Unit IEconomic Fundamentals

How to think like anEconomist!

You Can’t Always Get What You Want…

“And you can’t always get what you want,

Honey, you can’t always get what you want

You can’t always get what you want

But if you try sometime, yeah,

You just might find you get what you need!”

-Mick Jagger and Keith Richards1969

Essential QuestionWhy can’t you always get what you want?

Simply stated, this chorus explains why everyone has to make choices…

We will explore this question in Unit I…

What is Economics?

• The study of how people allocate their limited resources to satisfy their unlimited wants.

• The study of how people make “choices”.

Why is it a Social Science?

• It deals with the behavior of people as they cope with the fundamental problem of scarcity.

What does Economics deal with?

• Describing economic activity

• Analyzing economic activity

• Explaining economic activity

• Predicting economic activity

What do you think each ofthese questions means?

Why is what we want scarce?

• Scarcity: the fundamental economic problem facing all societies.

Why does this condition arise?

• Wants > Resources

• Goods and services are scarce because the resources needed to produce them are scarce!

Everything is Scarce!

SCARCITY

LIST TWO NON-EXAMPLES

WHY DOES THE CONDITION ARISE?

ActivityScarcity Pictograms

• Pictogram: a symbolic representation of a word that shows its meaning

• Create a pictogram to illustrate your interpretation / definition of each of the following terms:

- Wants - Goods

- Needs - Scarcity

W A N T S

RECAP – “Scarcity”

• Scarcity occurs when the limitedingredients (resources) for producing things that people want are insufficient to satisfy all wants.

• Take the production of “cookies”.

– The ingredients needed to produce cookies are “limited”.

» sugar, flour, M&Ms, the baker (that’s me)

Why is what we want scarce?

Look around the classroom…

1. List 3 goods that you see in the classroom and 2 services that exist in this school.

2. Explain why these goods/services are scarce.

How did the goods/services

get here?

Nothing appears

magically…

These goods/services

were produced to satisfy our wants…

Essential Question:

How do we satisfy our economic

wants?

Factors of Production

• Provide the means for a society to produce and distribute goods and services.

Exit Ticket

• How has scarcity affected your life?

• What did you do in result of it?

Warm-up: Factors of Production

Which factor of production is each of the following?

6. Rocks7. Lumber sitting at Home Depot8. Iron ore9. Fish in the ocean10. Economics teacher at CB East

1. Trees in a forest2. Cook in a restaurant3. Tractor used to plow fields4. Ice cream store owner5. Money used to buy new

Nike sneakers

Three Basic Economic Questions

3 Q’s are answered in order to make decisions about the ways

limited sources will be used.

1. What to produce?

2. How to produce?

3. For whom to produce?

Answering the 3 basic economic questions in a Market Economy [i.e., U.S.]

What to produce?What should we devote our resources to?

How to produce?What methods should be used in production?

What is most efficient?

For whom to produce?Who can afford the product?

Trade-offs

Trade-offs exist because we cannot have everything we want.

Choices must be made to satisfy our wants and needs.

Examples…

Some choices are easy to make…

Hmm…Should I have pizza or a hoagie for lunch today?

Other decisions are agonizing…

Should I get out of bed and go to school today or should I sleep in?

Personal Trade-offs…

If you were given $50.00, what would you do with it?

Each choice in a trade-off has advantages and disadvantages…

Reflecting on Personal Trade-offs…

Write down three [3] examples of trade-offs you made in the last week…

Be prepared to share!

Opportunity Cost

When comparing the top 2 choices, it is the BENEFIT of the next best alternative that must be sacrificed to satisfy a want.

Not all possible things given up.

The best thing we give up to get what we want.

Why it Matters

Understanding the opportunity costs of different choices in life makes you a

better decision-maker!

You always have to give something up…

Visualizing the Relationship…

Limited Resources & Unlimited Wants

Scarcity

Trade-offs (choices)

Opportunity Costs

Decision Making Grid: Purchasing „Halo 3‟ Video Game

Using a decision making grid forces you to consider the costs and benefits of each alternative…

PriceDelivery

CostTransaction

TimeDelivery

Time

Online Store

49.95 $0 5 minutes7 minutes to

download

Catalog 42.95$3.00

(shipping)10 minutes

1 week for shipping

WalmartStore

35.95$4.00

(gas money)1+ hour None

1. What is the opportunity cost of buying at Walmart?2. What is the opportunity cost of buying online?

Considering the Opportunity Costof Personal Trade-offs…

Pick one of your three trade-offs…What was the opportunity cost?

Be prepared to share!

Exit Ticket

In your own words,

explain the concept

‘opportunity cost’.

ECONOMICS IS EVERYWHERE!

Warm-Up

1. Take out your photograph2. Switch photographs with the person next to you.3. Identify examples of goods and services in the

photograph. Time: 3 min4. Based on the list you created in question 2, classify each

good/service as an example of the factors of production. [land, labor, capital] Time: 3 min

5. According to the photograph, how might scarcity affect daily life? What are some of the opportunity costs of your daily

decisions?

Reviewing key concepts from yesterday…

What is the opportunity cost that arises from each of the following trade-offs?

I packed my lunch all week so I had money to go out to dinner on Friday.

I went to work on Thursday night to earn money rather than studying for a test I had on Friday.

I did not go to the movies with my friends so I would have money to buy gas.

I turned down an offer to Princeton [on full scholarship] so I could go to Penn State University

…located in the happiest valley in the world!

HOW CAN WE MEASURE WHAT WE ARE GAINING AND LOSING

WHEN MAKING CHOICES?

Essential Question

Measuring Opportunity Cost Graphically…Production Possibility Frontiers

Production Possibility Frontier [PPF]:

Represents all possible combinations of total output that could be produced when all resources are fully employed and used efficiently.

Why is the PPF curve downward sloping?

Trade-offs

We are always making a choice and giving something up

By “resources”, we mean the 4 Factors of Production

Imagine that you have $5 and there are 2 things you really want to buy: chocolate and ice cream…

Example…

Prices:

1. How many chocolate bars can you buy instead of one ice cream cone?

2. How many ice cream cones can you buy instead of one chocolate bar?

Example…

Chocolate Bar $0.50

Ice Cream Cone $1.00

What you give up------------------What you get

BOWED-OUT PPFs Varying O.C.

Principle of Increasing Costs: As a society produces more of one product, the O.C. of producing that product increases because we are using more resources that

are poorly suited to produce it.

Food

Computer

4

3

2

1

1 2 3 4

O.C. between 1 and 2 computers = 1 food unit

O.C. between 3 and 4 computers = 1 food unit

CONSTANT OPPORTUNITY COST

STRAIGHT-LINE PPFs Constant O.C.

Corn vs. Beads

Given a set amount

of resources (scarcity!), the more

beads made, the less corn

made.

Combination Corn Beads

A 160 0

B 80 20

C 40 30

D 0 40

1. What is the O.C. of going from C to D?

2. What is the O.C. of going from D to A?

3. What is the O.C. of 1 corn?

4. What is the O.C. of 1 bead?

Now…Construct a PPF

Given a set amount

of resources (scarcity!), the more

beads made, the less corn

made.

Combination Corn Beads

A 160 0

B 80 20

C 40 30

D 0 40

1. Construct a PPF using the above information.

2. Put corn on the x-axis.

3. Put beads on the y-axis.

4. Label all points!

Productivity

What makes productivity increase?

Productivity increases when more output can

be produced with the same amount of inputs.

Efficiently using all four factors of

production will lead to greater productivity…

Three Ways to Increase Productivity

1. Specialization

Productive inputs specialize in the task they do best

2. Division of Labor

Workers perform fewer tasks more frequently

PRACTICE MAKES PERFECT!

Three Ways to Increase Productivity

3. Investment in Human Capital

Sum of all skills, abilities, health, and motivation of people

Examples – training, healthcare, motivational programs

“It is what you would be left with if someone stripped away all of your

assets and left you on a street corner with only the clothes on your back”

Problem Set # 1

A society can make either guns or butter

Put guns on the x-axis and butter on the y-axis

Label the following points:

Point Guns Butter

A 5 3

B 3 9

C 1 15

X 2 9

Y 3 12

Problem Set # 2

A society can make either Jeeps (x-axis) or Cars (y-axis)

If the economy makes 100 cars, it can‟t make any jeeps

If the economy makes 200 jeeps, it can‟t make any cars

Problem Set #3 - Exploring the Essential Question

Imagine that a new society, Paternoville, produces only two items: Footballs and Peachy Paterno Ice Cream.

Use the information on the table below to construct a Production Possibilities Frontier with Footballs on the x-axis and Peachy Paterno Ice Cream on the y-axis.

FootballsPeachy Paterno

Ice Cream (gallons)

100 0

90 4

75 8

50 12

0 16

1. If the economy is currently producing 90 footballs, what is the opportunity cost of producing 10 additional footballs?

2. What is the opportunity cost of increasing the annual output of Peachy Paterno Ice Cream from 8 to 12 gallons?

3. If there were a labor shortage or some other event that effects production, where would the output of Paternoville production appear on the graph?

4. What would happen to Paternoville‟s PPF if a technological advancement improved production across the board?

On average, rank order the following choices from 1 – 7, with 1 being the activity you spend the most time on, and 7 being the activity you spend the least time on each week.

Student clubs or groupsPartyingWatching TVStudying/Homework Exercise or sportsWorking for PaySocializing with Friends

Exit TicketHow do you spend your free time?

Economic Interdependence

What does „interdependence‟ mean?

Economic Interdependence: the actions of one part of the country (world) has an impact on what happens elsewhere

Understanding how all parts fit together

Circular Flow of Economic Activity

Represents a market economy

2 main “markets”

Product Market: Factor Market:where goods and services where the 4 factors ofare bought and sold production are bought/sold

Shows interdependence between businesses and individuals

Human Circular Flow Model…

Factors of Production

Circular Flowof Economic Activity

Product MarketMoney Money

MoneyMoney

Goods & Services

Goods & Services

Factors of Production

Individuals Households

Factor Market

Business Firms

Circular Flow of Economic Activity

Type Description Strengths Weaknesses

Traditional

Command

Market

A day in the life of…

The Task

Imagine that you are a person in one of the economies below. Working with a partner, you will use what you‟ve learned about the characteristics, strengths and weaknesses of this economic system to write a journal entry as this person.

You will then compare this to how you spend your time as a person living in a market economy.

The Economic System (choose one)

Command or Traditional

Scenarios You may choose one [1] of the following two [2] writing prompts, and respond in 6-8 sentences

A Typical Day: describe a typical day as a person in your chosen economy What is your daily routine? ▪ How do you secure your basic needs? What are you thinking about? ▪ Who do you spend time with? What is your attitude toward the work you are doing?

A Special Occasion: describe a special occasion as a person in your chosen economy. Where do you go? ▪ What do you do on a special occasion? Think about the economy‟s assumptions about nature, work, and the meaning of

life. Do any of these features influence the type of celebrations that occur on a special occasion?

The Market Economy and You! d

Your final task is to briefly describe how you spend your day typically or on a special occasion.

The type of economic system chosen __/1

Length: an entry that responds to one of the two prompts in 6-8 sent __/2

Meets Requirements: responds to at least three of the focus questions __/6

Illustration: create an illustration that reflects life in this type of economy __/3

Brief description of how you spend your time __/4

Illustration: create an illustration that reflects life in a market economy __/2

Neat and creative presentation of all necessary requirements __/1

Works well with partner __/1

Total __/20

3

Circular Flowof Economic Activity

4 2

1

5

6

7

Warm-up:Circular Flow of Economic Activity

2

Who do you think owns the businesses shown in this picture?

How is the local economy affected when competitors open up near

these local businesses?

Exploring “Isms”: Capitalism

What is capitalism?

A system in which private citizens own the factors of production

What is competition?

A struggle among sellers to attract consumers while lowering costs

Capitalism thrives on

competition

Sellers compete for the most

buyers

Buyers compete to find the best products at the

lowest price

Competition is allowed to flourish with a minimum of government interference

* The U.S. is ‘mixed’ because some government regulation / interference does exist

Another term to describe the American Economic system

What is a „free enterprise‟ economy?

Entrepreneur

• Organizes and manages land, labor, and capital in order to seek profits

• Both the “spark plug” and the catalyst of the free enterprise economy

• When successfully, everyone benefits...how?

Consumer

• Determine what products are ultimately produced

• Their decisions often are the power of the economy…why?

Government

• Protector• Enforces laws that

protect consumers, workers, and businesses

• Provider/Consumer• Provides defense

services, education, and public welfare

• Consumes goods and services at all levels

• Regulator

• Promoter of National Goals• Reflects the will of a

majority of its citizens

Essential Question:How should the U.S. government carry out its economic roles?

What characteristic of a Free EnterpriseEconomy does this cartoon reflect?

Don‟t even think about touching the candy…

Economic decision-making…

Consider the game we just played…

What two types of “economic systems” were simulated?

Who answers the three basic economic questions in a command economy?

Who answers the three basic economic questions in a market economy?

Let’s look more closely at the symbolism reflected in the game…

Closure: Rock, Paper, Scissors Activity

Action/Object SymbolizesCandy Money

Random Distribution of Candy What you are born with.

Rock, Paper, Scissors Work/Free EnterpriseCollection of Candy Government

Kids who didn’t play by the rulesWhat happens in a free enterprise society; can be illegal and corrupt

Redistribution of Candy (wealth) Communist Theory

Questions for Discussion

1. If you had a lot of candy before we started, how did you feel?2. If you lost all your candy, how did you feel?3. How did you feel about me collecting your candy if you were

‘rich’?4. How did you feel about me collecting your candy if you were

‘poor’?