Download Unit 1: Economics

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.