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Introduction: Economic Issues Burlington Central High School Mr. LaPlante Grade 12 University Credit Economics Unit 1 Chapters 1-3 The Nature of Economics and the Economy Economics and Key Skills • • • • • • Note taking News Issues & Analysis Debate Research Organisation Interpreting graphs and statistics Basic principles of economics “Social Science of Scarcity and Choice” Economics defined • Greek origins • Oikos – “house” • Nemo – “to manage” • Wise management of one’s house • “The study of the way we make decisions about the use of scarce resources” • Why? – Because our needs and wants are insatiable and our resources are finite Human Behaviour • Rational and social beings therefore we are able to predict the groups behaviour but not always the individuals that make up the group. • Knowledge of the group behaviour can be useful for decision makers. As a student are you?... • Effective? • Using resources to achieve the desired results • Efficient? • Using the bare minimum of resources to achieve the desired result Economic decisions need to be both effective and efficient Efficiency means we have to realise we give up something else to achieve our goals Opportunity coststhe sum of all that is lost from taking one course of action over another.(maximum potential loss) The Economic Problem • Economic problems – production and consumption – Scarcity: the central economic problem • Macroeconomic ideas – growth – unemployment – inflation – balance of payments problems – cyclical fluctuations The Economic Problem • Microeconomic issues – choices: • what • how • for whom – the concept of opportunity cost – rational decision making What are the four categories of Resources? Land Labor Capital Entrpreneurship What is a Land Resource? A shorthand expression for any natural resource provided by nature What is Labor? The mental and physical capacity of workers to produce goods and services What is Capital? The physical plants, machinery, and equipment used to produce other goods What is Financial Capital? The money used to purchase capital What is Entrepreneurship? The creative ability of individuals to seek profits by combining resources to produce innovative products Land Labor Capital Entrepreneurship organizes resources to produce goods and services What is Ceteris Paribus? A Latin phrase that means that while certain variables can change, “all other things remain unchanged” What is Positive Economics? An analysis limited to statements that are verifiable What is Normative Economics? An analysis based on value judgement Society Chooses Resources Scarcity Unlimited wants The Economic Problem • The production possibility curve – what the curve shows A production possibility curve 8 Units of food (millions) 7 6 Units of food Units of clothing (millions) (millions) 5 4 8m 7m 6m 5m 4m 3m 2m 1m 0 3 2 1 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m 0 0 1 2 3 4 5 Units of clothing (millions) 6 7 8 A production possibility curve 8 a Units of food (millions) 7 6 5 Units of food Units of clothing (millions) (millions) 4 a 8m 7m 6m 5m 4m 3m 2m 1m 0 3 2 1 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m 0 0 1 2 3 4 5 Units of clothing (millions) 6 7 8 A production possibility curve 8 b Units of food (millions) 7 6 Units of food Units of clothing (millions) (millions) 5 4 8m 7m 6m 5m 4m 3m 2m 1m 0 b 3 2 1 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m 0 0 1 2 3 4 5 Units of clothing (millions) 6 7 8 A production possibility curve 8 Units of food (millions) 7 c 6 Units of food Units of clothing (millions) (millions) 5 4 8m 7m 6m 5m 4m 3m 2m 1m 0 c 3 2 1 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m 0 0 1 2 3 4 5 Units of clothing (millions) 6 7 8 A production possibility curve 8 Units of food (millions) 7 6 Units of food Units of clothing (millions) (millions) 5 4 8m 7m 6m 5m 4m 3m 2m 1m 0 3 2 1 0.0 2.2m 4.0m 5.0m 5.6m 6.0m 6.4m 6.7m 7.0m 0 0 1 2 3 4 5 Units of clothing (millions) 6 7 8 A production possibility curve 8 Units of food (millions) 7 6 5 4 3 2 1 0 0 1 2 3 4 5 Units of clothing (millions) 6 7 8 A production possibility curve 8 w Units of food (millions) 7 x 6 5 4 3 2 1 0 0 1 2 3 4 5 Units of clothing (millions) 6 7 8 The Economic Problem • The production possibility curve – what the curve shows – microeconomics and the p.p. curve: The Economic Problem • The production possibility curve – what the curve shows – microeconomics and the p.p. curve: • choices and opportunity cost The Economic Problem • The production possibility curve – what the curve shows – microeconomics and the p.p. curve: • choices and opportunity cost • increasing opportunity cost Increasing opportunity costs 8 Units of food (millions) 7 x 6 1 5 y 1 2 4 z 3 1 2 1 0 0 1 2 3 4 5 Units of clothing (millions) 6 7 8 The Economic Problem • The production possibility curve – what the curve shows – microeconomics and the p.p. curve: • choices and opportunity cost • increasing opportunity cost – macroeconomics and the p.p. curve: The Economic Problem • The production possibility curve – what the curve shows – microeconomics and the p.p. curve: • choices and opportunity cost • increasing opportunity cost – macroeconomics and the p.p. curve: • production within the curve Making a fuller use of resources x Food Production inside the production possibility curve y v O Clothing The Economic Problem • The production possibility curve – what the curve shows – microeconomics and the p.p. curve: • choices and opportunity cost • increasing opportunity cost – macroeconomics and the p.p. curve: • production within the curve • shifts in the curve Food Growth in potential output Now O Clothing Growth in potential output Food 5 years’ time Now O Clothing Food Growth in potential and actual output O Clothing Growth in potential and actual output y Food x O Clothing Canada’s Economic Goals • • • • • • • • • • Political stability Reduced Public Debt Economic growth Increased productivity and Efficiency Equitable distribution of Income Price Stability Full Employment Viable balance of payments and Stable Currency Economic Freedom Environmental stewardship The Economic Problem • The circular flow of income – firms and households The circular flow of goods and incomes The Economic Problem • The circular flow of income – firms and households – goods markets • real flows: goods and services The circular flow of goods and incomes The circular flow of goods and incomes Goods and services The Economic Problem • The circular flow of income – firms and households – goods markets • real flows: goods and services • money flows: consumer expenditure The circular flow of goods and incomes Goods and services The circular flow of goods and incomes Goods and services $ Consumer expenditure The Economic Problem • The circular flow of income – firms and households – goods markets • real flows: goods and services • money flows: consumer expenditure – factor markets The Economic Problem • The circular flow of income – firms and households – goods markets • real flows: goods and services • money flows: consumer expenditure – factor markets • real flows: services of labour and other factors The circular flow of goods and incomes Goods and services $ Consumer expenditure The circular flow of goods and incomes Goods and services $ Consumer expenditure Services of factors of production (labour, etc) The Economic Problem • The circular flow of income – firms and households – goods markets • real flows: goods and services • money flows: consumer expenditure – factor markets • real flows: services of labour and other factors • money flows: wages and other incomes The circular flow of goods and incomes Goods and services $ Consumer expenditure Services of factors of production (labour, etc) The circular flow of goods and incomes Goods and services $ Consumer expenditure Wages, rent dividends, etc. $ Services of factors of production (labour, etc) The Economic Problem • The circular flow of income (cont.) – macroeconomic issues • the size of total flows – microeconomic issues • individual markets • choices within goods and factor markets TOP 10 REASONS TO STUDY ECONOMICS 1. Economists are armed and dangerous: "Watch out for our invisible hands.” 2. When you call 1-900-LUV-ECON and get Kandi Keynes, you will have something to talk about. 3. You can talk about money without every having to make any. 4. You get to say "trickle down" with a straight face. 5. Mick Jagger and Arnold Schwarzenegger both studied economics and look how they turned out. 6. When you are in the unemployment line, at least you will know why you are there. ...TOP 10 REASONS TO STUDY ECONOMICS 7. If you rearrange the letters in "ECONOMICS", you get "COMIC NOSE". 8. Although ethics teaches that virtue is its own reward, in economics we get taught that reward is its own virtue. 9. When you get drunk, you can tell everyone that you are just researching the law of diminishing marginal utility. 10. Economists can supply it on demand. 1. Scarcity exists a. when people consume beyond their needs. b. only in rich nations. c. in all countries in the world. d. only in poor nations. C. No matter what economic system a country has, it is always faced with the problem of scarcity. 2. Which of the following would eliminate scarcity as an economic problem? a. Moderation of people’s competitive instincts. b. Discovery of large new energy reserves. c. Resumption of steady productivity growth. d. None of the above because scarcity can not be eliminated. D. Because it is impossible to provide everyone with everything they want, we will always have scarcity. 3. Which of the following is not a resource? a. Land. b. Labor. c. Money. d. Capital. C. Money is not a resource because it has no intrinsic value. Money that is used to make an investment is called financial capital. 4. Economics is the study of a. how to make money. b. how to operate a business. c. people making choices because of the problem of scarcity. d. the government decision-making process. C. Economics is the study of how people must decide among alternatives to meet their wants and needs in this world of scarcity. 5. Microeconomics approaches the study of economics from the viewpoint of a. individuals or specific markets. b. the operation of the Federal Reserve. c. economy wide effects d. the national economy. A. Microeconomics is the study of the decision- making process for individuals, business owners, and government. 6. A review of the performance of the Canadian economy during the 1990’s is primarily the concern of a. macroeconomics. b. microeconomics. c. both macroeconomics and microeconomics. d. neither macroeconomics nor microeconomics. A. Macroeconomics is the study of the economy as a whole. 7. An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. The phrase “ceteris paribus” means that a. other relevant factors like consumer incomes must be held constant. b. the gasoline prices must first be adjusted for inflation. c. the theory is widely accepted, but cannot be accurately tested. d. consumers need for gasoline remains the same regardless of price. A. Anytime price changes we always make the assumption that nothing else changes. 8. An economist notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. The economist has a. confused association with and causation. b. misunderstood the ceteris paribus assumption. c. Used normative economics to answer a positive question. d. built an untestable model. A. Just because one action follows another, does not mean that the first caused the second. 9. Which of the following is a statement of positive economics? a. The income tax system collects a lower percentage of the incomes of the poor. b. A reduction in the tax rates of the rich makes the tax system more fair. c. Taxes ought to be raised to finance health care. d. All of the above are primarily statements of positive economics. A. Positive economic statements are testable by facts and explain the world as it is without making value judgements. 10. Which of the following is a statement of positive economics? a. An unemployment rate of greater than 8 percent is good because prices will fall. b. An unemployment rate of 7% is a serious problem. c. If the overall unemployment rate is 7%, black unemployment rates will average 15%. d. Unemployment is a more severe problem than inflation. C. Other answers are based on a value judgement concerning the relationship between black and white unemployment rates. 11. Which of the following is a statement of normative economics? a. A minimum wage is good because it raises wages for the working poor. b. The minimum wage is supported by unions. c. The minimum wage reduces jobs for unskilled workers. d. The minimum wage encourages firms to substitute capital for labor. A. Even though the minimum wage reduces jobs for some working poor, it is a value judgement that the minimum wage is good for the economy overall. 12. Select the normative statement that completes the following sentence: If the minimum wage is raised rapidly, then a. inflation increases. b. workers will gain their rightful share of total income. c. profits will fall. d. unemployment will rise. B. To say that workers have right to a certain part of total income entails a value judgement.