What comes to your mind What comes to your mind when you hear the word, when you hear the word, “Economics”?“Economics”?

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An increase in demand in the short run and the long run. The market starts in a long—ruu equilibrium, shown as point A in panel (a). In this equilibrium, each firm makes zero profit, and the price equals the minimum average total cost. Panel (b) shows what happens in the short run when demand rised from D1 to D2. The equilibrium goes

An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in the business. Suppose, for instance, that Helen had instead left this money deposited in a savings account that pays in interest rate of 5%, she would have earned $15,000 per year. To own her cookie factory, therefore, Helen has given up $15,000 a year in interest income.

To see how a firm goes about mazimizing profit, we must consider fully how to measure its total revenue and its total cost. Total revenue is the easy part: it equals the quantity of output the firm produces times the price at which it sells its output. By contrast, the measurement of a firm’s total cost is more sbtle.

One of the Ten Principles of Economics in Chapter 2 is that people face tradeoffs. Probably no tradeoff is more obvious or more important in a person’s life thatn the tradeoff between work and leisure. The more hours you spend working, the fewer hours you have to watch TV, have dinner with friends, or pursue your favorite hobby. The tradeoff between labor and leisure lies behind the labor supply curve.

Movements of workers from region to region, or country to country, is an obvious and often important source of shifts in labor supply. When immigrants come to the United States, for instance, the supply of labor in the United States increases and the supply of labor in the immigrants’ home countries contracts. In fact, much of the policy debate about immigration centers on its effect on labor supply and, thereby,equilibrium in the labor market.

stically competitive industry. In both panels of this figure, the profit=maximizing quantity is found at the intersection of the marginal-revenue and marginal-cost curves.

The efficiency of a tax system refers to the costs it imposes on taxpayers. There are two costs of taxes beyond the transfer of resources from the taxpeyer to the government. The first is the distortion in the allocation of resources that arises as taxes alter

Do you see a jumble of Economic Terms and graphs that all run together in your mind?…

Quantity0

Price

Demand

Quantity0

Price

P = MC P = MR(demandcurve)

MC

ATC

MC

ATC

MR

Efficientscale

P

Quantityproduced

Quantity produced =Efficient scale

Sometimes it Sometimes it feels like feels like economics…economics…

It’s not so tough to understand. After all, you live economics every day of your life

……and sometimes it feels and sometimes it feels like you are just going like you are just going about your lifeabout your life

Our goal is to help you Our goal is to help you integrate economics into integrate economics into your life. Like the your life. Like the climbing wall, this is an climbing wall, this is an effort to give you a effort to give you a toehold on economic toehold on economic understanding. We understanding. We hope it will provide hope it will provide enough to get you enough to get you started, and a desire to started, and a desire to learn more.learn more.

There are 6 basic Economic There are 6 basic Economic Principles woven into your Principles woven into your everyday life.everyday life.

We all make choices (People economize)We all make choices (People economize) All choices have costsAll choices have costs Economic systems influence choicesEconomic systems influence choices Incentives produce “predictable” responsesIncentives produce “predictable” responses Do what you do best, trade for the rest Do what you do best, trade for the rest

(voluntary trade creates wealth)(voluntary trade creates wealth) Consequences of our choices lie in the future.Consequences of our choices lie in the future.

When you understand the When you understand the key Economic Reasoning key Economic Reasoning Principles, you willPrinciples, you will

Understand HowUnderstand How Understand WhyUnderstand Why Make Better ChoicesMake Better Choices Become EmpoweredBecome Empowered

How Do We Define How Do We Define Economics?Economics? The study of the allocation of scarce The study of the allocation of scarce

resourcesresources Resources : human, natural, capital, and Resources : human, natural, capital, and

entrepreneurial. These productive resources are entrepreneurial. These productive resources are used to create the goods and services people used to create the goods and services people want.want.

Scarce : wants exceed resourcesScarce : wants exceed resources Allocation: deciding who gets it?Allocation: deciding who gets it?

In other words, who does what, how do they In other words, who does what, how do they do it, and for whom do they do it?do it, and for whom do they do it?

#1 #1 We All Make ChoicesWe All Make Choices(People economize)(People economize)

Scarcity forces us to chooseScarcity forces us to choose

Unlimited wants, limited Unlimited wants, limited resourcesresources

Not making a choice is itself a Not making a choice is itself a choice choice

Active, not passiveActive, not passive

Children need a framework for Children need a framework for making choices that is best making choices that is best begun early begun early

Factors driving choices can be Factors driving choices can be material, behavioral, moral, or material, behavioral, moral, or some combination of all three. some combination of all three.

#1 #1 We ALL Make ChoicesWe ALL Make Choices

Most of us Most of us

want towant to

maximize maximize

our our

benefitsbenefits

BENEFITS

While minimizing our costs.

COSTS

#2 TANSTAAFL#2 TANSTAAFL™™

#2 TANSTAAFL#2 TANSTAAFL™™

Everything has a cost!Everything has a cost! Don’t confuse “cost” with “price”Don’t confuse “cost” with “price” Opportunity Cost – the 2nd best Opportunity Cost – the 2nd best

choicechoice (it is “The Road Not Taken”)(it is “The Road Not Taken”) Costs are measured in many waysCosts are measured in many ways

MaterialMaterial MonetaryMonetary Labor v. foregone leisureLabor v. foregone leisure TimeTime MoralityMorality SecuritySecurity

WHY ARE YOU IN THIS WHY ARE YOU IN THIS CLASS RIGHT NOW?CLASS RIGHT NOW?

Application of Opportunity Costs Application of Opportunity Costs Cost / Benefit AnalysisCost / Benefit Analysis It’s the best of your alternativesIt’s the best of your alternatives

Would your decision change if you didn’t Would your decision change if you didn’t have to take this class to graduate?have to take this class to graduate?

Would your decision be different if you won Would your decision be different if you won the powerball lottery? (118 million)the powerball lottery? (118 million)

Would you pick these up Would you pick these up if you approached this?if you approached this?

What would be the opportunity cost of this decision?

Would you pick this up if Would you pick this up if you approached this?you approached this?

What is the incentive to pick up this as opposed to the pennies?

#3 Economic Systems #3 Economic Systems Influence ChoicesInfluence Choices

An “economic system” is the way societies organize themselves to answer the three basic questions of economics:• What to Produce?• How to Produce It?• For Whom to Produce It?

#3 – Economic Systems Influence Choices#3 – Economic Systems Influence Choices

A model of the Circular Flow

# 3 - Economic Systems Influence Choices# 3 - Economic Systems Influence Choices

Traditional Economies – A Traditional Economies – A system that answers the system that answers the what, how, and for whom what, how, and for whom questions by following what questions by following what has always been done in has always been done in the past. These economies the past. These economies are usually characterized are usually characterized by subsistence living and by subsistence living and limited trade.limited trade.

There are three basic systems. Most economies have some elements of all three.

#3 - Economic Systems Influence Choices#3 - Economic Systems Influence Choices

Command Command Economies – The Economies – The answers to the answers to the economic questions economic questions above are made by a above are made by a central authority, central authority, usually “the state.”usually “the state.”

Market Economies – Market Economies – Decision-making Decision-making carried out by buyers carried out by buyers and sellers at and sellers at mutually agreeable mutually agreeable terms. Such terms. Such economies are economies are characterized by the characterized by the decentralization of decentralization of decision-making.decision-making.

How are the basic questions answered by a Market Economy?

# 3 - Economic Systems Influence Choices

#3 – Economic Systems Influence Choices#3 – Economic Systems Influence Choices

The main difference between economic The main difference between economic systems:systems:

Who owns the resourcesWho owns the resources Who incurs the costs of resourcesWho incurs the costs of resources Who receives the benefits from Who receives the benefits from

resource utilizationresource utilization

#4 Incentives produce #4 Incentives produce “Predictable” Responses“Predictable” Responses

Monetary and non-monetary. Monetary and non-monetary. That which is subsidized or rewarded will increase, That which is subsidized or rewarded will increase,

and that which is taxed or penalized will decrease.and that which is taxed or penalized will decrease. To change behavior, change the incentive. To change behavior, change the incentive. Sometimes it is only with hindsight that Sometimes it is only with hindsight that

“predictability” becomes obvious!“predictability” becomes obvious!

Completing Extended Application

=

&

#5 Do What You Do Best,#5 Do What You Do Best, Trade for the Rest. Trade for the Rest.

(As long as the trade is voluntary, both parties are better off).

#5 Do What You Do Best, Trade for the Rest#5 Do What You Do Best, Trade for the Rest

•Trying to produce everything yourself limits both production and consumption

• What do you “do best”?

•Sell what you produce at low opportunity cost.

•Buy what you would produce at a high opportunity cost.

#5 Do What You Do Best, Trade for the Rest#5 Do What You Do Best, Trade for the Rest

Trade works best when Trade works best when there isthere is HonestyHonesty TransparencyTransparency Expected Gain for both Expected Gain for both

partiesparties

The gain for both parties The gain for both parties does not need to be equal does not need to be equal in order to be valuable.in order to be valuable.

#5 Do What You Do Best, Trade for the Rest#5 Do What You Do Best, Trade for the Rest

•Trading goods and services with others adds value to seemingly disparate parties. This provides the incentive to ease social and political tension among people and nations.

Parity between trading partners is desirable.

Power and information disparities can make trade involuntary.

#6 Choices Have #6 Choices Have ConsequencesConsequences

Consequences lie in Consequences lie in the futurethe future

Predictability Predictability improves decision-improves decision-makingmaking

Observe patterns to Observe patterns to make predictionsmake predictions

Unpredictability Unpredictability leads to inconsistent leads to inconsistent decision-makingdecision-making

#6 Choices Have Consequences#6 Choices Have Consequences

Theory of unintended Theory of unintended consequencesconsequences

Our character is the Our character is the consequence of consequence of thousands of choices thousands of choices made throughout our made throughout our lives.lives.

Understanding the Understanding the past can help us start past can help us start in the present to make in the present to make choices that can choices that can change the future!change the future!

1. Identify the problem2. Analyze alternative solutions and select the

two best3. Make a list of the foreseeable positive and

the negative consequences of each choiceBe sure to differentiate between the short-

run and long run when evaluating consequences

4. Select the best choice

Applying Costs, Choices, and Consequences to make sound decisions

ProsPros ConsCons ProsPros ConsCons

Choice #2

My Decision: ____________________

_______________________________

Defining the Problem: _______________

_________________________________

Choice #1

#2b Economic Thinking is #2b Economic Thinking is Marginal ThinkingMarginal ThinkingIn thinking economically, economists coined the term “marginal” to describe the cost or benefit of attaining one one moremore unit of something.

Key QuestionDo the marginal benefits exceed marginal costs?

Sunk Costs

Generally, we tend to “hang on” to questionable decisions made in the past because we want to get value out of time, effort, or dollars dedicated to some prior activity. We say, “I can’t sell my house, sell a stock, quit working toward a degree in art history, stop studying for a test, fire Smith, or change occupations because of all my time, dollars, or energy that I’ve already put in.” Your time, dollars, and energy are sunk costs and are gone.

#2b Economic Thinking Is Marginal Thinking#2b Economic Thinking Is Marginal Thinking

Doing one more thing is not always a good economic choice, and can be counterproductive.

#4b Quantity and Quality of Resources Impact Living Standards.

The four factors of productiono Natural Resources (Land)o Human Resources (Labor)o Capital Resources (Equipment)o Entrepreneurial Resources (risk, profit motive)

•There are two ways for any given sector of an economy to grow – by taking growth from another sector and adding it to one’s own, or by growing the economy as a whole with all sectors participating in that growth (although not necessarily equally).•Over time, living standards rise by increasing the output of one or more of the four factors, even if the other three remain stable.

#4b Availability and quality of resources influence living standards.

To increase capital resources– technological changesTo increase capital resources– technological changes To increase human resources – better education, better skills, To increase human resources – better education, better skills,

higher birth rate, removal of age, race, gender and other higher birth rate, removal of age, race, gender and other barriers to employmentbarriers to employment

To increase natural resources – environmental controls, land To increase natural resources – environmental controls, land managementmanagement

To increase entrepreneurial resources – establishment of To increase entrepreneurial resources – establishment of private property, patent and copyright laws, access to financial private property, patent and copyright laws, access to financial markets, friendly tax and regulatory policymarkets, friendly tax and regulatory policy

Here are some ways we can grow our resources:

#4b Availability and quality of resources influence living standards.

Everyone is better off if we can grow our economy from this

Entrepreneurial Resources

Capital Resources

Natural Resources

Human Resources

TO THIS!

• Supply and demand are the two words that economists use most often because they are the forces that make market economies work.

• These concepts work most efficiently in COMPETITIVE markets.

# 6b Prices are determined # 6b Prices are determined by the market forces of by the market forces of supply and demand. supply and demand.

The LAW OF DEMAND states that, other things being equal, the quantity demanded of a good falls when the price of the good rises, and rises when the price falls.

# 6b Prices are determined by the market forces of supply and # 6b Prices are determined by the market forces of supply and demand.demand.

Price

Quantity

$2.00

$4.00

$6.00

1 2 3 4

Supply

Demand

$8.00

Equilibrium Quantity

Equilibrium Price

# 6b Prices are determined by the market forces of supply and # 6b Prices are determined by the market forces of supply and demand.demand.

TastesTastes Costs of Substitute Goods/Services (hot dogs and Costs of Substitute Goods/Services (hot dogs and

hamburgershamburgers Costs of Complementary Goods/Services (hot Costs of Complementary Goods/Services (hot

dogs and mustard)dogs and mustard) Changes in income Changes in income Number of Buyers in the marketNumber of Buyers in the market ExpectationsExpectations

Price is not the only determinant of demand. The demand curve can change (shift) because of such things as:

·Shifts in supply are the result of changes in:Resource CostsCosts of Producing Other Goods with the Same ResourcesTaxes and/or SubsidiesTechnological ChangeExpectationsNumber of Sellers

# 6b Prices are determined by the market forces of supply and demand.

The LAW OF SUPPLY states that, other things being equal, the quantity of a good supplied rises when the price of the good rises, and falls when the price falls.

# 6b Prices are determined by the # 6b Prices are determined by the interaction of supply and demand.interaction of supply and demand.

A specific scenario A specific scenario might help make the might help make the relationship clearer. relationship clearer. How do we answer How do we answer the question, “Why the question, “Why does a gallon of gas does a gallon of gas cost $3.00 this week, cost $3.00 this week, $3.50 next week and $3.50 next week and then $3.25 the then $3.25 the following week?”following week?”

#6b Prices are determined by #6b Prices are determined by the intersection of supply and the intersection of supply and demanddemand

Market for GasolineMarket for GasolinePrice (per gallon)

Quantity

Supply

Demand

$3.00

9M Barrels

Demand II

$3.50

12M Barrels

Supply II

$3.25

13M Barrels

$0

Any Questions?Any Questions?

ERP’s were adopted from Powell’s Center for Economic Literacy & ERP’s were adopted from Powell’s Center for Economic Literacy & other sourcesother sources