Download UNIT 1 - GUNS and ROSES

UNIT 1 - Fundamental Concepts
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Economics is
the study of how we can best increase a
country’s wealth with the resources that we
have available to us.
UNIT 1 - Fundamental Concepts
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Marginal Benefit
is the additional satisfaction or value one
obtains from an activity or product.
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Marginal Cost
is the additional cost or sacrifice one makes
of participating in an activity or purchasing a
product.
UNIT 1 - Fundamental Concepts
 Economic Decision-Making
You decide to participate in an activity
(going to college, buying something, etc.)
as long as your marginal benefit exceeds
your marginal cost.
UNIT 1 - Fundamental Concepts
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Macroeconomics and Microeconomics
The nation's unemployment rate, inflation,
interest rate trends, government budgets,
government fiscal policies, economic growth,
and monetary policy, are topics discussed in
_____ (fill in the blank).
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For inflation and unemployment rates,
visit http://www.bls.gov/
UNIT 1 - Fundamental Concepts
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Macroeconomics and Microeconomics
Price elasticity (sensitivity) of demand for
goods and services, firms’ production
behavior, cost functions, income inequality,
and protectionism, are topics discussed in
_____ (fill in the blank).
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For college tuition changes, visit
www.bloomberg.com and search for
“tuition”.
UNIT 1 - Fundamental Concepts
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The Production Possibilities Curve
A production possibilities curve represents
outcome or production combinations that
can be produced with a given amount of
resources.
UNIT 1 - Fundamental Concepts
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The Production Possibilities Curve
GUNS
600
500
E
C
F
B
400
G
A
300
D
350
500 580
700
ROSES
UNIT 1 - Fundamental Concepts
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Economic Growth
If an economy is operating at a point on the
production possibilities curve, all resources are
used, and they are utilized as efficiently as
GUNS
possible.
600
500
E
C
F
B
400
G
A
300
D
350
500 580
700
ROSES
UNIT 1 - Fundamental Concepts
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Economic Growth Is Caused by:
Increases in
Resources
Advances in
Technology
UNIT 1 - Fundamental Concepts
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Your Own Personal PPC
If two possible outcomes in your own personal life
are job earnings and educational credits, then
your PPC looks as follows:
Job earnings
30000
E
C
23000
F
B
16000
G
A
12000
D
10
18
23
30
College credits
UNIT 1 - Fundamental Concepts
Three Economic Systems are:
1.
2.
3.
Capitalism
Communism
Socialism
UNIT 1 - Fundamental Concepts
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Capitalism Characteristics
The role of the government is limited to
the most essential functions.
 All prices are determined in the free
market (supply and demand).
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UNIT 1 - Fundamental Concepts
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Communism Characteristics
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Government makes all decisions
regarding production, prices, wages,
interest rates, and income distribution.
UNIT 1 - Fundamental Concepts
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Socialism (Mixed Economy)
Characteristics
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Most economic decisions are made by
the private sector, but the role of the
government is significant. Government
spending and taxes are relatively high.
Survey question. On a scale of 1through 5 (1 = most
capitalist, and 5 = most communist), which
economic system do you prefer?
1.
2.
3.
4.
5.
0 of 30
1
2
3
4
5
UNIT 1 - Fundamental Concepts

Grading Systems
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Capitalist: every student gets the grade (s)he
works for.
Communist: all scores are added up, then
divided by the number of students in the
class. Everyone receives the same grade.
Socialist: some points are taken from the
higher scoring students and given to the
lower scoring students.
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For the grading system in our course,
which do you prefer (1 = pure capitalist; 5
= pure communist)?
1. The current system (no
redistribution)
2. A small amount of grade
redistribution (i.e. 6%)
3. A fair amount of grade
redistribution (i.e. 12%)
4. A considerable amount of
grade redistribution (20%)
5. Pure equality
0 of 5
UNIT 1 - Fundamental Concepts
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Economic Growth and Economic Systems

Countries with the highest overall economic
standard of living have the freest markets
(more elements of capitalism).
Examples: Hong Kong, the United States,
Japan, Taiwan, Great Britain, Canada,
Sweden, South Korea, and Singapore.
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UNIT 1 - Fundamental Concepts

2010 Purchasing Power Parity (unless otherwise noted)
Gross Domestic Product estimated in billions of dollars,
and Per Capita (person) GDP
Country/Area
GDP
Per Cap. GDP
World
United States
China
Hong Kong
Korea - North
Korea - South
Luxembourg
Qatar
$ 74,540
$ 14,660
$ 10,090
$ 326
$ 40
$ 1,459
$ 41
$ 151
$ 11,200
$ 47,200
$ 7,600
$ 45,900
$1,800
$ 30,000
$ 82,600
$ 179,000
For GDP information of other countries around the
world, see our CD, Unit 3, Section 2
UNIT 1 - Fundamental Concepts
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Economies around the World
Most industrialized countries are mixed
economies, but they also have many
capitalist elements. Characteristics include
Substantial activity in the private sector
(businesses and households). Prices are
determined by demand and supply.
A significant role by federal and local
governments.
UNIT 1 - Fundamental Concepts

The Role of Government
The role of most governments around
the world includes:
 Spending on defense, roads, legal system, public
services and education
 Redistributing incomes
through taxes and subsidies
 Passing laws and imposing
regulations
 Implementing price controls
 Conducting monetary policy
to affect inflation,
interest rates, and employment
UNIT 1 - Fundamental Concepts
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Important Concepts and Definitions
We will discuss the following concepts:
The simple circular flow
The circular flow with government and foreign
markets
Nominal and real prices and incomes
Positive and normative economic statement
The fallacy of composition
The fallacy of cause and effect
The Simple Circular Flow
Supply of Products
Purchases of (Demand for) Products
Households
Products
Market
Businesses
Supply of Labor and Resources
Purchases of (Demand for) Labor and Resources
Resource
(Inputs)
Market
UNIT 1 - Fundamental Concepts

The circular flow with government and
foreign markets (see next slide). This is
a more complex (more realistic) model.
Supply of Products
Foreign
Markets
Products
Market
Purchases
of Products
Products
Services
Households
Services
Businesses
Government
Taxes
Taxes
Supply of Labor and Resources
Purchases of (Demand for) Labor and Resources
Resource
(Inputs)
Market
UNIT 1 - Fundamental Concepts
Nominal and Real Prices
 Nominal prices are expressed in current
dollars.
 Real prices are adjusted for inflation.
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Enough money to purchase
3 gallons of gasoline a
few years ago. Not
enough to purchase 2 gallons
today.
UNIT 1 - Fundamental Concepts
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Positive and Normative Economic
Statements
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A positive statement can be proven or disproven.
A normative statement is an opinion or value
judgment.
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UNIT 1 - Fundamental Concepts
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Which is the Normative and Which is
the Positive Economic Statement?
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Statement I: The minimum wage should
increase to $8.50.
Statement II: If the minimum wage
increases, then firms’ cost of production rises.
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UNIT 1 - Fundamental Concepts
 The Fallacy of Composition
 Fallacy: what is good for one person (or one
group) is good for all persons (or all groups).
UNIT 1 - Fundamental Concepts
 The Fallacy of Cause and Effect
Because A happens before B, A must be
automatically the cause of B.
UNIT 1 - Fundamental Concepts
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Cause and Effect Fallacy Example
A: The car industry in country X has not done
well.
B: The economy of country X has not done
well.
Did A cause B?
UNIT 1 - Fundamental Concepts

Critical Thinking Guidelines
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Question the source.
Question the assumptions.
Question how the
variables are defined.
Question the validity of
the statement.
Question the statistics.
Think like an economist.
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