Download Unit 1: Introduction to economics

UNIT 1: INTRODUCTION TO
ECONOMICS
Honors Economics
What is Economics?

The social science that studies the choices that
individuals, businesses, and governments make
as they cope with scarcity and the incentives that
influence and reconcile those choices.
 Scarcity
 Incentives

Self-interest vs. Social interest
The Micro and Macro Views of the World


Microeconomics~ The study of the choices that
individuals and businesses make and the way these
choices interact and are influenced by governments.
Macroeconomics~ The study of the aggregate
effects on the national economy and global
economy of the choices that individuals, businesses
and government make.
Core Economic Ideas
1.
People make rational choices by comparing costs and
benefits.
A choice that uses the available
resources to best achieve the
objective of the person making the
choice.
2.
3.
4.
5.
Cost is what you must give up to get something.
Benefit is what you gain when you get something and
is measured by what you are willing to give up to get
A choice made by
it.
comparing all
A rational choice is made on the margin.
relevant
alternatives
Choices respond to incentives.
systematically and
incrementally.
Economics as a Social Science
Identify
the following statements as positive or normative:
 Economists seek to discover how the economic world works.
1. The
gap between
class must
and upper
class has
grown over the
In order
to bestthe
dolower
this they
distinguish
between
past
three and
decades.
positive
normative statements.
2. An
increasestatements
in the minimum wage will bring more teenage unemployment.
Positive
3. The
minimum wage should not be increased.
 A statement about “what is”
4. The poor pay too much for housing.
 Can be right or wrong
5. The number of farms has decreased over the last 50 years.
 Can be tested against facts
6. The population in rural areas has remained constant over the past
 Normative statements
decade.
A statement
“what
ought to
7. An increase
in theabout
tax on
cigarettes
willbe”
decrease teen smoking.
Dependsinon
opinions
8. An increase
thevalues,
number
of police on the inner-city streets will reduce
 Cannot be tested
the
crime rate.
Cause
and
Effect
Focus
9. The
United
States
should
place more emphasis on reducing carbon
emissions.
10.Healthcare should be provided to every American.
Economics as a Policy Tool: Evaluating
the Opportunity Cost of Choice

Personal Economic Policy


Business Economic Policy


Opportunity cost
FOP
Government Economic Policy

Guns or Butter
Use of the Production Possibilities Curve
Production Possibilities Curve
Cost
Alternative good or
service given up as a
result of a decision.
Every point on the PPF
indicates a cost in on
item or another.
Efficiency
Maximum production or
output of goods and
services.
Any point on the PPF
Underutilization
Growth
Efficiency
Underutilization
Growth
Expanding the ability to
produce.
Shift of the entire PPF to
the right
Resources/Technology
Production
Possibilities Curve
~~~~~~~~~~
A graph that shows
alternative ways to use
an economy’s
resources.
FOP ACTIVITY
In small groups you will complete the following:
PART I
Terms and Concepts (SIDE ONE)
1.
Definition of the term factors of production
2.
List and define the “four” factors of production
PART II
Scavenger Hunt (SIDE TWO)
1.
Walk around and find examples of each in the creation
of “education”.
Chapter 1 Review









Economics Defined
Scarcity vs. Shortage
Microeconomics vs. Macroeconomics
Positive vs. Normative
Factors of Production
Opportunity costs vs. Trade offs
Marginal Decision Making
Guns vs. Butter
Production Possibilities Frontier
ECONOMIC SYSTEMS
Chapter 2
The Three Economic Questions
Because ALL economic resources are scarce, every society must
answer three questions:
 What
goods and services should be
produced?
 How
should these goods and services be
produced?
 Who
consumes these goods and services?
What to Produce?
1.
2.
3.
4.
Consumption Goods and Services- goods and
services that are bought by individuals
Capital Goods- goods that are bought by
businesses to increase their productive resources.
Government Goods and Services- goods and
services that are bought by governments.
Export goods and services- goods and services
that are produced in one country and sold in other
countries.
What we ACTUALLY produce.
Consumption goods and
services (60%)
Capital goods (15%)
Export goods and services
(9%)
Government goods and
services (16%)
How Do We Produce?



The difference in what combination of factors of
production we choose to utilize.
Developed nations / less developed nations
Changes in the United States over time
For Whom Do We Produce?



This question is dependent on who owns and controls
the factors of production.
Given individual ownership of the factors of
production, a nation will produce for the consumer
that has the ability to purchase products.
Types of Income:
 Rent
(land)
 Wages (labor)
 Interest (capital)
 Profit (entrepreneurship)
Personal Distribution of Income
Richest 20%
Fourth 20%
Third 20%
Second 20%
Poorest 20%
0
10
20
30
40
50
60
Societies answer the three economic questions based on their goals and
values.
Economic Goals
Economic Goals
Economic efficiency
Making the most of resources
Economic freedom
Freedom from government intervention in
the production and distribution of goods
and services
Economic security
and predictability
Assurance a safety net will protect
individuals in times of economic disaster
Economic equity
Fair distribution of wealth
Economic growth
and innovation
Innovation leads to economic growth, and
economic growth leads to a higher
standard of living.
Other goals
Environmental protection, variety
Four Economic Systems
An economic system is the method used by a society to produce and
distribute goods and services.
Traditional
Free Market
Command/Centrally
Planned
Mixed
Free Markets



A purely free market can rarely exist, but in theory a
market economy would answer the three economic
questions through a system of exchange and trade.
Advantages: Freedom, Efficiency, Growth, Flexibility,
Variety
The core factors that allow a market system to work
efficiently:
1.
2.
3.
4.
Profit motive
Flow of information
Accurate price levels
Ease of product movement
Adam Smith (1723-90)

Father of modern economic theory

Scottish social philosopher/professor
Laissez Faire Economic Theory
“An Inquiry into the Nature and Causes
of the Wealth of Nations” (1776)
10 years to write and consisted of 5
volumes.
Established Economics as its own
discipline




Core Principles of Adam Smith
On the Division of Labor
Increase in quantity of work
1. Dexterity of workers
2. Saves time: no switch from one activity to the next
3. Machines replace manual labor
Division of physical and mental labor: professional specialization;
expertise
Increased productivity = increased wealth for everyone
Motivation for labor
Disposition to barter
Invisible Hand of the Marketplace
EXAMPLE
Adam Smith and the Invisible Hand



In every transaction, the buyer and seller
consider only their self-interest, or their own
personal gain. Self-interest is the motivating
force in the free market.
Producers in a free market struggle for the
dollars of consumers. This is known as
competition, and is the regulating force of the
free market.
The interaction of buyers and sellers, motivated
by self-interest and regulated by competition, all
happens without a central plan. This
phenomenon is called “the invisible hand of the
marketplace.”
Back to
Principles
Circular Flow Model
monetary flow
physical flow
Households
Firms
physical flow
monetary flow
Market Failure
1.
2.
3.
4.
5.
The provision of public goods (shared
consumption/ exclusion)
The provision of merit goods (lack of funds/opt
out – under consumption)
Income inequalities (social tension/economic
problems)
Existence of shortages and surpluses
(unemployment)
Existence of negative externalities
NPR
Karl Marx (1818-1883)




German philosopher, political economist and historian
Developed radical approach to understanding and coping with the problems
that occurred in free market systems, namely the Industrial Revolution
Published the Communist Manifesto in 1848 with close friend Frederick Engels
Marxism is rooted in an analysis of modern, Western thought.




18th century Enlightenment
Classical Economics
Utopian Socialism
German Philosophy
Marxism in Theory

Dialectical materialism
 Materialism
 Philosophical doctrine stating that matter is the only reality and that everything in
the world, including thought, will, and feeling, can be explained only in terms of
matter.
 Opposite of idealism
 Dialectical
 The theoretical process in the social sciences in which change occurs based on
contradictory, interacting forces
 The forces are based on existing class struggles
Thesis

Antithesis
Synthesis
Stages of economic development
 Pre-determined
 Tribal, Slave-Owning, Feudal, Capitalist, Socialist, Communist
Frederick Engels
Karl Marx
The Communist Manifesto: Online Reading Assignment
Introduction
Part I
Part II
Part III
Part IV
Identify problems with each of the following according to Marx:
1. Reactionary Socialists (Feudal, Petty-Bourgeois , and German Socialists)
2. Conservative/Bourgeois Socialism
3. Critical-Utopian Socialism and Communism
Centrally Planned Economies
Definition ~The government, or central authority controls
the factors of production.
Modern Day Forms of Central Planning:
 Socialism~ a social and political philosophy based on
the belief that democratic means should be used to
distribute wealth evenly throughout a society.
 Communism~ a political system characterized by a
centrally planned economy with all economic and
political power resting in the hands of the
government. Communist governments are
authoritarian in nature.
The Soviet Experiment

The October Revolution (1917)
 Vladimir Lenin led the Bolshevik revolution and remainder the party
and government leader until his death in January 1924.
 The new Soviet government was established two days after the
revolution under the leadership of the Council of People’s
Commissioners. Lenin was the chairman of the Council.
 Allowed peasants to seize land, workers to take over factories,
nationalized banks, confiscated private accounts, foreign trade
became the dictate of the state, abolished the existing judicial system,
titles/ranks were abolished, and church land was confiscated.
 By June 1918 private industry had all but disappeared and the
nationalization of land ensued.
The Soviet Experiment (cont.)




Land, labor and capital was all controlled by the state. The best resources were
allocated to the armed forces, space program, and production of capital goods.
Government committees decided the quantity, process and distribution of all
products.
The government created large state-owned farms and collectives to produce all
agricultural products.
Problems in centrally planned societies:
1.
Performance falls short of the set ideals
2.
Fail to meet consumer needs and wants
3.
Little individual incentives to work hard
4.
Lack of innovation
5.
Expensive and inflexible government structure needed to manage the
system
6.
Sacrifice of individual freedoms to pursue societal goals
Mixed Economies
It is doubtful that any nation can exist successfully as a pure market
economy.
 Most modern industrial economies mix features of free markets and
centrally planned systems.
 An economic system that permits the conduct of business with minimal
government intervention is called free enterprise.
 The degree of government involvement in the economy varies among
nations. Nations are placed on a continuum (a range with no clear
divisions) of mixed economies. On one end are centrally planned
economies
and onEconomies
the opposite end are free markets economies.
Continuum
of Mixed

Centrally planned
Iran
Iran
North Korea
North
Korea
Cuba
Cuba
South Africa
China
South Africa
Botswana
China
Russia
Russia
France
France
Botswana Peru
Greece
Greece
Peru
United Kingdom
United Kingdom
Canada
Canada United States
United States
Free market
Hong Kong
Hong Kong
Singapore
Singapore
Economic Freedom: Contemporary
Application
The World Map
The Heritage Foundation’s Analysis of Economic Freedom
 “Economic freedom is the fundamental right of every human to
control his or her own labor and property. In an economically free
society, individuals are free to work, produce, consume, and invest in
any way they please, with that freedom both protected by the state
and unconstrained by the state. In economically free societies,
governments allow labor, capital and goods to move freely, and
refrain from coercion or constraint of liberty beyond the extent
necessary to protect and maintain liberty itself.”


Business Freedom | Trade Freedom | Fiscal Freedom | Government
Spending | Monetary Freedom | Investment Freedom | Financial
Freedom | Property rights | Freedom from Corruption | Labor
Freedom
Check out the data: http://www.heritage.org/Index/TopTen.aspx
CHAPTER 3: FREE ENTERPRISE
Features of Free Enterprise
1.
Freedom
2.
Competition
3.
Contracts
4.
Self Interest
5.
Profits
6.
Private Property
7.
Voluntary Exchange
When does the government intervene?




Regulation
Public Goods and Services
Negative Externalities
Redistribution Programs
Regulation


Government Policies Designed to Mitigate Incomplete Information
 Regulatory Bodies: OSHA, SEC, FDA
 Laws: Truth in Lending Act, Truth in Advertising Act, Credit Card Act
Antitrust Policies
 Administered by the DOJ and FTC
 Goals (To eliminate monopolies, promote social welfare and to make it illegal for
managers to pursue strategies that foster monopoly power)
 Sherman Act (1890)~ Prohibits price-fixing, market sharing and other collusive
practices designed to “monopolize, or attempt to monopolize” a market.
 United States v. Standard Oil of New Jersey (1911)
 Charged with attempting to fix prices of petroleum products.
 Standard Oil dissolved into 33 subsidiaries.
 The rule of reason: Not all trade restraints are illegal, only those that are
unreasonable are prohibited
Public Goods and Services
Public Goods~ A good that is non-rival (shared
consumption) and non-exclusionary in
consumption.
 Non-rival
(shared consumption): A good which when
consumed by one person does not preclude other
people from also consuming the good.
 Non-exclusionary: No one is excluded from
consuming the good once it is provided.
“Free Rider” Problem
Individuals have little incentive to buy a public
good because of their non-rival & non-exclusionary
nature.
Externalities

The effects of a decision by consumers and producers
that has an impact on a third party
 Positive
Externalities – beneficial effects on third parties
 Negative Externalities – costs incurred by third parties
Pollution
 Government regulations may induce the socially
efficient level of output by forcing firms to internalize
pollution costs
 The Clean Air Act of 1970
Government Safety Net: Redistribution Programs
1.
2.
3.
4.
Cash transfers
In-kind benefits
Health related benefits
Education benefits
The Role of US Presidents: Income Redistribution

Franklin Roosevelt
 New
Deal
 Social Security, Unemployment, Aid to Dependent
Children

Lyndon Johnson
 War
on Poverty
 Head Start, Medicare, Medicaid

Bill Clinton
 Comprehensive
 AFDC-TANF
welfare reform