unit 1: basic economic concepts 1: basic economic concepts length: 2 weeks chapters: 1 and 2 what is...
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Unit 1: Basic
Economic ConceptsLength: 2 Weeks
Chapters: 1 and 2
What is Economics?
Economics is the study of _________.
• Economics is the science of scarcity.
• Scarcity means that we have unlimited wants
but limited resources.
• Since we are unable to have everything we
desire, we must make choices on how we will
use our resources.
choices
In economics we will study the choices of
individuals, firms, and governments.
Textbook DefinitionEconomics- Social science concerned with the
efficient use of scarce resources to achieve
maximum satisfaction of economic wants.
(Study of how individuals and societies deal
with ________)
Examples:You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on
welfare.
scarcity
Micro vs. MacroMICROeconomics-
Study of small economic units such as
individuals, firms, and industries (ex: supply
and demand in specific markets, production
costs, labor markets, etc.)
MACROeconomics-Study of the large economy as a whole or
economic aggregates (ex: economic growth,
government spending, inflation,
unemployment, international trade etc.)
Positive Economics Economic analysis is used to answer questions
• about the way the world works.
• that have definite right and wrong answers.
How is Economics used? • Economists use the scientific method to make
generalizations and abstractions to develop theories. This is
called theoretical economics.
• These theories are then applied to fix problems or meet
economic goals. This is called policy economics.
Normative EconomicsEconomic analysis that involves saying how the
world should work.
Positive vs. Normative Positive - Based on facts. Avoids value judgments
(what is). *about description*
Normative - Includes value judgments (what ought to
be). *about prescription*
1. How much revenue will a bridge toll yield next year?
2. How much would that revenue increase if the toll were
raised from $1.00 to $1.50?
3. Should the tolls be raised, bearing in mind that a toll
increase would likely reduce traffic and air pollution
near the bridge but impose some financial hardship on
frequent commuters?
Which of the following
statements is/are normative?
1. The price of gas is rising.
2. The price of gas is too high.
3. Gas prices are expected to fall in the near
future.
5 Key Economic Assumptions1. Society’s wants are unlimited, but ALL resources
are limited (scarcity).
2. Due to scarcity, choices must be made. Every choice
has a cost (a trade-off).
3. Everyone’s goal is to make choices that maximize
their satisfaction. Everyone acts in their own “self-
interest.”
4. Everyone makes decisions by comparing the
marginal costs and marginal benefits of every
choice.
5. Real-life situations can be explained and analyzed
through simplified models and graphs.
Analyzing Choices
Joe’s DilemmaJoe doesn’t know what he should do after he graduates from
high school. He just got his acceptance letter from UCLA
(go Bruins!) but he is considering taking a year off to work
as an apprentice under a local aging artist. He also recently
read an article about taking a gap year. He is considering a
community development program in Brazil and then doing
a little backpacking South America.
What should Joe do?
Trade-offs and Opportunity CostALL decisions involve trade-offs.
The most desirable alternative given up as a
result of a decision is known as opportunity cost.
Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.
(Examples: going to the movies)
What are trade-offs of deciding to go to college?
What is the opportunity cost of going to college?
What is the opportunity-cost of this decision?
Thinking at the MarginDecisions are not always “all or nothing” but rather require
us to decide how much more or less to do.
Marginal Analysis = a decision that made by considering the marginal cost (MC) and marginal benefit (MB) of consuming or producing one more unit or one less unit.
Marginal = additional
MB ≥MC = Do it!
MB < MC = Skip it!
Thinking at the Margin Problems1. You own a 100-spot parking garage in downtown Chicago.
You have charged $1.00 per hour for parking for a long
time, and your lot is always full during the business day
(9:00 AM to 5:00 PM). If you raise your price to $1.50
hour, only 65 people will use your garage. If the price is
$2.00 per hour only 54 people will park. At $2.50 per hour
only 45 people will use your garage.
• Where should you set your price? Why?
$1 x 100 spots = $100
$1.50 x 65 = $97.50
$2 x 54= $108
$2.50 x 45= $112
• An airline is trying to decide how much to charge
passengers who fly standby. It costs the airline $100,000 to
fly the 200-seat plane from New York to Los Angeles. The
plane is about to take off with 24 empty seats. A standby
passenger is waiting by the gate, but he only has $200.
• Should the airline sell him a seat for that amount? Why or
why not?
Thinking at the Margin Problems
• You own a store with 10 employees who collectively earn
$350,000 per year in wages, for an average of $35,000 per
employee. Your store takes in $500,000 per year in
revenue, so each worker is earning an average of $15,000
in profit for you. Adding an additional employee will raise
total wage costs to $385,000 per year, while revenues rise
to $537,000; each worker is now making you an average
profit of $13,818 per year.
• Should you hire the eleventh worker? Why or why not?
• Yes, you are still making $2,000 more with that additional
employee.
Thinking at the Margin Problems
Unit 1: Basic
Economic Concepts““Econ, Econ,
EconEcon””
EconEcon
24
Economic
TerminologyUtility =
Marginal =
Satisfaction!
Additional!
Allocate = Distribute!
25
Scarcity vs. Shortages
•Shortages occur when producers will not or cannot
offer goods or services at current prices. Shortages
are temporary.
•Scarcity occurs at all times for all goods.
Price vs. CostWhat’s the price? vs. How much does that cost?
Price= Amount buyer (or consumer) pays
Cost= Amount seller pays to produce a good
InvestmentInvestment= the money spent by BUSINESSES to
improve their production
Ex: $1,000 new computer, $1 Million new factory 26
Services= actions or activities that one
person performs for another (teaching,
cleaning, cooking)
Goods= physical objects that satisfy needs and wants
Give examples…
•Consumer Goods- created for direct
consumption (example: pizza)
•Capital Goods- created for indirect
consumption (oven, blenders, knives, etc.)
•Goods used to make consumer goods
Goods vs. Services
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Accountants vs. Economists
Accountants look at only EXPLICIT COSTS.
•Explicit costs are the traditional “out-of pocket
costs” of decision making.•Ex: Going to Disneyland
Economists look at the EXPLICIT COSTS and the IMPLICIT COSTS.
•Implicit costs are the opportunity costs such as
forgone time and forgone income.
•Ex: Peyton Manning leaves the NFL to open
a taco shop. 28
The 4 Factors of
Production
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The Four Factors of Production
Entrepreneurship
Capital
Labor
Land
•Producing goods and services requires the use of
resources- DUH!.
•ALL resources can be classified as one of the
following four factors of production:
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Land = All natural resources that are used to produce
goods and services. Anything that comes from
“mother nature.” (Water, Sun, Plants, Oil, Trees,
Stone, Animals, etc.)
The Four Factors of Production
Labor = Any effort a person devotes to a task for which
that person is paid. (manual laborers, lawyers,
doctors, teachers, waiters, etc.)
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Two Types of Capital:1. Physical Capital- Any human-made resource that is
used to create other goods and services (tools, tractors, machinery, buildings, factories, etc.)
2. Human Capital- Any skills or knowledge gained by a worker through education and experience (college degrees, vocational training, etc.)
The Four Factors of Production
32
33
Program for International Student Assessment (PISA) is a worldwide
evaluation of 15-year-old school children's scholastic performance
• Entrepreneurship= ambitious leaders that combine
the other factors of production to create goods and
services.
• Examples-Henry Ford, Bill Gates, Inventors, Store
Owners, etc.
The Four Factors of Production
Entrepreneurs:
1. Take The Initiative
2. Innovate
3. Act as the Risk Bearers
So they can obtain _________.
Profit= Revenue - Costs
PROFIT
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The Factors of Production
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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.