Economics Why study economics Welcome

Economics

Why study economics? § § Welcome to the exciting world of economics! Affects daily lives Helps us to make informed decisions Helps us become more effective citizens

Economic Reasoning: Why are We A Nation of Couch Potatoes? § Definition: The social science that deals with how society allocates scarce resources among its unlimited wants and needs by examining alternatives and considering the opportunity costs for each alternative § Economic reasoning can be used to explain a wide range of human behavior.

Key Idea #1: Scarcity § § § Chief economic problem—faced in all societies Condition of having to choose among alternatives Idea of limited resources and unlimited wants and needs § Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives. § Scarce good versus free good

How Do You Know When Something Is Scarce? Scarcity Forces You to CHOOSE SCARCITY CHOICE

Opportunity Cost: the foregone alternative Think: “next-best”

Scarcity IS: Even in the face of abundance. . . What’s scarce when you’re § in the Mall of America? § at the all-you-can-eat buffet?

Key Idea #2: Choice § Scarcity leads us to choose between alternatives § Choices are on an individual (micro) and societal (macro) level § Three economic questions – What should be produced? – How should goods and services be produced? – For whom should goods and services be produced?

People’s Choices are always RATIONAL § Rational choice = choosing the alternative that has the greatest excess of benefits over costs. § If ALL choices are rational, then the challenge is to understand the decisionmaker’s perception of costs and benefits.

Key Idea #3: Opportunity Cost § Definition: the value of the best alternative forgone when making any choice § Most important concept in economics § TINSTAAFL

Why are We A Nation of Couch Potatoes? § Which well known people do Americans tend to admire? § How are Americans’ exercise and diet habits changing?

Why are We A Nation of Couch Potatoes? § On the one hand, Americans admire people who look slender and physically fit.

Why are We A Nation of Couch Potatoes? § On the other hand, according to the Center of Disease Control and Prevention – ~25% of Americans are getting enough exercise – ~35% are overweight – Percentage of children who are overweight has doubled since the early 1970 s

Why are We A Nation of Couch Potatoes? § Economic Mystery: Why do an increasing number of Americans, the same people who admire the trim, slender look so often featured in the media, exercise too little and eat too much?

True or False? § Few Americans know that exercising more and eating less can help many people become healthier. § Exercise and a healthful diet are free. § In jobs that involve physical work, exercise is like a fringe benefit. § The price of food has been increasing. § Passive modes of entertainment like-TV and video gamesare popular. § Common jobs in the past-in mining, farming, and manufacturing-were much safer than today’s jobs in technology, law and finance.

Solve the Mystery! § Read Activity 1 and answer the questions on a separate sheet of paper (10 minutes).

Guide to Economic Reasoning § § § People choose. People’s choices involve costs. People respond to incentives in predictable ways (monetary, nonmonetary, positive, negative). People create economic systems that influence economic choices and incentives People gain when they trade voluntarily. People’s choices have consequences that lie in the future.

Applying Economic Reasoning to Couch Potatoes! § What are some of the costs associated with failure to exercise enough and being overweight? § What incentives might influence people to exercise less and eat more? § How might you solve the mystery? § What are some ways to change the incentives associated with exercise and diet? ’

Article Tasks Step 1 § Please read and code your assigned article. § Put an * by any material you think is a main idea. § Put an ! by any material you think is surprising or interesting. § Put a ? by any material you do not understand/have questions about.

Article Tasks Step 2 § Get in groups of 4 people with the same article and answer the questions about your article.

Article Tasks Step 3 § Find a partner (based on article numbers) who did not read the same article as you and do the following: – Summarize the article for your partner. – Identify and explain at least one item from each coding category (*, !, ? ) – Explain how your article relates to the Couch Potato lesson (Does it contradict or support the lesson? How and why? )

The Economic Way of Thinking: What differentiates economics from other social sciences? § Economists emphasize the role of opportunity costs in analyzing choice – Opportunity cost versus opportunity benefit (what is gained by making a particular choice) – Expected benefits of alternatives will affect choices – As set of alternatives change, choices change

Opportunity Cost: Choices impose costs; people receive benefits and incur costs when they make decisions. § The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.

Opportunity Cost Analysis What was the 1 st decision you made this morning?

Opportunity Cost = the Next-Best Alternative § Identifying Opportunity Cost: – What are the considered alternatives? – Prioritize the alternatives – What is the best and what is the “next-best”? § What would you do – not what could you do? § What does the decision-maker perceive to be the benefits of each alternative?

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Opp. Cost Benefits Refused

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Opp. Cost Get Up Now Shower bkfst don’t rush On time coffee Don’t Get Up Now More sleep

Opportunity Cost Analysis: Decision Maker = YOU Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Choice Opp. Cost Benefits Refused Shower breakfast don’t rush On time, coffee X More sleep X

Opportunity Cost Analysis: Decision Maker = YOU Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Shower bkfst Coffee don’t rush On time Choice X X Opp. Cost Benefits Refused More sleep

Use the concept of opportunity cost to discuss the following questions: § Who might choose to get bumped from a flight? § Should Tiger Woods mow his own lawn? § What is the cost of attending college? – for Le. Bron James? – for you?

The Economic Way of Thinking: What differentiates economics from other social sciences? § Motivation for choices is to maximize value of some objective/and objectives defined by self interest – Business owners motivation is to maximize profit – Consumers make choices to maximize satisfaction (utility) – Self interest doesn’t necessarily mean that people are greedy/selfish

The Economic Way of Thinking: What differentiates economics from other social sciences? § Motivation for choices is to maximize value of some objective/and objectives defined by self interest – Economists study all sorts of choices: how people choose life partners, voting, drug use etc.

The Economic Way of Thinking: What differentiates economics from other social sciences? § Individuals maximize choices by using marginal decision making – Margin—current level of activity – Marginal decision making– deciding to do a little more or a little less of something

People respond to incentives in predictable ways. § Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways. § Incentives may be positive or negative. § Incentives may be monetary or non-monetary.

Microeconomics/Macroeconomics § § Microeconomics branch of economics that examines the choices and interaction of individuals concerning one product, firm, or one industry (how individual producers and consumers respond to changes in market) Macroeconomics the branch of economics that examines the behavior of the whole economy at once unit of analysis not individual but economy as a whole

Micro or macro? You decide § Comparing unemployment rates of Germany and the United States § How the price of milk is determined § The impact of preservation of wilderness areas on the logging industry and on the price of lumber § Increases in US consumer demand

Importance of Economic Theory § Theory: simplified description of reality – Why is theory important even if it is sometimes incorrect or can’t predict outcomes 100% of the time? § Model: simplified form of reality which shows the relationship between different factors § Economic theory simplifies reality

Ceteris Paribus Assumption § All other things unchanged § Assumption that only one variable changes at a time § Economists do this because they want to get a general sense of the direction of relationships

Normative versus Positive Statements § Normative- a statement that makes a value judgment § Positive-a statement of fact or a hypothesis

Normative or Positive? You decide! § Ms. Hartsfield is shorter than most students at SMCHS. § Ms. Hartsfield has two of the cutest babies ever! § Ms. Hartsfield has two children. § Ebenezer is a cloth snowman.

Chapter 2 Confronting Scarcity: Choices in Production

Review § What is the economic way of thinking? – Scarcity forces us to choose and economists analyze opportunity costs when analyzing choices – People are motivated to maximize their self interest – Individuals maximize choices by engaging in marginal decision making

Factors of Production § Definition: resources available to an economy for the production of goods and services § Factors of production (FOP) create utility. § Utility is the value or satisfaction that people derive from the goods or services they consume

Factors of Production § Land (natural resources)-resources of nature that can be used in the production of goods and services – Must be found in nature – Expansion occurs through: § Discovery of more § Discovery of new use § New ways of extraction

Factors of Production § Labor-human factor in production – Natural ability – Human capital – Increase labor through § Increasing number of people available § Increasing human capital

Factors of Production § Capital-resources produced for use in the production of goods and services – Resource must have been produced – Resource can be used to produce other goods and services – THIS DOES NOT MEAN FINANCIAL CAPITAL (money)

Factors of Production § Entrepreneurs change the way that the factors of production are used by putting new technologies to work § Entrepreneur person who seeks to earn profits by finding new ways to organize the factors of production (sometimes classified as the fourth factor of production) § Technology knowledge that can be applied to production of goods and services

Case in Point: Technology Cuts Costs, Boosts Productivity and Profits § Read p. 41 § Who are the winners and losers from technology? – Consumers – Producers – Workers

Land, labor or capital? § § § § An unemployed factory worker A college professor The SMCHS library Yellowstone National Park An untapped deposit of natural gas The White House A power plant

Production Possibilities Model § § § CSU Monterey Bay built on site of Fort Ord Shift from military use to civilian use Definition: Model that shows goods and services that an economy is capable of producing given the factors of production and technology it has available

Production Possibilities § Production Possibilities Alterna tives Schedule § Combinations of what you can produce limited by Consu current resources. mer Option 1 Option 2 Option 3 Option 4 10, 000 7, 000 4, 000 0 0 300 450 1, 000 Goods (jeans) Capital Goods (factori es)

Production Possibilities Curve § Assumes that only two goods can be produced § Any increase in one good means you can produce less of the other § Assumes that factors of production are fixed

Production Possibilities Curve § The PPC is downward sloping – Reflects scarcity § The PPC is bowed out – Curve gets steeper as we move from left to right – “Producing an additional good on horizontal axis requires a greater sacrifice of the good on the vertical axis than did previous units produced” (Tregarthen & Rittenberg, 2000, p. 57)

Production Possibilities Curve § The PPC is bowed out – The absolute value of the slope of any production possibilities curve (PPC) = the opportunity cost of an additional unit of a good on the horizontal axis – Steeper the slope, the greater the opportunity cost of producing that good – Illustrates the law of increasing opportunity cost

Calculating Opportunity Cost § Opportunity cost = what is given up/what is obtained § Economy can produce either 40 houses or 20 office buildings § OC of houses = 20 office buildings/40 houses=. 5 office buildings § OC of office buildings = 40 houses/20 office buildings = 2 houses § Try “Try It Yourself” 2 -2 on p. 49

Production Possibilities Curve § Law of increasing opportunity cost: As an economy moves along its PPC in the direction of increased production of one good, the opportunity cost of additional units of that good increase – Required resources become more scarce – The more of good “B” we produce, the resources we transfer to producing that good were better suited to producing good “A. ”

Production Possibilities Curve § Comparative advantage is when the opportunity cost of producing that good or service is lower for a particular economy than any other – International trade theory is based on comparative advantage

Production Possibilities Curve § Specialization implies that an economy is producing goods and services in which it has a comparative advantage – People work and use the income they earn to buy goods and services from people who have a comparative advantage in doing other things – What would life be like without specialization? Hong Kong vs. United States

Production Possibilities Curve § Movement along the PPC means that all factors of production are being maximized (point B) Efficient level of production (can’t make more of one good without making less of another) § Production within the curve means that factors of production are being used inefficiently (point A) – – – Idle factors of production Inefficient production Could increase production of both goods

Production Possibilities Curve § Production outside of the PPC is impossible without economic growth (point C)

Applications of the PPC Model § In order to allocate resources efficiently, then each nation should specialize in producing products for which they have a comparative advantage § Nations should trade in order to get the goods and services they need – Trade results in more production § Failure to specialize means that the world economy would be producing inside the global PPC

Production Possibilities and Economic Growth § An outward shift of the PPC indicates economic growth. § Economic growth raises standards of living, even in the continuing face of scarcity. § Economic growth is a sustained increase in a nation’s production of goods and services.

Production Possibilities and Economic Growth § The history of world economic growth raises important questions about the ability of nations to deal with the ever-present problem of scarcity. – Rich versus poor nations – Conditions that favor growth – How can growth be promoted? – How can poverty be reduced?

Production Possibilities and Economic Growth § Economic growth occurs through – Increases in educational levels – Changes in technology – Increases in quantity or quality of labor and capital – Innovation (the application of inventions to produce consumer goods and services)

Institutions Matter for Economic Growth § Institutional arrangements define the formal and informal rules of the game that govern how people interact provide incentives § The following foster economic growth: – Open markets – Property rights – Rule of law – Entrepreneurship and innovation

Economic growth creates benefits throughout the economy. § Expands a nation’s productive capacity. § All segments of the economy have benefitted from economic growth; hence the rise of the middle class.