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Economics & Finance What is Economics? Econ Economy Economics Econometrics Econometric Forecasting Economize Study of how Societies Allocate Scarce Resources Chapter 1 Section 1 Scarcity and the Science of Economics TINSTAAFL There Is No Such Thing AS A Free Lunch OK….. Prove Me Wrong!! Chapter 1 Section 1Terms: Economics Study of How Societies Allocate Scarce Resources Need Basic requirement for survival: Food, Clothing, Shelter Want A way of expressing a need: Pizza or other “favorite food” Chapter 1 Section 1Terms: Scarcity Situation that arises when unlimited wants are met with limited resources Unlimited Wants Scarce Resources Scarcity Choices What to Produce How to Produce For Whom to Produce Chapter 1 Section 1Terms: Scarcity vs Shortages Shortages occur when producers won’t or can’t offer goods or services at the current price. Shortages can be temporary (holiday) or long-term (war or drought). Scarcity exist when wants/needs are greater than resource supply. Can change long-term when new resources are discovered or new technologies make greater use of existing resources. Chapter 1 Terms cont. In order to satisfy Needs & Wants utilizing Scarce Resources, we must employ the: Factors of Production Land, Labor, Capital and Entrepreneurs Each of these resources are SCARCE! Land “Gifts of Nature” or Natural Resources including: fertile soil, forests, mineral deposits, livestock, sunshine etc. Chapter 1 Terms cont. Labor People: Physical efforts put forth to produce goods and provide services. Includes all people who contribute to production except “Entrepreneurs” Subject to change in supply due to: Population growth War Disease etc. Capital (or Capital Goods) Physical Capital : Tools, equipment, machinery, and factories used in production. Human Capital: Investment in self through education, training, internship/experience. Chapter 1 Terms cont. Entrepreneurship Innovator Risk Taker Profit Seeker Production When all factors of production: Land, Capital, Labor and Entrepreneurship are present Production of Goods & Services takes place End Chpt 1 Section 1 Chapter 1 Section 1 Assessment 1. Describe an Economic: Good Service Combination 2. Why is the idea of Scarcity a starting point for thinking economically? 3. Describe a situation of Scarcity 3b.Describe a situation of Shortage 4. Describe the 3 (4) Factors of Production, explaining the role of the Entrepreneur Chapter 1 Section 1 Assessment 5. What special advantages does Physical Capital offer? (The book lists three distinct advantages. Come up with a 4th!!) Economic Choices and Decision Making: Trade-Offs & Opportunity Cost Trade-Offs Alternative choices forgone in each economic decision (Figure 1.5 in text) Opportunity Cost Cost of the next best alternative when one choice is made over another. (See cartoon page 21) Production Possibilities Frontier Diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed. Decision Making Grids Economic Choices and Decision Making: Process for designing PPF Identifying Possible Alternatives Cost of Idle Resources (point “e”) A Alternative Possibilities a Guns 70 e 40 d Fully Employed Resources b Production can take place anywhere on or inside the frontier. c 300 Butter Economic Growth could take us here 400 Economic Choices and Decision Making: C Economic Growth d Guns a b Increased productivity And additional factors of production expand Production possibilities c Butter Economic Choices and Decision Making: Opportunity Cost B Opportunity Cost a Guns 70 b 40 The opportunity cost Of producing 100 units Of butter is the 30 guns given up c 300 Butter 400 Economic Choices and Decision Making cont. Thinking Like an Economist Build Simple Models Alternative Possibilities Opportunity Cost Economic Growth Economic Choices and Decision Making cont. Employ Cost Benefit Analysis Cost Benefit Analysis Incremental Steps Economic Choices and Decision Making cont. The Road Ahead Free Enterprise Economy Topics & Issues Standard of Living Economics & Citizenship Making the Rational Choice Scope of Economics Description Gross Domestic Product (GDP) Dollar value of all “FINAL” goods and services, structures produced within a country’s borders in one year Most comprehensive measure of a country’s total output Key measure of nation’s economic health Other Key Measurements: Unemployment rate Inflation International trade Business/Labor relations Government spending Scope of Economics cont. Analysis Examination of information summarized in studies and presented: Graphs, Charts, Reports etc. Explanation Communication of Information gained through analysis to others so that action can be taken Prediction Forecasting economic trends so that action can be taken to avoid excessive unemployment and inflation Stabilize the economy Group Activity Pair up with ONE other person Your Island Team member names What You’ll Produce (Must be TWO Products or Services) List…… Quantity ea. How You’ll Produce it… Manufacture Grow Factory/Handmade Etc… Who Gets It?? Rich Poor Middle Class List your Factors of Production Land - Describe Labor - Describe Capital – Describe Entrepreneurs - Describe Production Possibilities Curve Create a curve and animate the following: Production Possibilities Frontier Movement along the curve = Change in allocation of resources Shift in Curve = Change in resources or technology Show a point of inefficiency Explain your Graph! 10 % Entrepreneurs by Population 6.8 Canada Finland 1.4 France 1.8 Denmark 2 Germany 2.2 Britain 3.3 % Entreprenuers In Population 8.5 U.S. Chapter 1 Terms cont. Goods Item that is economically useful or satisfies an economic “want” Book, CD, Ipod etc. Consumer Good Intended for final use by individuals Capital Goods Manufactured goods intended to be used to produce other goods Chapter 1 Terms cont. Services Work that is performed for someone to satisfy an economic “need” or “want” surgery, haircut, home repair etc. Consumer Person who uses goods and services to satisfy wants and needs. Consumption is the process of using up goods to satisfy wants and needs. Chapter 1 Terms cont. Value Worth that can be expressed in dollars and cents Paradox of Value Some necessities, such as water, have little monetary value Some non-necessities, such as diamonds, have great monetary value. Scarcity is a major factor in determining value If there was only enough water remaining for a small number of people, then people would pay truck loads of diamonds for a single gallon! Utility For a good to have value, it must also have utility Capacity to be useful and provide satisfaction Not fixed or measurable, like weight or height Varies from one person to another Therefore, In order to have value, a good must both be scarce and have utility Chapter 1 Terms cont. Wealth Accumulation of those products that are tangible, scarce, useful and transferable from one person to another Nation’s wealth is comprised of all items in the economy: homes, factories, footballs, clothing etc. Services are not counted as wealth because: They are intangible The Circular Flow of Economic Activity Product Markets Business Income Consumer Spending Goods Services Goods Services Individuals Businesses Buy Productive Resources Payments for Resources Land Capital Labor Entrepreneurs Factor Markets Income from Resources The Circular Flow of Economic Activity Factor Markets Where productive resources are bought and sold Where individuals earn incomes Product Markets Where producers sell their goods and services to consumers Where people spend their incomes Productivity & Economic Growth Economic Growth Occurs when nation’s total output of goods and services increases over time. The circular flow of Economic Activity becomes larger More factors of production, goods, and services flow in one direction More payments flow in the opposite direction Productivity When scarce resources are used efficiently Productivity & Economic Growth Division of Labor (Specialization) When work is arranged so workers do fewer tasks than before Model T Assembly line production Specialization: When factors of production perform tasks that they can do relatively more efficiently than others Investing in Human Capital Human Capital Sum of the skills, abilities, health, and motivation of people. Investment through: Health care, training, education, motivation Productivity & Economic Growth Investing in the Future Investments in both human and physical capital Long-term approach to profit making Economic Interdependence We rely on each other to produce the goods and services we need/want Everything is CONNECTED! Effect of Education on Income Average Income For Education level Males Less Than 9th Grade 9th to 12th Grade (no diploma) High School Graduate Some College, no degree Associate Degree Bachelor’s Degree Master’s Degree Professional Degree Doctorate Degree $22,746 $27,638 $32,611 $39,367 $40,465 $55,832 $71,225 $120,052 $93,106 Females $14,957 $18,594 $22,656 $26,562 $29,776 $37,319 $46,072 $74,077 $60,468 Father of Economic study Adam Smith 1723 – 1790 Kirkcaldy, Scotland Friend of Benjamin Franklin Wealth of Nations The Invisible Hand Each individual “intends only his own gain, and he is in this…led by an invisible hand… Three Basic Economic Questions: What to produce? Given the limited resources we have, what exactly should we produce? How should we produce it? Mass Production? Hand crafted? For Whom should we produce? Professionals? Workers? Government? On a Piece of Paper… List some examples from your life that involve Scarcity and the Economic Choices you’re forced to make. What decisions did you make? Were they based on Needs, Wants or Both? What were the deciding factors? Were the decisions based on Short Term or Long Term Factors? Were you able to have it all????