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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
48
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
1
2
3
4
5
6
7
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
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)