more workers?

FOR WHOM to Produce• The third question deals with FOR WHOM

to produce.

“SWEDEN”

INDIA V. BELGIUM

VOLVO

SAAB

•*

In the American free enterprise economy, privately-owned businesses and consumers, rather that the government answer these three questions!

1.WHAT TO PRODUCE 2. HOW TO PRODUCE

3. FOR WHOM TO PRODUCE

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The Factors of Production

• The factors of production, or resources required to produce the things we would like to have, are land, capital, labor, and entrepreneurs.

*

factors of production

4 FACTORS OF PRODUCTION*** (FOP)

****  --provide the MEANS to produce and to distribute goods and services.

****--must be PRESENT for production to take place. 

&

The Factors of Production (cont.)

Figure 1.2

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Land

In economics, land refers to the “gifts of nature,” or natural resources not created by humans.

Economists tend to think of land as being fixed, or in limited supply.

The problem of scarcity is likely to become worse as populations grow in the future.

Capital

• Another factor of production is capital–the tools, equipment, machinery, and factories used in the production of goods and services.

• Such items also are called capital goods to distinguish them from

financial capital, the money used to buy the tools and equipment used in production.

Labor

• The second factor of production is labor–people with all their efforts, abilities, and skills.

Entrepreneurs

• Some people are special because they are the innovators responsible for much of the change in our economy.

• an entrepreneur, is a risk-taker in search of profits who does something new with existing resources.

• They provide the initiative that combines the resources of land, labor, and capital into new products.

Production

**Only when all factors of production are present, production, or the process of creating goods and services, can take place.

The Scope of Economics• Economics is the study of human efforts to

satisfy wants through the careful use of scarce resources.

There are four key elements to this study:

description, analysis, explanation, and prediction.

1)DescriptionEconomics deals with the description of economic

activity.

For example, the Gross Domestic Product (GDP) is the most comprehensive measure of a country’s total output and is a key measure of the nation’s economic health.

2)AnalysisIn order to answer such questions, economics must

focus on the analysis of economic activity as well.

What exactly is happening??

The importance of analysis is that it helps us to discover why things work and how things happen.

3)ExplanationEconomics is also concerned with the explanation of

economic activity.

If we all have a common understanding of the way our economy works, some economic problems will be much easier to address or even fix in the future.

4)Prediction

Because economics deals with the study of what is or what tends to be, it can help predict what may happen in the future, as well as the likely consequences of different courses of action.

Goods, Services, and Consumers

• Economics is concerned with economic products –goods and services that are useful, relatively scarce, and transferable to others.

Goods

• The first type of economic product is a good –a tangible item that is economically useful or satisfies an economic want.

Goods

– A consumer good is intended for final use by individuals.

– When manufactured goods are used to produce other goods and services, they are called capital goods.

– Any good that lasts three years or more when used on a regular basis is called a durable good.

– A nondurable good is an item that lasts for less than three years when used on a regular basis.

35

Services

• The other type of economic product is a service, or work that is performed for someone.

• The difference between a good and a service is that a service is intangible, or something that cannot be touched.

Consumers• The consumer is a person who uses goods

and services to satisfy wants and needs.

• As consumers, people indulge in consumption, the process of using up goods and services in order to satisfy wants and needs.

3 TYPES {ADD}•INDIVIDUALS (I)

•BUSINESSES (B)

•GOVERNMENT (G)

CONSPICOUS CONSUMPTION- the use or acquisition of goods and services solely to impress others

Value, Utility, and Wealth• In economics, value refers to a worth that

can be expressed in dollars and cents.

• Why, however, does something have value, and why are some things worth more than others?

$$$$$$

Utility • It turned out that for something to have value, it must also have utility, the capacity to be useful and provide satisfaction.

• The utility of a good or service may vary from one person to the next.

•The paradox of value is the situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as

diamonds, have a much higher value.

Paradox of Value

Wealth • Wealth, is the accumulation of those products that are tangible, scarce, useful, and transferable from one person to another.

The Circular Flow of Economic Activity

• The wealth that an economy generates is made possible by the circular flow of economic activity.

• The key feature of this circular flow is the market, any arrangement that allows buyers and sellers to exchange a certain economic product.

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Product Markets

• After individuals receive their income from the resources they sell, they spend it in product markets.

• These are markets where producers sell their goods and services to consumers.

• Individuals earn their incomes in factor markets, the markets where productive resources are bought and sold.

• How does this circular flow operate?

Factor Markets

INDIVIDUALS

BUSINESS

ORGANIZATIONS

PRODUCT MARKETS FOR

CONSUMERPRODUCTS

FACTOR MARKETS FOR PRODUCTIVE

RESOURCES

INSIDE FLOWFACTORS OF

PRODUCTION

GOODS &

SERVICES

YOU

IBM

• This is described by the term productivity, which is a measure of the amount of output produced by a given amount of inputs in a specific period of time.

• Productivity goes up whenever more output can be produced with the same amount of inputs in the same amount of time.

Productivity and Economic Growth• Economic growth occurs when a nation’s

total output of goods and services increases over time. (GNP,GDP)

44

Division of Labor and Specialization

• Division of labor and specialization can improve productivity.

– Division of labor takes place when work is arranged so that individual workers do fewer tasks than before.

– Specialization takes place when factors of production perform tasks that can be done relatively more efficiently than others.

ProductivityCars/day Fixed capital

costsCost\cars per day

1 $100,000 $100,000

2

5

10

$100,000

$100,000

$100,000

$50,000

$20,000

$10,000

Economy of Scale = the more you PURCHASE the better the PRICE!

ADAM SMITH (1723-1790)SCOTTISH ECONOMIST"Wealth of Nations" 1776Championed the new middle class as a result of the industrial revolution.

BELIEVED:a. that government should not have a large role in the economy. It should only be involved in national defense,

courts, internal improvements and education. Therefore, private enterprise should be free from ALL government interference =

LAISSEZ-FAIRE.

You’re on your own!!

b. that individuals, acting naturally in their own self- interests would bring about the greatest good for society. Greed is good!” – (M. Douglas in Wall Street)

c. in the concept of the "invisible hand" whereby competition + the free marketplace (S/D) would guide resources to their most productive uses.

d. that the "mercantilist view" that wealth consisted solely of money was incorrect. In "Wealth of Nations" he stated that

source of wealth consisted of all of the goods and services that were produced by labor and then consumed by all.

e. in international trade because it was natural for people to trade freely with each other. Trade makes labor more productive and increases a nation's wealth. He was a strong proponent of the concept of "voluntary exchange".

Smith was the first to notice that labor became more productive as each worker becomes more skilled at a single job. He felt that new machinery + division of labor

+ specialization increase in productivity and even greater wealth for a nation.

49

Trade-Offs and Opportunity Cost• There are alternatives and costs to

everything we do.

• In a world where “there is no such thing as a free lunch,” it pays to examine these concepts closely.

• People face trade-offs, or alternative choices, whenever they make an economic decision.

Introduction• The process of making a choice is not

always easy.

OPPORTUNITY COST• To an economist cost often means more than the

price tag placed on a good or service.

• Instead, economists think broadly in terms of opportunity cost–the cost of the next best alternative use of money, time, or resources when one choice is made rather than another.

In order to gain something, you must be willing to give something up!

• A popular model economists use to illustrate the concept of opportunity cost is the production possibilities graph.

PRODUCTION POSSIBILITES

A classic example is a mythical country called “Alpha” which produces two goods–guns

and butter.

Production Possibilities

This is a diagram representing various combinations of goods and/or services an economy can produce when all productive

resources are fully employed

CAN THIS BE?

A popular model economists use to illustrate the concept of opportunity cost is the production

possibilities graph.

A L P H A

1 4

1 2

1 0

5

00

2

4

6

8

1 0

1 2

1 4

1 6

1 3 5 7 5 1 2 0 1 5 0

B U T T E R

OPPORTUNITY COST IS ILLUSTRATED BY THE PRODUCTION POSSIBILITIES GRAPH.

IT DEMONSTRATES THE RELATIONSHIP OF RESOURCES TO PRODUCTION

SO … WHAT HAPPENED TO IT ?

OPPORTUNITY COST

is expressed in terms of tradeoffs, or in terms of things given up in order to get something else.

IT INVOLVES MAKING DECISIONS BY USING LOGICAL ANALYSIS TO RECOGNIZE AND EVALUATE THE MAKING OF CHOICES ON ALTERNATIVES

FOREIGN COMPETITION

•LOWER LABOR COSTS•NO HEALTHCARE•NO SAFETY REGULATIONS

WORKER’S HEALTH& SAFETY

CONE MILLSCOMPANY’S

PROBLEM

LOSS OFPROFITS

POSSIBLE SOLUTIONS???

BANKRUPTCY =LOSS OF JOBS

TARIFFS?

UNIVERSAL HEALTHCARE?

56

Employ Cost-Benefit Analysis• Most economic decisions can be made by using cost-

benefit analysis, a way of thinking about a problem that compares the costs of an action to the benefits received.

• Businesses choose to invest in projects which give the highest return per dollar spent. State and local governments also use cost-benefit analysis to evaluate the effectiveness of public programs.

IS IT WORTH SPENDING $5.4 MILLION PER MINUTE FOR TV ADVERTISING DURING THE SUPER BOWL?

57

The Road Ahead• Economics includes the study of how things

are made, bought, sold, and used.

• It provides insight as to how the economy works on a daily basis.

• It also provides a more detailed understanding of a free enterprise economy.

• This is one in which consumers and privately owned businesses, rather than the government, make the majority of the WHAT, HOW, and FOR WHOM decisions.

58

Topics and Issues

• The study of economics will provide a working knowledge of property rights, competition, supply and demand, the price system, and the economic incentives that make the American economy function.

• Along the way, topics such as unemployment, the business cycle, inflation, productivity, and economic growth will be covered.

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Economics for Citizenship

• The study of economics helps us to become better decision makers–both in our personal lives and in the voting booths.

• The study of economics will not provide you with clear-cut answers to all questions, of course, but it will give you a better understanding of the issues involved.