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True or False???? The best things in life are free. Unit 1: Economics Introduction to Economics Topic 1: Definition of Economics Economics studies how scarce resources are used to fulfill society’s needs and wants Scarcity Scarcity condition where wants are greater than resources *Because scarcity exists, choices must be made Resources anything that helps produce a good or service (also called factors of production) The Four Factors of Production •Types of Resources Land Labor Capital Entrepreneurship 8 The Four Factors of Production Land = natural resources (Water, Sun, Oil, Trees, Stone, etc.) 9 The Four Factors of Production Labor = Workers (manual laborers, lawyers, doctors, teachers, waiters, etc.) 10 The Four Factors of Production Capital: Resources that are used to create other goods (tools, tractors, machinery, buildings, factories, etc.) 11 The Four Factors of Production Entrepreneurship= Organizes other resources Ultimate goal: Make profit 12 The Four Factors of Production Classify the Factors of Production in the following scenario: You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door. The Four Factors of Production Classify the Factors of Production in the following scenario: You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door. Resources Resources are interdependent of one another Have to have all resources in order to make a product/service Needs Necessary for survival Wants Not necessary for survival In order for a product to have value, it must be scarce and provide utility (usefulness) Conspicuous Consumption Purchase of items to impress others Topic 2: principles of economics 1. People Economize People make decisions based on what THEY think will benefit them the most 2. All choices involve a cost Opportunity Cost – highest valued alternative given up when a choice is made There is no such thing as a free lunch: Nothing is FREE!!!! Video clip “Dumpster Diving - extreme couponing” 3. Incentives influence behavior 4. Rules influence individual choices 5.Voluntary trade creates wealth Video clip “trading up” Answer the following questions the way an economist would 1. Making a choice means: A. B. C. D. deciding among many possibilities being able to get everything not thinking about future consequences considering a daily horoscope 2. People throughout the world usually make decisions: A. impulsively; choosing quickly without much thought B. generously; thinking of the needs of others C. randomly; leaving the outcome up to chance D. purposefully; considering costs and benefits 3. Which of the following best explains the relationship between choices and incentives? A. incentives motivate people to make certain types of choices B. incentives rarely influence personal choices C. incentives make it difficult to predict what choice people will make D. incentives have nothing to do with choices 4. A hungry economist decides to buy a bag of potato chips; which of the following would best explain his decision? A. the chips cost less than the other snacks B. the chips came in the largest bag C. the chips offer a greater benefit to him than the other snacks D. there are no other choices available In Economics decisions are made at the MARGIN MARGINAL = additional Stop Watch Marginal Utility Additional usefulness of consuming ONE more product Diminishing Marginal Utility: As more is consumed the additional usefulness is LESS Diminishing Marginal Utility Squidward - too many krabby patties When a person acquires more units of an item, ADDITIONAL UTILITY will go down # of donuts consumed Total utility Marginal utility 0 - - 1 5 2 12 3 20 4 25 5 28 # of donuts consumed Total utility Marginal utility 0 - - 1 5 5 2 12 7 3 20 8 4 25 5 5 28 3 Increasing marginal utility occurred with donuts?? Diminishing marginal utility occurred with donuts?? A rational person will weigh the additional utility (MU) against the additional costs (MC) Marginal Cost: additional cost of consuming ONE more item How can a person maximize their utility??? MU<MC = Don’t do it MU>MC = Do it MU=MC * Do it and STOP **utility maximized here Assume it cost $10 to see each movie. Complete the chart below. # of movies Total utility 0 0 1 15 2 25 3 32 4 35 Marginal utility Total cost Marginal cost Assume it cost $10 to see each movie. Complete the chart below. # of movies Total utility Marginal utility 0 0 - 1 15 15 2 25 10 3 32 7 4 35 3 Total cost Marginal cost Assume it cost $10 to see each movie. Complete the chart below. # of movies Total utility Marginal utility Total cost 0 0 0 0 1 15 15 10 2 25 10 20 3 32 7 30 4 35 3 40 Marginal cost Assume it cost $10 to see each movie. Complete the chart below. # of movies Total utility Marginal utility Total cost Marginal cost 0 0 0 0 0 1 15 15 10 10 2 25 10 20 10 3 32 7 30 10 4 35 3 40 10 How many movies should be seen if a person wishes to maximize their utility??? Assume pizza cost $2.00 a slice. Complete the chart in your notes and determine the number of slices that will maximize utility How many pieces of pizza should you eat????? Pizza slices Total utility Marginal utility Total cost Marginal cost 0 0 0 0 0 1 8 8 2 2 2 14 6 4 2 3 19 5 6 2 4 23 4 8 2 5 25 2 10 2 6 26 1 12 2 7 26 0 14 2 8 24 -2 16 2 Pizza slices Total utility Marginal utility Total cost Marginal cost 0 0 0 0 0 1 8 8 2 2 2 14 6 4 2 3 19 5 6 2 4 23 4 8 2 5 25 2 10 2 6 26 1 12 2 7 26 0 14 2 8 24 -2 16 2 Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) 0 1 0 8 2 3 4 5 6 7 Marginal Marginal Cost Utility/Benef it 2 0 2 8 2 6 2 5 2 4 2 2 2 1 2 0 2 You will continue to consume until 14 19 Marginal utility = 23 Marginal Cost 25 26 26 24 would you -2 buy if the price How8 many pizzas per slice was $2? 47 Maximizing utility if choosing between 2 items Must calculate the Marginal utility per price of each item. “Bang for your Buck” Formula for calculating marginal utility per price: MU/Price Calculating MU/P allows you to compare products with different prices Example: Where to go on vacation?? ? You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? Destination Marginal Utility Price Tahiti 3000 $3,000 Chicago 1000 $500 MU/P 49 Example: Where to go on vacation?? ? You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? Destination Marginal Utility Price MU/P Tahiti 3000 $3,000 3000/3000= 1 Chicago 1000 $500 1000/500= 2 50 Topic 3 : Types of Economics microeconomics studies small specific segments of the economy Examples: profits at McDonalds Demand for gasoline macroeconomics studies the economy as a whole;would look at a country’s entire economy Example: poverty in the U.S. International Trade Micro or Macro??? Ferris Beuller’s day off Topic 4: ECONOMIC MODELS Production Possibilities Curve • A production possibilities curve (PPC) is a model that shows alternative ways that an economy can use its scarce resources • This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 56 PPC Each point represents a specific combination of goods that can be produced given resources available. A B C boats 9 7 4 trucks 4 7 9 PPC 4 Key Assumptions • Only two goods can be produced • Full employment • All resources are fully utilized • Technology is fully utilized PPC Point inside (D) = unemployment Point outside (E) = unattainable given current resources Points on curve (A,B,C) = efficient All resources being utilized Economy at full employment PPC shows Opportunity Cost Example: 1. The opportunity cost of moving from a to b is… 2 Bikes 2.The opportunity cost of moving from b to d is… 7 Bikes 3.The opportunity cost of moving from d to b is… 4 Computers 4.The opportunity cost of moving from d to c…. 2 computers 60 PPC can show two different types of costs: constant and increasing Constant Cost: opportunity cost of moving from one point to the other is always the same Increasing cost: opportunity cost of moving from one point to the other gets bigger Constant opportunity cost: Opportunity cost is always the SAME pizza calzones A B C D 4 0 3 1 2 2 1 3 E 0 4 • Opportunity Cost of moving from a-b, b-c, c-d, and d-e? 63 Constant opportunity cost Resources are easily adaptable for producing either good Ex: pizza and calzones Results in a straight line PPC Increasing opportunity cost: Opportunity costs increase as more of a good is produced PIZZA ROBOTS A B 20 19 0 1 C D E 16 10 0 2 3 4 • Opportunity Cost of moving from a-b, b-c, c-d, and d-e? Increasing opportunity cost As you produce more of any good, the opportunity cost will increase Why??? Resources are NOT easily adaptable to producing both goods Results in a BOWED OUT PPC Constant vs. Increasing Opportunity Cost Resources for corn and wheat are more easily adaptable to each other than resources for cactus and pineapples Corn Cactus Wheat Pineapples Per Unit Opportunity Cost Per unit opportunity cost: Doesn’t look at total costs, looks at the cost of ONE more item Per Unit Opportunity Cost = Cost Gain 68 Per Unit Opportunity Cost: Cost/Gain 1. Ron has resources to produce 20 pizzas or 200 burgers To make ONE pizza, John must give up _________ burgers To make ONE burger, John must give up ___________ pizza 2. John has resources to produce 100 pizzas or 200 burgers To make ONE pizza, John must give up __________ burgers To make ONE burger, John must give up ___________ pizza 69 PER UNIT Opportunity Cost How much each marginal unit costs = Cost Gain Example: 1. The PER UNIT opportunity cost of moving from a to b is… 2/2 = 1 Bike 2.The PER UNIT opportunity cost of moving from b to c is… 3/2 Bikes 3.The PER UNIT opportunity cost of moving from c to d is… 4/2 = 2 Bikes 4.The PER UNIT opportunity cost of moving from d to e is… 5/2 Bikes 70 Practice per unit Opportunity cost A B C D E Autos 0 2 4 6 8 missiles 30 27 21 12 0 1.What is the per unit cost of moving from point D to point E? 12/2= 6 missiles 2.What is the per unit cost of moving from point C to point B? 2/6 = 1/3 autos 3.What is the per unit cost of moving from point C to point D? 9/2 missiles 4.What is the per unit cost of moving from point B to point A? 2/3 autos Practice handout PPC (front page) Shifting the Production Possibilities Curve 73 Production Possibilities 4 Key Assumptions of PPC Only two goods can be produced Full employment Resources maximized Technology maximized 3 reasons the PPC will shift 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade 74 Inward shift of PPC Indicates decrease in economy Happens due to: - destruction of resources Less trade Decline in quality of resources Outward shift in PPC Indicates increase in economy (Economic growth) Happens due to: -increase in #/quality of resources - Technology - More Trade AB is original PPC… What happens??? 1. BP Oil Spill in the Gulf 2. Better technology in producing both items 3. Many workers unemployed 4. Significant increases in education 5. Full employment 77 Practice handout PPC (back page) Topic 5: Economic Systems All societies must answer 3 economic questions 1. what will be produced 2. how will it be produced 3. who will get what *the way the questions are answered determine a country’s economic system The Bead Game Stop Watch Traditional economies economic questions answered by past 81 Command Economies economic questions answered by government (communism and socialism) Video clip “command vs market” Command Economies Advantages 1.Equal incomes means no extremely poor people 2.Capable of quick change Disadvantages 1.No incentive to work harder 2. No Competition = poor quality Market Economy economic questions answered by people Market Economies Advantages 1.Economic freedom 2.Competition = better quality goods Disadvantages 1.Unequal distribution of wealth 2.Economic loss 3.Incentive to make a profit CONSUMER SOVEREIGNTY Consumer is ruler of the market Consumers determine which products are successful The Invisible hand - Adam Smith The concept that society’s goals will be met as individuals seek their own self-interest. Example: Society wants fuel efficient cars… • Profit seeking producers will make more. • Competition between firms results in low prices, high quality, and greater efficiency. • The government doesn’t need to get involved since the needs of society are automatically met. Competition and self-interest act as an invisible hand that regulates the free market. The invisible hand: Adam Smith Video clip: “I, pencil” “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own selfinterest.” Mixed Economy elements of the all economic systems together (government and people answer economic questions) Topic 6: Circular Flow of a market economy Shows the interdependence between business and households Resource Market Individuals Businesses Product Market 92 The Circular Flow of a market economy The Product Market-The “place” where goods and services produced by businesses are sold to households. Households demand; Firms supply The Resource (Factor) Market-The “place” where resources (land, labor, capital) are sold to businesses. • Firms demand, households supply 93 TOPIC 7: MARKET STRUCTURES Perfect Competition Most competition Monopolistic Competition Pure Monopoly Oligopoly least competition According to the demonstration which group Represented each structure???? 94 Market competition demo 1. Each food item represents the SIZE of each firm with in the structure. 2. TYPES of items each group has?? 3. COMPETITION within group?? TOPIC 7: MARKET STRUCTURES Perfect Competition Monopolistic Competition Oligopoly Pure Monopoly Imperfect Competition Most competition least competition 96 Perfect Competition Number of firms: Many (thousands) of small firms Choice for Consumers: many Type of Good: identical products Market Entry: very easy, no barriers to entry Amount of competition: Great deal; more than any other structure Perfect competition Example: Agricultural products Monopolistic Competition Characteristics of monopolistic competition Number of firms: hundreds of small companies Choice for consumers: many Type of Good: product DIFFERENTIATION Market Entry: easy, little barriers to entry Amount of competition: a lot; non-price competition Examples: monopolistic competition Retail stores Restaurants Pizza Oligopoly Number of firms: Few large companies Choice for Consumers: Few Type of Good: similar or different Market entry: difficult to enter; barriers exist Amount of Competition: LITTLE One firm’s actions have impact on other firms Brand name recognition important Examples: Oligopoly Soft drinks Cereal Athletic apparel Example of how one firm in oligopoly impacts another “I love Lucy” clip Monopoly Number of firms: Single Seller Choice for consumers: ONE Type of Good: unique; no substitutes Amount of Competition: none (usually illegal because of this) Market Entry: Impossible 105 Example: Monopoly Utility companies ID the market structure Business 1: I’ve got plenty of competition. If I tried to raise my price, I’d lose business to the large firms that dominate our industry. I wait for them to raise prices and I follow along behind. Business 2: New shops like mine are opening all the time – there are hundreds of us. I have to spend money on advertising to convince people that my shop is unique and different. Business 3: I can’t afford to advertise; it would eat up what little profit I make. Besides, what good would it do? My product is the same as everyone else’s. Business 4: My product is like no one else’s. I work hard to make sure my firm stays out in front to avoid cutthroat competition.