ECONOMICSECONOMICS

What is it?? What is it??

Hmmmmm ??Hmmmmm ??

ECONOMICSECONOMICS

Book Definition: Book Definition: How people choose to use How people choose to use

limited resources in an effort limited resources in an effort to satisfy unlimited wantsto satisfy unlimited wants

EconomicsEconomics

Choices. . . What to buy, what not to buy. .Choices. . . What to buy, what not to buy. . Should I spend time reading this, or go on Should I spend time reading this, or go on

Youtube and watch a funny video.. . Youtube and watch a funny video.. .

Should I get a job this semester or Should I get a job this semester or concentrate on my classes. . .concentrate on my classes. . .

This is an everyday definition of This is an everyday definition of Economics. Economics.

SCARCITYSCARCITYThe problem of limited The problem of limited

resources and unlimited wants.resources and unlimited wants.

This is the essential economic This is the essential economic problem everyone has, even Bill problem everyone has, even Bill

Gates. Gates.

A resource or goodA resource or goodis scarce if:is scarce if:

people want itpeople want itthere is not enough of it to fulfill there is not enough of it to fulfill

everyone’s wantseveryone’s wants it has alternative usesit has alternative usesusing it one way means giving up using it one way means giving up

using itusing it

another wayanother way

Two Basic Questions Everyone Two Basic Questions Everyone has. . .has. . .

What do I need and What do I want?What do I need and What do I want?

You need to know. . . What is the You need to know. . . What is the difference between a need and a difference between a need and a want? want?

A NeedA Need

Textbook Definition: a basic Textbook Definition: a basic requirement for survival- food, requirement for survival- food, clothing, shelter. clothing, shelter.

A WantA Want

Textbook Definition- A way you Textbook Definition- A way you express your needsexpress your needs

Huh? What does that mean?Huh? What does that mean?

Need vs. WantNeed vs. Want

You need to eatYou need to eatYou want a DoughnutYou want a DoughnutYou don’t need a Doughnut. . Some You don’t need a Doughnut. . Some

broccoli would work just as well. . But broccoli would work just as well. . But you WANT a doughnutyou WANT a doughnut

The doughnut is how you’ve expressed The doughnut is how you’ve expressed your need to eat. your need to eat.

In Economics some words have very specific In Economics some words have very specific meanings outside of how we normally use meanings outside of how we normally use

them.them. For example- the word Cost For example- the word Cost

In the regular world- the word cost means, In the regular world- the word cost means, the price of something you buy. the price of something you buy.

In Economics- the word Cost means In Economics- the word Cost means Consequence. Consequence.

You need to know the meaning of the You need to know the meaning of the word Costword Cost

TINSTAAFLTINSTAAFL

““There is no Such thing as a free There is no Such thing as a free lunch.”lunch.”

When you make a choice, you When you make a choice, you usually give something up. usually give something up.

For example, let’s say you have a For example, let’s say you have a dollardollar

With your dollar you have two With your dollar you have two optionsoptions

A Candy Bar or A Soda A Candy Bar or A Soda

You can only buy one of the two options You can only buy one of the two options with your dollarwith your dollar

If you chose the Candy bar If you chose the Candy bar

A Candy Bar No Soda for A Candy Bar No Soda for youyou

If you choose the sodaIf you choose the soda

No Candy for you

You can’t have bothYou can’t have both

By choosing one, you give up the By choosing one, you give up the other. other.

Whatever you did not choose, that Whatever you did not choose, that was the cost (consequence) of your was the cost (consequence) of your choice. choice.

3 BASIC ECONOMIC 3 BASIC ECONOMIC QUESTIONSQUESTIONS

WHAT GOODS & SERVICES SHALL BE WHAT GOODS & SERVICES SHALL BE PRODUCED?PRODUCED?

HOW SHALL THEY BE PRODUCED?HOW SHALL THEY BE PRODUCED?

FOR WHOM SHALL THEY BE PRODUCED?FOR WHOM SHALL THEY BE PRODUCED?

Everyone has to answer these three Everyone has to answer these three questions for everything that they do. questions for everything that they do.

Three Question ExampleThree Question Example

You want to make a peanut butter sandwich You want to make a peanut butter sandwich for a snackfor a snack

You’ve just answered the first basic You’ve just answered the first basic Economic question- WHAT GOODS & Economic question- WHAT GOODS & SERVICES SHALL BE PRODUCED?- Answer- A SERVICES SHALL BE PRODUCED?- Answer- A peanut butter sandwichpeanut butter sandwich

So what do you do. . So what do you do. .

Get out the bread, spread peanut butter on one Get out the bread, spread peanut butter on one piece, jelly on the other and put them together. piece, jelly on the other and put them together.

You’ve just answered the second basic You’ve just answered the second basic economic question- HOW SHALL THEY BE economic question- HOW SHALL THEY BE PRODUCED?PRODUCED?

Then you eat it. . .Then you eat it. . .

You’ve just answered the third basic economic You’ve just answered the third basic economic question- FOR WHOM SHALL THEY BE question- FOR WHOM SHALL THEY BE PRODUCED? For yourself !PRODUCED? For yourself !

WHAT GOODS & SERVICES SHALL BE PRODUCED?WHAT GOODS & SERVICES SHALL BE PRODUCED? HOW SHALL THEY BE PRODUCED?HOW SHALL THEY BE PRODUCED? FOR WHOM SHALL THEY BE PRODUCED?FOR WHOM SHALL THEY BE PRODUCED?

Every personEvery person Every businessEvery business Every country Every country All must be able to answer these questions, if All must be able to answer these questions, if

they can’t -people die, businesses go broke, they can’t -people die, businesses go broke, countries collapse. countries collapse.

LIMITED RESOURCESLIMITED RESOURCES(We can’t always get what we want)(We can’t always get what we want)

Think of three things that you want but Think of three things that you want but cannot afford.cannot afford.

Think of three things you wish were in Think of three things you wish were in WoodlandWoodland

Think of three things that America needs Think of three things that America needs but must obtain from another countrybut must obtain from another country

Possible AnswersPossible Answers

For yourself- A car, clothes, more For yourself- A car, clothes, more food, I-pod, computerfood, I-pod, computer

For Woodland- A better Mall, a Zoo, a For Woodland- A better Mall, a Zoo, a theme park, cheaper housingtheme park, cheaper housing

For America- Oil, Electronics, Cars, For America- Oil, Electronics, Cars,

We can’t have everything due to We can’t have everything due to scarcity, we must specialize based scarcity, we must specialize based on what we have to work with. on what we have to work with.

There are four basic elements that go into There are four basic elements that go into any type decision making, business or any type decision making, business or

country.country. FACTORS OF PRODUCTIONFACTORS OF PRODUCTION NATURAL RESOURCESNATURAL RESOURCESCAPITAL GOODSCAPITAL GOODSLABORLABORENTREPRENEURSHIPENTREPRENEURSHIP

NATURAL RESOURCESNATURAL RESOURCES

THINGS PROVIDED BY NATURETHINGS PROVIDED BY NATUREFor example- the peanut butter for your For example- the peanut butter for your

sandwich. sandwich. LAND, AIR, WATER, FORESTS, COAL, LAND, AIR, WATER, FORESTS, COAL,

IRON ORE, OIL, ETC.IRON ORE, OIL, ETC.AN ECONOMY CANNOT CREATE AN ECONOMY CANNOT CREATE

GOODS IF IT LACKS NATURAL GOODS IF IT LACKS NATURAL RESOURCES.RESOURCES.

CAPITAL GOODSCAPITAL GOODS

HUMAN MADE RESOURCES THAT ARE HUMAN MADE RESOURCES THAT ARE USED FOR PRODUCTION.USED FOR PRODUCTION. For example- the knife used to spread the For example- the knife used to spread the

peanut butter, you can’t eat it, but you need it peanut butter, you can’t eat it, but you need it for the sandwich process to work. for the sandwich process to work.

FACTORIES, MACHINES, TRUCKS, FACTORIES, MACHINES, TRUCKS, BUSINESS BUILDINGS.BUSINESS BUILDINGS.

THINGS THAT A BUSINESS USES TO MAKE THINGS THAT A BUSINESS USES TO MAKE ITEMS THAT WILL BE SOLD TO A ITEMS THAT WILL BE SOLD TO A CONSUMER.CONSUMER.

LABORLABOR

HUMAN RESOURCESHUMAN RESOURCES

THE HUMAN EFFORT USED IN THE HUMAN EFFORT USED IN PRODUCTION.PRODUCTION.For example- you making the sandwichFor example- you making the sandwich

ENTREPRENEURSHIPENTREPRENEURSHIP

INDIVIDUALS WHO USE CREATIVITY INDIVIDUALS WHO USE CREATIVITY AND KNOW HOW TO CREATE A AND KNOW HOW TO CREATE A BUSINESS.BUSINESS.

THEY ASSUME THE RISK OF FAILURE.THEY ASSUME THE RISK OF FAILURE.For example- you deciding to make a For example- you deciding to make a

sandwich. If you decide to sell your sandwich. If you decide to sell your sandwich, you might make money, you sandwich, you might make money, you might not. That’s the risk. might not. That’s the risk.

Some MisconceptionsSome MisconceptionsCorrectedCorrected

Not resourcesNot resources

– – TimeTime

– – MoneyMoneyEconomics and Finance are not the sameEconomics and Finance are not the same

– – Economics is about resourcesEconomics is about resources

– – Finance is about moneyFinance is about money

– – Finance is an application of economicFinance is an application of economic

reasoningreasoning

More Terms to knowMore Terms to know

A Good - an item that is A Good - an item that is economically useful or that satisfies economically useful or that satisfies an economic want. an economic want. An example- A car, I-pod, soda, pantsAn example- A car, I-pod, soda, pants

Note- A Capital good is an item used to Note- A Capital good is an item used to produce another good- knife for peanut produce another good- knife for peanut butter. butter.

A Service – work performed for A Service – work performed for someonesomeoneExample- haircut, oil change, teeth Example- haircut, oil change, teeth

cleaning, brain surgery.cleaning, brain surgery.

You can’t hold a haircut, but you can get You can’t hold a haircut, but you can get one. one.

Consumer- Me, you, everyone.Consumer- Me, you, everyone.People who use goods and services People who use goods and services

to satisfy wants and needs. to satisfy wants and needs.

Question Time. . . Question Time. . .

What makes something valuable? What makes something valuable?

Value means- Worth that can be Value means- Worth that can be expressed in dollars and cents. expressed in dollars and cents.

Are you valuable to your parents??Are you valuable to your parents??

How much are you worth to them?How much are you worth to them?

Can they express what you are worth Can they express what you are worth in money ??in money ??

Odd questions. . .Odd questions. . .

Value in Economics doesn’t have Value in Economics doesn’t have anything to do with emotions, strictly anything to do with emotions, strictly dollars. dollars.

Currently you cost your parents just Currently you cost your parents just over an estimated 7500 dollars a year in over an estimated 7500 dollars a year in food, housing, and medical expenses.food, housing, and medical expenses.

Next year, the number goes up when Next year, the number goes up when you include college tuition. you include college tuition.

Paradox of ValueParadox of Value

Which is more valuable-Which is more valuable-

A Diamond Ring or a Flat Screen A Diamond Ring or a Flat Screen TV TV

Paradox of ValueParadox of Value

Let’s be honest- Many guys would Let’s be honest- Many guys would say the TV, and many girls would say the TV, and many girls would choose the ring. choose the ring.

Who is right? Who is right?

Another TermAnother Term

Utility – the capacity to be useful. Utility – the capacity to be useful.

For example in a utlity closet you For example in a utlity closet you find all sorts of useful things- find all sorts of useful things- brooms, mops, sponges etc. . brooms, mops, sponges etc. .

Paradox of ValueParadox of Value

Now. . Which one has more utility ? Now. . Which one has more utility ? How is a Diamond Ring useful?How is a Diamond Ring useful?How is a TV useful? How is a TV useful?

Paradox of ValueParadox of Value TVs do have more utlity than a Diamond TVs do have more utlity than a Diamond

ring, unless you’re trapped in a glass box ring, unless you’re trapped in a glass box and have to cut your way out. and have to cut your way out.

Generally, we assign more value to a Generally, we assign more value to a Diamond. Diamond.

This is known as the Paradox of Value- This is known as the Paradox of Value- Assigning value to items with little utility, Assigning value to items with little utility, but high scarcity. but high scarcity.

Making Economic Decisions Making Economic Decisions

For every decision you have choices, For every decision you have choices, some big, some small, sometimes some big, some small, sometimes you have many, other times you you have many, other times you have only a few. have only a few.

Term: Trade-off – any alternative Term: Trade-off – any alternative choice. choice.

OPPORTUNITY COSTOPPORTUNITY COST

The next best alternative The next best alternative use of a resource that is use of a resource that is given up when a decision given up when a decision is made to use resources is made to use resources

in a particular way.in a particular way.

Back to the Candy PurchaseBack to the Candy Purchase

Snickers or Skittles Snickers or Skittles

Let’s presume, that if Bel-Air was out of Let’s presume, that if Bel-Air was out of Snickers, your next choice for candy would Snickers, your next choice for candy would be Skittles. be Skittles.

If you had to choose between If you had to choose between the two: the two:

Snickers or Skittles Snickers or Skittles

If Bel-Air had both in stock, and you chose If Bel-Air had both in stock, and you chose Snickers, your Opportunity Cost would be Snickers, your Opportunity Cost would be the Skittles, since you can’t buy both. the Skittles, since you can’t buy both.

Illustrating Opportunity Cost. Illustrating Opportunity Cost.

You can’t buy everything you wantYou can’t buy everything you wantCountries can’t produce everything Countries can’t produce everything

they need. they need.

In Economics, we use graphs to In Economics, we use graphs to explain the range of choices in any explain the range of choices in any decision. decision.

Ok. . An Odd example. . . Ok. . An Odd example. . . (I really didn’t make this one up)(I really didn’t make this one up) Suppose there is an imaginary country.. . Suppose there is an imaginary country.. .

In this country, they are very productive, In this country, they are very productive, but not very creative. They can only make but not very creative. They can only make two things: Guns and Buttertwo things: Guns and Butter

As President, you can order your As President, you can order your people to make Guns, Butter or both people to make Guns, Butter or both at the same time. at the same time.

If you order everyone to make Guns, they If you order everyone to make Guns, they can produce a maximum of 50 Gunscan produce a maximum of 50 Guns

If you order everyone to make Butter, they If you order everyone to make Butter, they can make a maximum of 50 Butter. can make a maximum of 50 Butter.

If you had to graph your options If you had to graph your options it would look like thisit would look like this

5050

Guns

Butter 500

Point A

Point B

Point A represents Everyone producing GunsPoint B represents Everyone producing Butter

If you had to graph your options If you had to graph your options it would look like thisit would look like this

5050

Guns

Butter 500

Point A

Point B

Point A represents Everyone producing GunsPoint B represents Everyone producing ButterPoint C represents ½ of your population producing Guns, and the other ½ producingButter

Point C

The Curve is called a Production Possibilities The Curve is called a Production Possibilities Curve or Production Possibilities FrontierCurve or Production Possibilities Frontier

5050

Guns

Butter 500

Point A

Point B

The Curve represents all possible options that youhave. In this case, how much guns or butter you can produce.

Point C

Opportunity CostOpportunity Cost

5050

Guns

Butter 500

Point A

Point B

Point C

If your country is currently at point A, and you decide toproduce a few pounds of Butter, the opportunity cost arethe guns you have to stop producing.

Economic GrowthEconomic Growth

5050

Guns

Butter 500

Point A

Point B

Suppose you invade a neighboring country and obtain more resources, your PPF line would shift.

Point C

Economic Growth cont. Economic Growth cont.

5050

Guns

Butter 500

Point A

Point B

Point C

Based on your new curve, you could produce more guns and butter, because your resources Increased.

Guns and Butter- TranslationGuns and Butter- Translation

Guns – It represents Government Guns – It represents Government Spending- Roads, the FBI, the Army, Spending- Roads, the FBI, the Army, the Post Office etc. . the Post Office etc. .

Butter- Private Spending- Buying a Butter- Private Spending- Buying a house, a cheeseburger, a cell phone house, a cheeseburger, a cell phone etc. . . etc. . .

During the Cold War, we beat the USSR, because we could During the Cold War, we beat the USSR, because we could produce more Guns and Butter at the same time, they spent all of produce more Guns and Butter at the same time, they spent all of their resources on Guns. their resources on Guns.

Which of the following is anWhich of the following is anopportunity cost?opportunity cost?

a. A bad grade on a quiz because you a. A bad grade on a quiz because you didn’t studydidn’t study

b. Your mother’s hurt because you b. Your mother’s hurt because you forgot her birthdayforgot her birthday

c. Not going out with your friends c. Not going out with your friends because you are called in to work.because you are called in to work.

d. All of the above are opportunity d. All of the above are opportunity costs.costs.

Thinking in EconomicsThinking in Economics

Economists use: Economists use: Models Models No, not that kind. . . Graphs. . .No, not that kind. . . Graphs. . .

Cost- Benefit Analysis –weighing the Cost- Benefit Analysis –weighing the consequence of a decision against its consequence of a decision against its benefits. benefits.

Taking Small Steps. Taking Small Steps.