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Economics 1.1 Microeconomics Conceptual Lens: Decision Making 1.1 Compare how individuals and governments utilize scarce resources (human, natural and capital) in traditional, command, market and mixed economies. Economics Study of how individuals, firms, and nations fulfill their wants and needs. Why Do We Study Economics? To solve the problem of SCARCITY Resources are scarce 4 Basic Economic Questions What will be produced? How will it be produced? How much to produce? For whom will it be produced? 4 Basic Economic Questions Example: Teen Vogue Magazine What will be produced? How will it be produced? How much to produce? For whom will it be produced? 4 Basic Economic Questions Example: Clinique Makeup What will be produced? How will it be produced? How much to produce? For whom will it be produced? 4 Basic Economic Questions Example: Gillette Shaving Cream What will be produced? How will it be produced? How much to produce? For whom will it be produced? 4 Basic Economic Questions Example: Pampers Diapers What will be produced? How will it be produced? How much to produce? For whom will it be produced? 4 Basic Economic Questions Example: Depends Underwear What will be produced? How will it be produced? How much to produce? For whom will it be produced? Wants Things one desires but does not have to have to survive. Needs Things you must have to survive – food, clothing, shelter Distributive Summarizing Assessment Prompt #1 1’s: Why do we study economics? 1 minute 2’s: What is the difference between a need and a want? 1 minute Goods Material products that satisfy wants and needs You can touch these! Services Activities performed to satisfy wants and needs 4 Factors of Production Resources are combined to produce wants and needs Capital Entrepreneurship Labor Land Capital Tools and equipment used to make the product. Used to produce goods and services. Distributive Summarizing Assessment Prompt #2 1’s:What is the difference between a good and a service? 1 minute 2’s: Explain what a resource is? 1 minute Entrepreneurship Business portion Ideas - Business Plans Owner Person takes a RISK with their money Labor Human labor Efforts that help produce the product Land Resources provided by nature to help produce the product Includes Natural Resources Renewable - Can be replaced Trees, Fish Non-Renewable – Cannot be replaced Fuel, Coal 4 Factors of Production Capital + Entrepreneurship + Labor + Land = ________________ How can I remember??????? CELL Distributive Summarizing Assessment Prompt #3 1’s: Explain entrepreneurship. 1 minute 2’s: Explain the difference and give an example of a renewable and nonrenewable resources. 1 minute Scarcity Lack of adequate resources to obtain all of one’s wants or needs Scarcity always exists because our wants and needs are always greater than the amount of resources (Factors of Production) we have Limited Resources We never have enough resources to buy all of our wants and needs. Therefore, scarcity exists. Remember, scarcity is the lack of resources to obtain ALL of our wants AND needs. Producer The one who makes the goods and services Goal – to get the highest price Consumer The one who receives goods and services Goal – To get the lowest price Distributive Summarizing Assessment Prompt #1 1’s: Why does the producer want to get the highest price for their product? 1 minute 2’s: Why does the consumer want to pay the lowest price for a product? 1 minute Incentives Motivate consumers to buy something! Producer: Has incentive to make a profit Consumer: Has an incentive to save money Sales Buy One Get One Free Salaries and Wages - You gotta get paid!! Salary – Set amount of money paid to a worker for their labor Wage – Payment to a worker by the hour for their labor Distributive Summarizing Assessment Prompt #2 1’s: What is the difference in a salary and a wage? 1 minute 2’s: Give an example of a job that earns a salary and an example of a job that earns a wage. 1 minute Tom’s Decision Tom takes a date to the varsity football game. At half-time, he goes to the concessions. He asks his date, Melissa, what she would like. Melissa wants a soda and nachos. Tom is really hungry. He wants a hot dog, nachos, and a soda. Lets take a look at the price list. Price List Hot dogs: Nachos: Chips: Soda: $1.50 $2.00 $ .75 $1.00 Tom only has $5.00!!!!!!!!! Decision Making Model Step 1 – Define the problem What is Tom’s problem????? Decision Making Model Step 2 – List the alternatives Option #1 Get what he wants. It will cost him $4.50 and he will have .50c left over. Option #2 Get Melissa what she wants. It will cost him $3.00. He will have $2.00 left over. He will be able to get a hot dog but nothing to drink. Option #3 Get both himself and Melissa a hot dog and soda. It will cost him $5.00. Decision Making Model Step 3 – State the criteria What are his priorities? Filling his own tummy? Making Melissa happy? Decision Making Model Step 4 – Evaluate the Alternatives There is a trade-off in all three options listed. He must give up one thing in order to get something else. Trade-Offs Option #1 Get what he wants. It will cost him $4.50 and he will have .50c left over. Trade off? Option #2 Get Melissa what she wants. It will cost him $3.00. He will have $2.00 left over. He will be able to get a hot dog but nothing to drink. Trade off? Option #3 Get both himself and Melissa a hot dog and soda. It will cost him $5.00. Trade off? Decision Making Model Step 5 – Make a decision Tom decides making Melissa happy is more important than filling his own tummy. He chooses Option #2 and goes without a drink. He instead gets a drink from the water fountain. Tom chose a want (Melissa) over a need (food) Distributive Summarizing What are the steps in the decision-making model? Trade Off The act of giving up one thing of value for another Give up good test score for fun at the mall OR Give up fun at the mall for good test score Opportunity Cost Value of the alternative option that is lost when one makes a decision. Study for test or trip to the mall? Opportunity Cost Option #1 Get what he wants. It will cost him $4.50 and he will have .50c left over. Opportunity Cost? Option #2 Get Melissa what she wants. It will cost him $3.00. He will have $2.00 left over. He will be able to get a hot dog but nothing to drink. Opportunity Cost? Option #3 Get both himself and Melissa a hot dog and soda. It will cost him $5.00. Opportunity Cost? Types of Cost Variable Cost Costs that change Fixed Cost Costs that do not change Total Cost Variable cost + Fixed cost Marginal Cost Cost of producing “one more unit” Types of Cost Variable + Fixed = Total Cost – Expenses = Profit Distributive Summarizing 1’s: What is a variable cost. Give an example. 2’s: What is a fixed cost. Give an example. Technology Application of scientific breakthroughs to commerce and industry Invention Technology created to meet a need Example? Paper clip, light bulb Innovation Something that profoundly changes and improves the way things are done Examples? Computers Light Bulb Robotics Machines used to produce goods and services Automation Machines (robots) are used to complete the same task a human did for less cost Agribusiness Replacement of small labor intensive farms with larger capital intensive farms. Productivity The ability to turn input into output in a certain amount of time How fast a product can be created using the 4 Factors of Production Output versus Input Input (factors of production) are used to produce Output (the product) Specialization Devotion of certain resources to a specific task Someone who can make a product better than anyone else. Division of Labor Act of splitting up work into smaller tasks performed by different workers Get better and better at each task Boosts productivity Economic Interdependence The outcome of specialization and the division of labor Individuals depend on others to produce many or most of the goods they need to sustain their lives. Mass Production The production of large quantities of goods Factory – building used to produce the product Assembly Line Henry Ford The product moves down the line and is assembled by a series of laborers, each of who carries out a specific task – specialization Cost is low, production is high Lucy, Lucy, Lucy Lucy What part of the factors of production are Lucy and Ethel? Lucy and Ethel are preforming one task, in economics what is this called? What is the method of assembly being shown in the video? What kind of production is being shown in the video? Investment Invest now – get the benefit later Example: Stock Market or Savings Account Capital Investment A business purchases capital in order to invest in their business Capital goods Money is spent to invest in capital goods such as machines, tools, and other equipment to increase productivity Human Capital Investment in labor to make employees more productive Education and Training Investment in your employees (labor) Send them for education and training to enhance their skills The worker becomes more productive Blue Collar Worker Manual labor Use physical skills Burger King, McDonald’s Carpenter Cashier at Wal-Mart White Collar Worker No manual labor Use their brains Doctors, Lawyers Office Workers Skilled Worker Includes both blue collar and white collar Make more $$$ Carpenter Doctor Both are skilled Unskilled Worker Blue collar only Make less $$$ McDonald’s worker Cashier Law of Diminishing Returns As you add more input to production, your output decreases Adding one more worker will cost you more money!! Example: Cooks in a kitchen Tennis ball assembly line Law of Diminishing Returns Graph Traditional Economy Economy based on tradition and customs Subsistence level -make just enough to survive Productivity is motivated by the need to survive Very little technology – no computers, cell phones, farm equipment No opportunity to advance – keeps many in poverty Social status inherited from your parents Market Economy Adam Smith – 1776 Advocated a Market Economy Wrote Wealth of Nations Described laissez faire economics “Invisible Hand” Unseen force that directs the market Individuals pursue their own self interest in the market Laissez faire “leave alone” – no government intervention in the economy Market Economy Capitalism – private property – Factors of Production are owned by the people FREEDOM! – Privately owned! Profit Motive – Producers enter the market to make $$$ Incentive for Workers to Produce – Workers produce more to make more $$$ Four Essential Economic Questions are answered by producers and consumers in a market economy Producers produce what they want Consumers consume what they want Command Economy Karl Marx Advocated a Command Economy Wrote Communist Manifesto Describes the problems with capitalism and the market economy Centralized Economy Everyone in society is equal (Equity) Government distributes goods and services evenly The government controls the economy No competition – products are poorly made Four Basic Economic Questions are answered by the central government in a command economy Mixed Economy Most economic systems today are mixed Mixture of market economy and command economy Production owned by individuals but guided by the government United States is a mixed economy (mostly market with some command) China is a mixed economy (mostly command with some market) United States Economy Elements of market and command Market: People own Factors of Production capitalism Command: Some government intervention Sets a minimum wage (minimum amount an employer can pay their employee) OSHA – workplace safety (hardhats, steel toe boots, chemical safety) EPA – environmental safety CPSC – consumer protection (unsafe products) Barack Obama’s Stimulus Package The Free Enterprise System – Mixed Market Economy US is a mixed market economy government intervention producers are free to enter the market Capitalism Driven by voluntary exchange Buy and sell what you wish in the market Capitalism = FREEDOM The factors of production (resources) are privately owned Consumer sovereignty Consumers are rulers of the market!!!! They decide what gets produced! Profit Motive $$$$$$$$$$$$$$$$$$$$ Producers are in business for a profit Keynesian Theory John Keynes Keynesian economics advocates a mixed economy– predominantly private sector, but with a role for government intervention during recessions – “deficit spending” Fiscal policy – how the government taxes its citizens and the government decides to spend money Disadvantages (Bad stuff) of the Free Enterprise System Offers less security to citizens If you open a business, you could lose money! Does not guarantee full employment Not everyone will have a job Fails to produce equity Not all citizens are equal Competition Struggle among producers to compete to make the most profit Lowers prices Increases quality of products Government’s Role Patent Legal rights to an invention or innovation Copyright Legal rights to written work Government’s Role in the Economy Monopoly Prohibits illegal monopolies One producer of a good or service cannot dominate the market Monopoly Market structure under which there is only one producer of a given good or service No adequate substitutes NO Competition Lower quality products – no one to compete with Monopolies are allowed to dictate price Higher prices Sherman Anti-Trust Act Anti-trust laws Laws passed that prohibit monopolies / trusts Why? To ensure competition Microsoft Anti-Trust Case 1998 – US Justice Department and 20 US states filed suit against Microsoft many computer companies were upset and felt that they violated free market competition. Microsoft ordered to break into two parts Microsoft appealed and the case was settled out of court Circular Flow of Economic Activity “Economic Interdependence” Households, businesses, and government must have each other to function Circular Flow - Major Players Households (Individuals) Labor – they go to work Consumer – they purchase stuff Circular Flow - Major Players Businesses (Firms) Producers – they make stuff They pay people for their labor Circular Flow - Major Players Government Pay people for their labor Pay business for goods Provides “other” stuff not provided by producers Police protection Factors Market Where the factors of production are sold Capital goods Labor Land Product Market Where consumer goods are sold Product Market ___________ Market Individuals __________ Market Firms Product Market Factors Market Individuals Product Market Firms Supply How much of a certain good is available to consumers Law of Supply – Producers will only produce a good or service that will make them a profit. Demand How much consumers want the good Law of Demand: Consumers will only demand (buy) a product if they need it or want it AND it is at an affordable price. Equilibrium Price – “Market Price” The point at which supply and demand meet and the price is said to be balanced. Supply Demand Equilibrium Price Surplus When demand is lower than supply. There is a supply of goods and no consumer demand to purchase them. Example – Wal-Mart Clearance Christmas Stores After December 26 DEMAND SUPPLY PRICE Shortage When supply is lower than demand There are not enough goods to fulfill consumer demand. Example: Oil Affects gas prices DEMAND SUPPLY PRICE Price The amount of money expected, required, or given in payment for something. Quantity An exact amount or number Influences on Supply and Demand Substitute Goods Goods that can be used in place of other goods Example: Chicken and beef Coke and Pepsi Complementary Goods Goods that work together to fulfill a certain need Example: DVD, DVD Player Shortage When supply is lower than demand There are not enough goods to fulfill consumer demand. Example: Oil Affects gas prices DEMAND SUPPLY PRICE Surplus When demand is lower than supply. There is a supply of goods and no consumer demand to purchase them. Example – Wal-Mart Clearance Christmas Stores After December 26 DEMAND SUPPLY PRICE Pricing – Factors that Affect Price What determines price? What is the equilibrium price? Pricing HIGH Price Shortage = ________ Surplus = LOW ________ Price Consumer Tastes What consumers prefer affects what they buy Name brand clothing Popular cars Name brand shoes Competitive Markets and Pricing In the market there are buyers and sellers Buyers Consumers Make decisions about what goods and services to buy Influence supply through demand Sellers Producers Make decisions about what goods and services to offer based on demand In competition with other producers in the market GDP Gross Domestic Product Total value of all goods and services produced in an economy **Per Capita GDP - GDP based on population Standard of Living Measured by a nation’s GDP Standard in which citizens live Access to healthcare, infrastructure, etc. United States GDP is??? Uganda GDP is??? CPI Consumer Price Index Measures the amount of goods and services bought by consumers Business Cycle 4 Main parts: Expansion Peak Trough Contraction Expansion The steady ride up Economy is growing Real gdp is increasing Businesses are investing Economy is recovering Something happens to jump start the economy Example: WWII ***Recovery*** Business Cycle Contraction Economy coming down Real gdp is decreasing What goes up must come down Fall in production Rising interest rates Declining profits Slowdown in capital investments Demand slows Hiring stops - unemployment is high Layoffs Business Cycle Peak Top of the hill Has prosperity Production is high Unemployment is low Wages increase Must come down ***Prosperity*** Business Cycle Trough Low point in the business cycle High unemployment Low economic production Falling stock prices If the trough lasts a long time, the economy experiences a depression. Business Cycle Recession If a contraction (economy going down) lasts for 6-8 months, the economy experiences a recession Business Cycle Distributive Summarizing Assessment Prompt #1 1’s: What are the four main parts of the business cycle? 1 minute 2’s: On which part of the business cycle is the economy experiencing a recovery? 1 minute Exports and Imports Exports Goods leaving a nation to be sold to another nation Imports Goods entering a nation from a foreign nation to be sold Balance of Trade Favorable balance of trade Export MORE than you import TRADE SURPLUS Unfavorable balance of trade Import MORE than you export TRADE DEFICIT Favorable Balance of Trade $100 $80 in billions $60 Profit $40 Imports Exports 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 $0 1994 $20 Favorable balance of trade is when a nation exports, or sells, more than it imports, or buys. Therefore the nation makes a profit, or is said to have a “Favorable Balance of Trade.” Unfavorable Balance of Trade $100 $80 $60 Profit Exports 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Imports 1994 in billions $40 $20 $0 -$20 -$40 -$60 -$80 An Unfavorable balance of trade is when a nation imports, or buys, more than it exports, or sells. Therefore the nation suffers a loss, or is said to have an “Unfavorable Balance of Trade.” Distributive Summarizing Assessment Prompt #3 1’s: What is the difference in an import and an export? 1 minute 2’s: Explain what a favorable balance of trade is (trade surplus) and why the US would want a surplus. 1 minute National Debt National debt – how much money the government owes Deficit spending – the government spends more money (revenue/income) than it takes in In the RED Also called a budget deficit