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Bonus Dates • If you get your homework in before the actual due date I will give five bonus points for the homework assignment for each chapter. • Chapters 1 Bonus remains for Tuesday 9/13, Chapter 2 Bonus Friday 9/16. • Otherwise all homework is due the day of the Unit Test set tentatively for the week of September 19-23. I. What is Economics – The Language • A. Definition – Social Science concerned with the efficient use of scarce resources to achieve maximum satisfaction of human material wants. • HUH?!??????? I. What is Economics cont…? • B. Unlimited Wants satisfied by Limited Resources and using those resources as efficiently as possible. • Case example USA vs. USSR • See this stuff is easy!!! In the beginning… I. What is Economics cont…? • C. Scarcity and Choice • 1. Because resources are scarce it forces individuals and countries to make choices. • 2. Those choices always come with some sort of cost. What is Economics? Economics: the study of Unlimited Wants Satisfied by Limited Resources. Unlimited v. Limited: Forces people, nations, & the world to deal with the problem of Scarcity. Scarcity forces Choice! 3. Economics is the study of Choice!!! No, you can't always get what you want You can't always get what you want You can't always get what you want You can't always get what you want You can't always get what you want You can't always get what you want But if you try sometimes you might find You get what you need Economics, the study of choice! I. What is Economics cont…? • “There is no such thing as a free lunch.” • One of the most repeated quotes in all of economics. • What does it mean?? • Because resources are scarce and we must make choices based on those limited resources, our choices ALWAYS come with a cost! • Examples – Fill your gas tank lately? Wants???? • Food, Clothing, and Shelter • Cars, Concerts, and CD’s • Primary v Secondary Wants • Different people? • Different nations? • Different wants? I. What is Economics cont…? • C. Scarcity and Choice • 4. Opportunity costs – the items you sacrifice in order to acquire what you want. • - Explicit costs - $ • - Implicit costs – time, energy… Economics, the study of choice! Making a Choice Carries a Cost! • Opportunity Cost • When one road is taken an opportunity on another road is missed! • In taking AP Econ, what did you not take? • Going out for a sport means….. • Buying a new outfit means….. Basic Economic Questions • $100 gift certificate and a trip to Mayfair Mall! • Ever not buy something? • Ever regret a purchase? • Have a CD you hate? Overview • Because we have unlimited wants but limited resources we have to make choices and understand that our choices come with a cost. • How do we get the greatest satisfaction for the lowest cost?? • “The most bang for the buck!” I. What is Economics cont… • D. Marginal • 1. Economics seeks to compare the marginal benefit to the marginal cost. • 2. Marginal = Additional or extra. • (More commonly; is it worth it? Is the added effort worth the benefit you will receive both individually and in society.) An example • Needed – 3 volunteers. • You get to eat. Do you think like an Economist – Yet?? • Can the government provide too much financial aid??? • What should you consider? • Costs= • Benefits= • How do you measure it? • That’s what the class is about. II. Why Study Economics • A. Economics has replaced politics as the avenue toward freedom. • 1. Economics dominates political decisions. • B. It will help you make better financial decisions. Academic not Vocational – Accounting = Vocational Academic = the skills to run a business better III. Broad Economic Goals • A. 8 Widely accepted goals of USA • 1. Growth – Higher Standard of Living • 2. Full Employment – Provide jobs for all citizens willing and able to work. • 3. Efficiency – maximum fulfillment of wants with all available resources. • 4. Price-level stability – avoid large swings in prices (inflation /deflation) • 5. Freedom – allow for choices. • 6. Equitable distribution of income – poverty v. wealth. • 7. Security – provide for those unable to provide for themselves. • 8. Balance of Trade – keep a reasonable balance of goods and financial transactions. • B. Debatable, complementary, and may involve trade-offs. End of Chapter 1 • Economics Defined • Unlimited wants vs. limited resources. • Scarcity leads to choice. • Choice is made by evaluating what is going to give the most satisfaction for the lowest cost. • Bonus for chapter 1 work Tuesday September 13. AP Macro Outline – 2005-2006 I. A. B. C. D. E. 8 – 12 % Basic economic concepts Chapters 1, 2, 3, 4, 5 & parts of 20 Scarcity, choice and opportunity costs Production possibilities curve Comparative advantage, specialization and exchange Demand, supply, and market equilibrium Macroeconomic issues: business cycle, unemployment, inflation, growth II. Measurement of economic performance Chapters 4, 5, 7, 8 A. National Income Accounts (4-6%) 1. Circular flow 2. Gross Domestic Product 3. Components of GDP 4. Real versus Nominal GDP B. Inflation measurement and adjustment (4-5%) 1. Price indices 2. Nominal versus real values 3. Costs of inflation C. Unemployment (4-5%) 1. Definition and measurement 2. Types of unemployment 3. Natural rate of unemployment Do you think like an economist yet? Let’s See 12 – 16 % Chapter 2 • I. The Economizing problem. • A. Society’s material wants are unlimited yet resources are scarce? • 1. On the one hand we deal with the desires of consumers. • 2. Consumers seek those items that give them the greatest utility (pleasure/satisfaction). • 3. Business and Gov’t also have wants such as satisfying production goals or helping the citizenry. THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS.... BUT LIMITED OR SCARCE PRODUCTIVE RESOURCES! Wants???? • Food, Clothing, and Shelter • Cars, Concerts, and CD’s • Primary v Secondary Wants • Different people? • Different nations? • Different wants? I. The economizing problem cont… • • • • • 4. On the other hand we deal with all of the natural, human and manufactured resources. B. Resource Categories 1. Land – All gifts of nature. 2. Capital – machinery, tools etc… 3. Labor – physical and mental talents of individuals. I. The economizing problem cont… • 4. Entrepreneurial Ability – an innovator who takes the risk of trying to produce new products, new techniques, or forms of business organizations. • Try to remember CELL Resource Categories • Land • Labor • Capital ( is not money but is new machines and factories) • Entrepreneurial Skills (CELL – a pneumatic device) I. The economizing problem cont… • C. Resource markets • 1. The place where resources or the services of resource suppliers are bought and sold. • 2. Business demands the 4 categories of resources to make their goods and services. • 3. In return business must pay for those resources. • 4. Those resource payments are in the form of Rent, Interest, Wages and Profits/losses. (weasel puss is red!) 5. Business/Owners Decisions based on…$$$ LAND RENT CAPITAL INTEREST LABOR WAGES ENTREPRENEUR PROFIT & LOSS 6. Simple Circular Flow Page 37 in book. Circular Flow Model BUSINESSES Circular Flow Model BUSINESSES HOUSEHOLDS Circular Flow Model RESOURCE MARKET RESOURCES BUSINESSES INPUTS HOUSEHOLDS Circular Flow Model $ COSTS $ INCOMES RESOURCE MARKET RESOURCES BUSINESSES INPUTS HOUSEHOLDS Consumer Choices are based on... UTILITY or Opportunity cost LUXURIES vs. NECESSITIES Secondary vs. Primary Wants Circular Flow Model $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET Circular Flow Model $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION How Does an Economy Work? The Circular Flow Model 1995 Essay: Draw, Label, & Explain the Circular Flow! 7. Full vs. Allocative Efficiency • Full – using resources and producing goods in the least costly way. • Allocative – using the resources and producing goods in the least cost way but also how society deems appropriate. II. How do nations decide how to best use those resources? A. 3 Basic Questions for any nation: 1. What? 2. How? 3. For Whom? To answer these questions, economic systems were created. These economic systems vary greatly in how they use their scarce resources. In the USA we used our scarce resources to produce $29,000 per person of goods and services. In Zambia scarce resources were used to produce $900 per person of goods and services. B. Economic Systems • • • • 1. 2. 3. 4. Traditional Command Market Mixed Each system answers: what, how, and for whom differently. Economic v Political Systems • All nations fall economically into Traditional, Command, Market, or Mixed systems • Nations politically can be Capitalist, Socialist, Communist, Dictatorship, or Fascist C. Traditional Systems • 1. Barter System • 2. Low Productivity • 3. Third World Countries • Saukville D. Command Systems • 1. Government controls the economy • 2. Government determines: – What to produce – Who will produce it – How it will be produced – For whom it will be produced E. Market Systems • 1. Laissez Faire role of government • 2. Private ownership of the means of production • 3. Markets determine price and allocate resources F. Mixed Economic Systems • 1. Most national economies today • 2. Market economies dominate with varying degrees of government regulation and manipulation. Goals of Macroeconomists: 1. Economic Growth 2. Stable Prices 3. Full Employment “ISMS” • • • • • • • Capitalism Socialism Communism Imperialism Nationalism Fascism Nazism Capitalist Systems - USA • Limited role of government • Private ownership of the means of production • Markets determine price and allocate resources Socialist Systems • An expanded role of government • Government & Private ownership of the means of production • Government & Markets determine price and allocate resources In most European countries & in Canada health care is PROVIDED by the Government. Governments own and run airlines and railroads in some countries too! Communist Systems • Government controls the economy • Government determines: – What to produce – Who will produce it – How it will be produced – For whom it will be produced Imperialism v. Nationalism • Nationalism is waving the flag and being patriotic! • Imperialism is planting the flag in another country and claiming it for political or economic gain! Dictatorships • Mussolini’s Fascism – Control government – Control the economy – Allow some freedoms • Hitler’s Nazism – Total control of a person’s life – Total control of the nation A Quick Check • • • • • • • • • • • • Answer T for traditional, C for Command or M for Market. 1. This economy has no money in its exchanges. 2. In this economy consumers decide what will be produced. 3. In this economy, government decides what will be produced. 4. In this economy, government has only a minor role. 5. This economy sees the greatest potential for productivity. 6. J. Stalin, A. Hitler, F. Castro A. Hilts use this system today. 7. In this economy the people decide who will receive the goods produced by using money. 8. The pilgrims 9. Airbags and seat belts 10. McRib, Mcgrafton Take a look at the first three questions for your chapter two homework. You should be able to answer them. Production Possibility Curves Understanding Efficiency and Choice III. PPC Curves • A. Simplistic way of illustrating the consequences of choice in an economy. • B. 4 Assumptions • 1. Full employment and productive efficiency. • 2. Fixed resources. • 3. Fixed Technology • 4. Two goods – consumer goods and capital goods. • C. A PPC table lists the different combinations of two products that can be produced with limited resources. • D. A PPC curve is a 2 dimensional graph of the goods. PRODUCTION POSSIBILITIES Assumes.... Efficiency Fixed Resources Fixed Technology Two Products for example... PRODUCTION POSSIBILITIES Assumes.... Efficiency Fixed Resources Fixed Technology Two Products for example... PRODUCTION POSSIBILITIES What if we could only produce ... 10,000 Robot Arms or PRODUCTION POSSIBILITIES What if we could only produce ... 10,000 Robot Arms or 400,000 Pizzas PRODUCTION POSSIBILITIES What if we could only produce ... 10,000 Robot Arms or 400,000 Pizzas Using all of our resources, to get some pizza, we must give up some robot arms! for example... PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots (in thousands) 10 PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots 10 (in thousands) (thousands) Robots in graphical form Pizzas (hundred thousands) PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots 10 (in thousands) (thousands) Robots in graphical form Pizzas (hundred thousands) PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots 10 (in thousands) (thousands) Robots in graphical form Pizzas (hundred thousands) PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots 10 (in thousands) (thousands) Robots in graphical form Pizzas (hundred thousands) PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots 10 (in thousands) (thousands) Robots in graphical form Pizzas (hundred thousands) PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots 10 (in thousands) (thousands) Robots in graphical form Pizzas (hundred thousands) III. PPC Curves cont… • E. If an economy is at full employment and full efficiency it must sacrifice some of one good in order to get more of another good. • F. The amount of other products that must be sacrificed to obtain additional units of another good is the – OPPORTUNITY COST! PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots 10 (in thousands) (thousands) Robots in graphical form Pizzas (hundred thousands) III. PPC Curves cont… • 1. Law of increasing opportunity costs - the opportunity cost of each additional unit is greater than the previous one. • - When you continue to add to Pizzas it is going to cost you marginally more in robots. • - why? – it is not an equal trade off. There comes a point when transfer of resources is more costly than an equal trade off. • - That is why PPC curves are concave. • - Converting capital goods or military good to consumer goods is not an equal trade off. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 9 7 4 0 (in hundred thousands) Robots 10 (in thousands) (thousands) Total versus Marginal Opportunity costs. Robots in graphical form Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Limited Resources means a limited output.... PRODUCTION POSSIBILITIES Limited Resources means a limited output.... At any point in time, a fullemployment, full-production economy must sacrifice some of product X to obtain more of product Y. PRODUCTION POSSIBILITIES Robots (thousands) G. Allocative Efficiency Q 14 13 1. Society 12 must 11 A decide B 10 on some C 9 point 8 7 along D the frontier 6 5 MB = MC Attainable 4 3 2 1 Unattainable W Attainable and efficient but Inefficient E 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Robots (thousands) Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes.... Unattainable LAW OF INCREASING A OPPORTUNITY COSTS B The amount of other C W products which must be forgone or D sacrificed to Attainable and obtain some amount of a specific product is calledefficient Attainable the but opportunity cost of that good. Inefficient E 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Robots (thousands) Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes.... Unattainable LAW OF INCREASING A OPPORTUNITY COSTS B This means that a graph of C W the production possibilities curve will be CONCAVE D Attainable bowed out from the origin. and efficient Attainable but Inefficient E 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Robots (thousands) Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes.... Unattainable LAW OF INCREASING A OPPORTUNITY COSTS B This means that a graph of C W the production possibilities curve will be CONCAVE D Attainable bowed out from the origin. Attainable Economic resources are but not completely adaptInefficient able to other uses. and efficient E 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Robots (thousands) H. Unemployment and underQ 14 13 utilization of 12 resources. 11 Shown inside 10 the curve. 9 Unemployment & Underemployment Shown by Point U 8 7 6 5 4 3 2 1 U 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Capital Goods Q A a Economic Limits Along PPC Frontier B Consumer Goods Q PRODUCTION POSSIBILITIES Capital Goods I. Growth Q C brought on by an increase in A resource supplies or advances in technology. Shifts the Curve to the Right. Economic Growth b a B D Consumer Goods Q 12 10 8 6 4 2 0 2 4 PPC – Constant Cost Graph 6 8 10 12 PPC – Constant Cost Graph Quantity of Wheat In tons 12 10 What if the Axis's Were labeled wheat & oil? 8 6 4 2 0 2 What is this now an Output or Input PPC? 4 6 8 10 12 Quantity of Oil In millions of barrels Quantity of Wheat In tons 12 PPC – Constant Cost Graph of 10 Outputs 8 6 4 2 0 2 4 6 8 10 12 Quantity of Oil In millions of barrels Quantity of Wheat In tons 12 PPC – What happens if output increases? 10 8 6 4 2 0 2 4 6 8 10 12 Quantity of Oil In millions of barrels PRODUCTION POSSIBILITIES Assumes.... Efficiency PRODUCTION POSSIBILITIES Assumes.... Efficiency Fixed Resources PRODUCTION POSSIBILITIES Assumes.... Efficiency Fixed Resources Fixed Technology PRODUCTION POSSIBILITIES Assumes.... Efficiency Fixed Resources Fixed Technology The Role of Government FULL EMPLOYMENT STABLE PRICES ECONOMIC GROWTH ALLOCATIVE EFFICIENCY PRODUCTIVE EFFICIENCY PRODUCTION POSSIBILITIES Assumes.... Efficiency Fixed Resources Fixed Technology PRODUCTION POSSIBILITIES Robots (thousands) Q 14 Unemployment & Underemployment Shown by Point U 13 12 11 10 9 8 7 6 5 4 3 2 1 More of either or both is possible U 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Robots (thousands) Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes.... ECONOMIC GROWTH The ability to produce a larger total output a rightward shift of the production possibilities curve caused by... 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Robots (thousands) Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes.... ECONOMIC GROWTH 1 - Increases in resources 2 - Better resource quality 3 - Technological progress 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Robots (thousands) Q 14 A’ 13 12 11 10 9 8 7 6 5 4 3 2 1 Economic Growth B’ C’ D’ E’ 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q PRODUCTION POSSIBILITIES Two Examples of Economic Growth Goods for the Future FAVORING PRESENT GOODS CURRENT CURVE FUTURE CURVE CONSUMPTION Goods for the Present PRODUCTION POSSIBILITIES Two Examples of Economic Growth CURRENT CURVE FUTURE CURVE CONSUMPTION Goods for the Present FAVORING FUTURE GOODS Goods for the Future Goods for the Future FAVORING PRESENT GOODS CONSUMPTION FUTURE CURVE CURRENT CURVE Goods for the Present Basic Review – Chapter 2 • 5 point Bonus Chapter 1 for Monday 9/13; 10 Point Bonus Chapter 2 Wednesday 9/15 • Unlimited wants v limited resources • Primary v Secondary • Land, Labor, Capital, Entrepreneurial • Choice • Scarcity • Opportunity Cost • Absolute & Comparative Advantage • What, How, and For Whom • Economic Systems: Traditional, Command, Market, and Mixed • Construction of a Circular Flow & PPC curves • Efficiency???? PRODUCTION POSSIBILITIES Applications.... • Wartime Production • Discrimination • Land-Use Controversies • Destruction from War • Growth: Japan vs. United States • Famine in Africa • Emerging Technologies On the back of your quiz: • Draw a simple circular flow with Households & Businesses, The Factor Market with CELL & WPiR, & the Product Market with Goods & Services and Cash Flow. • Draw and Label PPC curves on a single graph for Pesto and Pasta Lands labeling: Absolute Advantage(AA) and Comparative Advantage(CA) – Pesto land produces 40 Lasagna and 20 Pizzas – Pasta land produces 30 Lasagna and 30 Pizzas The Macro Economy • • • • • • • Consumer Purchases Business Investments Government Purchases Exports Imports GDP = C + I + G + X – M (demand side) GDP = W + i + R + P + Inbt + Dep (income side)