Economics & You

What is Economics?

Economics is all that deals with the

production, distribution, and consumption of goods and services.

You are involved in economics every day of

your life.

How does economics relate to

MY life?

Needs

• Water

• Food

• Clothing

• Shelter

• Essential to KEEPING PEOPLE ALIVE

Wants

• Things we don’t need

but that may make

our lives better.

Resources

Resources are the factors of production that are used in the production of

goods & services.

Types of resources are natural, human,

capital and entrepreneurship.

Resources• - The work done by individuals

• - machines, buildings, tools & money

• - raw materials water, minerals & land

Sometimes there are many choices.

Sometimes only a few choices.

.

Choice

Choice is selecting an _item_ or

_action_ from a set of possible

alternatives.

We must make choices because

goods & services are _limited_.

Since resources are limited…

You have to make smart choices.

Making Choices Trade-off: choosing one

thing over another

Opportunity Cost: cost of choosing one thing over another; you give up the next best option.

The Goal of economic decision making is to maximize resources

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When we were finished getting ice cream, “Where are you two going?”

The boy, whose name was Omar, answered: “We’ve saved up all our money and today we are going to the toy store! My sister Zainib wants to buy either a rabbit or a bike and I want to buy either a basketball net or a skateboard”.

Toy Store

Trade-off is the process of choosing one good or service over another. The item that you don’t pick is the opportunity cost. The rabbit is Zainib’sopportunity costand the skateboard is Omar’s opportunity cost.

Opportunity

Costs

Purchases

Principle #1: People Face Tradeoffs.To get one thing, we usually have to give up another thing. The opportunity cost of an item is what you give up to obtain that item.

Whether to go to college or to work?

Whether to study or go out on a date?

Whether to go to class or sleep in?

Guns v. butter

Food v. clothing

Leisure time v. work

Efficiency v. equity

Principle #2: The Cost of Something Is What You Give Up to Get It.

Actor and rap star Will Smith chose to skip college (M.I.T.) and go straight from high school to the music and film industry where he has earns millions of dollars.

Opportunity Cost

Opportunity Cost is what is _given_

_up_ when a choice is made - the

next _highest valued alternative.

Individuals must consider the _value_ of

what is given up when making a

_choice__.

Incentives

Incentives are things that incite or

motivate someone to make a choice.

Incentives are used to change

economic_ _behavior_.

• Yesterday, when I was walking through town, I decided to go to “Bubba’s Ice Cream”. My friend Fatima works there. Fatima provides a serviceto me because she serves me ice cream. A serviceis any kind of work performed for others for a fee. The ice cream is a good. A good is something you can feel, or any kind of merchandise that’s manufactured.

Bubba’s Ice Cream

•Look at the pictures on the right. Which of these pictures show goodsand which ones show services?

1)

2)

3)

4)

$$ Too Much $$

Price determines who gets

_goods_ and _services__.

(for you)

• I asked Fatima for a double scoop of my favorite kind of ice cream: chocolate chocolate chip. “I am sorry Huey, we are all out of that flavor”, she said. Disappointed, I settled for vanilla.

• Fatima asked me if I would like my vanilla ice cream in a cup or a cone. I asked for a cone. Fatima said I was lucky because there was only one more cone available. The little boy behind me in line wailed, “I wanted my ice cream in a cone!” I told Fatima that he could have the last cone, and that I would have mine in a dish with chocolate syrup.

What is supply and demand?

• The supply of chocolate chocolate chip ice cream at “Bubba’s” was gone because it was in high demand (wanted) by many customers. Look at the chart on the left to see what flavors are in supply at “Bubba’s Ice Cream”.

0102030405060708090

100

Gallons

vanilla choc. straw. mint

choc.

Flavors

Choc.

Choc.

Chip

Price

Price is the amount of _money exchanged

for a good or service.

Interaction of _supply_ and __demand__

determines price.

Demand

Demand is the amount of a good or

service that _consumers_ are willing

and able to _buy_ at a certain price.

Generally if…

Demand is high → Price is _high_

Demand is low → Price is _low__

Demand is high

Demand is low

Supply

Supply is the amount of a good or

service that _producers_ are willing

and able to _sell_ at a certain price.

Generally if…

Supply is high → Price is _low_

Supply is low → Price is _high_

There was a scarcity

of cones at Bubba’s.

Scarcity means that

there are limited

resources, and

therefore, people must

make choices. Look at

the pictures on the

right. Which pictures

show a scarcity?

1)

2)

3)

Scarcity

Scarcity is the inability to satisfy all wants

at the same time. All resources and

goods are limited.

This requires that choices be

made.

• What to produce?

• How to produce it?

• For whom to produce?

3 Basic Economic questions

Production

Production is the combining of human,

natural, capital, and entrepreneurship

_resources_ to make goods or provide

services.

Resources available and

_consumer_ _preferences_

determine what is produced.

Consumption

Consumption is the using of goods

and services.

Consumer _preferences_ and _price_

determine what is __purchased_.

What is an entrepreneur?

• Russell is an entrepreneur. An entrepreneur is a person who comes up with a product or service, or a better way to produce one. They find the resources, the money, and the time to produce new products.

• I wished Deja good luck and continued on my way. On the next two blocks were two popcorn stands. They both lowered their prices!

What is free enterprise?

• Both popcorn stands lowered their prices because of free enterprise. Free enterprise means competition. Companies compete with one another to get the most customers, and therefore, make the most money. I decided to buy popcorn from the first popcorn stand, because their price was the lowest.

Popcorn

$0.50---

Now

$0.25!

Popcorn

$0.50---

Now

$0.30!

Henry Ford

• In October, 1913 a revolutionary step was taken in the advancement of factory assembly when Henry Ford unveiled his moving assembly line which made production faster.

Weighing Costs and Benefits

• Model = simplified view, graph, helps understand real world (more complicated)

They also assume some factors WILL NOT CHANGE

• Production Possibilities Curve = helps maximize productivity

• Applying Models to Real Life

Simplistic-not all factors clear

picture of opportunity cost nothing more

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

BY1

X1

Assume a country can produce two types of goods with its resources – capital goods and consumer goods

If it devotes all resources to capital goods it could produce a maximum of Ym.

If it devotes all its resources to consumer goods it could produce a maximum of Xm

Ym

Xm

If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods

If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

.B

CY1

X1

Production inside the PPF – e.g. point B means the country is not using all its resources

It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.

Principle #3: People Face Tradeoffs

• Efficiency v. Equity

–Efficiency means society gets the most that it can from its scarce resources.

–Equity means the benefits of those resources are distributed fairly among the members of society.

• This completes my lesson on economics! I hope you enjoyed the tour. Economics is an important part of our lives. Think of all of the ways you use economics everyday!

THE END