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What is Economics? • Economics is the social science that studies how societies (individuals, What is Economics? • Economics is the social science that studies how societies (individuals, businesses, and Government) allocate their scarce resources to satisfy unlimited wants. • Three IMPORTANT words – Allocate – to assign, allot, distribute – Scarce – insufficient to meet demand, not enough to go around for all – Resources – “things” available to a society that are used to attempt to satisfy unlimited wants.

The principal problem of Economics is… Scarcity The principal problem of Economics is… Scarcity

“The first lesson of economics is scarcity: There is never enough of anything to “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics”. --Thomas Sowell

SCARCITY YOU CAN’T HAVE EVERYTHING YOU WANT! The inability of limited resources to satisfy SCARCITY YOU CAN’T HAVE EVERYTHING YOU WANT! The inability of limited resources to satisfy people’s wants 3/15/2018 Lesson 1: Scarcity 4

Scarcity It’s about RESOURCES and WANTS. Scarcity It’s about RESOURCES and WANTS.

You can’t eliminate scarcity You can’t eliminate scarcity

But you can learn to deal with it! But you can learn to deal with it!

When faced with SCARCITY of resources, decisions have to be made about how to When faced with SCARCITY of resources, decisions have to be made about how to use those resources Trade-offs Opportunity Costs

…are all the alternatives in making a decision …the cost of the next best …are all the alternatives in making a decision …the cost of the next best use of money, time, or resources (you’re 2 nd Choice)

… Are all of the alternatives that go into making a decision…. In this … Are all of the alternatives that go into making a decision…. In this case let’s say you have many different choices of what you want to do on Saturday night.

Here all of your Choices on Saturday night…which are… • • • Go on Here all of your Choices on Saturday night…which are… • • • Go on a Date Hang out with friends Watch TV Read a good book Hang out with parents Go to bed early These are all of your trade -offs Opportunity Cost is different, though…

 • Remember… Opportunity Cost is the next highest valued alternative. (The 2 nd • Remember… Opportunity Cost is the next highest valued alternative. (The 2 nd Best Choice)

Great Forest! 1. Macro [national] economics – concerned with the economy as a whole Great Forest! 1. Macro [national] economics – concerned with the economy as a whole Macro examines the “forest, not the trees, leaves, or specific pieces of bark. ” 2. Micro [details of the big picture] – concerned with specific economic units or individual markets under a microscope. Emphasis is on individual households, industries, or firms [like the # of workers employed by Ford] [Concerns the components of the economy] Micro examines the “trees, leaves, & pieces of bark, rather than the forest. ”. Nice bark!

Macro[large](telescope) “whole economy” [economy-wide issues] Macro Micro[small](microscope] “segment of the economy” [issues in the Macro[large](telescope) “whole economy” [economy-wide issues] Macro Micro[small](microscope] “segment of the economy” [issues in the economy] Micro “Check out those pieces of bark!. “Beautiful, beautiful forest!” Production Microeconomics Macroeconomics How much steel How much office space. Total industrial output Gross Domestic Product Prices Price of individual goods Price of medical care Rate of inflation Employment Jobs in the steel industry Total number of jobs Economy’s unemployment

Introduction to Economics What is Economics? Two fields of Economic study: Micro and Macro Introduction to Economics What is Economics? Two fields of Economic study: Micro and Macro Economics is divided into two main fields of study Microeconomics: Studies the behaviors of INDIVIDUALS within an economy: Consumers and producers in particular markets. Examples: The Automobile market in Switzerland, the market for movie tickets in Zurich, the market for airline tickets between the US and Europe, the market for vacations to Spain, the market for international school teachers. Macroeconomics: Studies the total effect on a nation's people of all the microeconomic activity within that nation. The four main concerns of macroeconomics are: 1) total output of a nation, 2) the average price level of a nation, 3) the level of employment (or unemployment) in the nation and 4) distribution of income in the nation Examples: Unemployment in Canada, inflation in Zimbabwe, economic growth in China, the gap between the rich and the poor in America

Resources or “Factors of Production” Land – Natural Resources • Acreage, rivers, lakes, ports, Resources or “Factors of Production” Land – Natural Resources • Acreage, rivers, lakes, ports, natural resource (oil, precious metals, minerals) Labor – Human Resources • Physical and Mental talents that produce goods and services Capital – “stuff you use to make other stuff” All manufactured goods and services used in producing consumer goods. Examples: Tools, machinery, equipment, trucks to carry goods, airplanes, etc. Entrepreneurship – 1. 2. Someone who takes the initiative in using or combining the above Resources to produce a good or service. Someone who is innovative, a risk taker, and makes basic business decisions. Remember -- ALL THESE RESOURCES ARE IN LIMITED SUPPLY THEY ARE SCARCE!!!!

The Four Factors of Production Resources beget production, which beget income, which beget wealth. The Four Factors of Production Resources beget production, which beget income, which beget wealth. 1. Land [natural resources] – Nature’s items [“gifts of nature”] resources nature A. In the earth - coal, oil, water, fossil fuels, etc. B. On the earth – vegetation and water C. In the atmosphere – sun, wind, and rain [Land is the starting point of all production. “Stuff” from which everything is made. . Water Wind Sun Fossil fuels “Gifts of Nature”

2. Labor [human resources] {“effort”} resources “effort” anyone who works [“paid work”] work” [Labor 2. Labor [human resources] {“effort”} resources “effort” anyone who works [“paid work”] work” [Labor is the “brain-power” and “muscle-power” of human beings] A. Physical – pro athletes & lumberjacks B. Intellectual – ministers, doctors & lawyers *Most important resource – 70% of input cost. “Hired Help”

Real Capital v. Financial Capital REAL CAPITAL [tools, machinery, & factories] Can produce something Real Capital v. Financial Capital REAL CAPITAL [tools, machinery, & factories] Can produce something directly with these . FINANCIAL CAPITAL [stocks, bonds, and money] Can’t produce anything directly with these

. 3. Capital Resources – all “man-made inputs” used in the production process (tools, . 3. Capital Resources – all “man-made inputs” used in the production process (tools, machinery, and physical plants) A. Capital goods – goods [machinery, buildings, & tools] used to produce other goods. [crane, Ford plant, hammer] goods [products meant for “future consumption”] consumption” B. Consumer goods – products meant for “immediate consumption” “Real Capital” [machinery, physical plants & tools] [capital is a factor of production] v. “Financial Capital” [stocks, bonds, & $] [not factors of production] A product can be both a consumer good & a capital good –depends on its use. Ex: Jet aircraft used by a movie star to visit friends (consumer good). The same aircraft used by a business manager to serve customers [capital good]. Ex: F 150 pick-up to deliver produce [capital good] or take family to church [consumer good] “man-made inputs”

Rent Land Wages Labor Interest Capital Profits Entrepreneur . 4. Entrepreneurship – starting a Rent Land Wages Labor Interest Capital Profits Entrepreneur . 4. Entrepreneurship – starting a new business or introducing a new product. “Sparkplugs” who introduce the product or start the new product business. He combines land, labor, & capital to produce products Resource payments. The resource owners receive rent [for the use of their land; wages [for their labor]; interest [payment for financial capital], and profits [for their entrepreneurial ability].

Introduction to Economics The productive Resources Payments for resources: Since resources are scarce, there Introduction to Economics The productive Resources Payments for resources: Since resources are scarce, there is a cost associated with their use. Firms (resource demanders) must provide households (resource suppliers) with a payment for their resources. For LAND: Firms pay households RENT. Landowners have the option to use their land for their own use or to rent it to firms for their use. If the landowner uses his land for his own use, the opportunity cost of doing so is the rent she could have earned by providing it to a firm. For LABOR: Firms pay households WAGES. To employ workers, firms must pay workers money wages. If a worker is self employed, the opportunity cost of self-employment is the wages he could have earned working for another firm. For CAPITAL: Firms pay households INTEREST. Most firms will take out loans to acquire capital equipment. The money they borrow comes mostly from households' savings. Households put their money in banks because they earn interest on it. Banks pay interest on loans, which becomes the payment to households. If a household chooses to spend its extra income rather than save it, the opportunity cost of doing so is the interest it could earn in a bank. For ENTREPRENEURSHIP: Households earn PROFIT for their entrepreneurial skills. An entrepreneur who takes a risk by putting his creative skills to the test in the market expects to earn a normal profit for his efforts.

PRIVATE PROPERTY ROLE OF SELF-INTEREST FREEDOM OF ENTERPRISE & CHOICE COMPETITION PRIVATE PROPERTY ROLE OF SELF-INTEREST FREEDOM OF ENTERPRISE & CHOICE COMPETITION

PRIVATE PROPERTY ROLE OF SELF-INTEREST MARKETS & PRICES FREEDOM OF ENTERPRISE & CHOICE COMPETITION PRIVATE PROPERTY ROLE OF SELF-INTEREST MARKETS & PRICES FREEDOM OF ENTERPRISE & CHOICE COMPETITION ACTIVE, BUT LIMITED, GOVERNMENT

1. Private Property – the right of individuals to exercise control over things owned. 1. Private Property – the right of individuals to exercise control over things owned. Freedom to negotiate binding legal contracts. Contracts are legally binding in oral or written form. [A verbal agreement is binding only if it involves a small sum of money over a short period of time and does not involve real estate purchases. ] 2. Freedom of Enterprise (business) & Choice Can move within the economy to any job, to buy or sell property, or start a business. The consumer is “sovereign” (king) in the economy. His king dollars vote as it is he who decides what gets produced. The U. S. has over 100, 000 business failures each year. 3. Role of Self-Interest–each producer or consumer tries to do what is best for themselves. Self interest themselves is the main force driving the economy. Producers aim for maximum profits Consumers seek the lowest prices & highest quality K-Mart?

5. Markets & prices. Markets bring the buyers and sellers into contact. Prices send 5. Markets & prices. Markets bring the buyers and sellers into contact. Prices send signals. High prices send signals to increase production and for other producers to enter the market Low prices send signals to decrease production and for producers to exit the market 6. Limited Government Intervention in the economy. The role of government was one of “laissez faire. ” [“hands off”] off” In the words of Adam Smith, the government should not interfere with the operation of the economy except serve as an arbitrator in settling disputes The government’s role: role (according to Smith) a. provide defense, b. administer justice, and Arbitrator c. maintain certain public institutions. [settling disputes]

The Three Fundamental Questions. . . 1. What will be produced? 2. How will The Three Fundamental Questions. . . 1. What will be produced? 2. How will the goods be produced? 3. Who will get the goods and services?

The Case for the Market System Efficiency, Incentives, and Freedom Adam Smith said the The Case for the Market System Efficiency, Incentives, and Freedom Adam Smith said the “invisible hand” determines what gets produced, how, & for whom. It is the invisible hand that moves us along the PPC. The invisible hand is now called the market mechanism. Its essential feature is mechanism the price signal

Scarcity Choices Unlimited Wants WHAT G/S HOW will the to produce? Limited Resources WHO Scarcity Choices Unlimited Wants WHAT G/S HOW will the to produce? Limited Resources WHO will receive the G/S produced? G/S be produced? Most needy or most money BASIC ECONOMIC PROBLEMS Answers to the above determine: ECONOMIC SYSTEMS TRADITIONAL COMMAND FREE MARKET

Economic Systems – the way society produces products 1. Traditional 2. Pure Command 3. Economic Systems – the way society produces products 1. Traditional 2. Pure Command 3. Pure Market 4. Mixed a. Capitalism b. Democratic Socialism c. Authoritarian Socialism [Communism] The way the 3 basic questions are answered Determines an economic system. 1. Traditional-[where “CUSTOM RULES”] I. Used to be

2. PURE COMMAND - where the “GOVERNMENT RULES”. The government controls all resources. What, 2. PURE COMMAND - where the “GOVERNMENT RULES”. The government controls all resources. What, How, and For Whom answered by the government. Karl Marx 3. PURE MARKET – where “INDIVIDUALS RULE”. Individuals and firms control all resources. The government has no say. WHAT, HOW & FOR WHOM are decided by individuals. Adam Smith MIXED – all countries have mixed economic systems How are these words used in everyday life? 1. Traditional 2. Command 3. Market

 • A mixed economy is one that uses both market signals and government • A mixed economy is one that uses both market signals and government directives to allocate goods & resources. • Most economies use a combination of market signals and government directives to select economic outcomes.

ADAM SMITH WEALTH OF NATIONS – 1776 [explained the free market concept] The “INVISIBLE ADAM SMITH WEALTH OF NATIONS – 1776 [explained the free market concept] The “INVISIBLE HAND” – when individual consumers/ producers compete to achieve their own private self-interest. The “role of government” [“LAISSEZ-FAIRE” – “HANDS OFF”] is limited to national defense, public education, maintaining the infrastructure, and enforcing contracts. Smith said the market system was best because it encouraged specialization, resulting in increased output & more economic growth. No “G” Government was like an “INVISIBLE FOOT” – government action to benefit particular groups. Keynes will say the G can act as a pressure In loving memory gauge, letting off excess steam or building it up as needed. [active-not all inclusive role] My name is mercantilism. So mercantilism died as economic theory. of mercantilism Smith’s book was an attack on mercantilism Mercantilism Wealth doesn’t come from an accumulation of gold and silver but from more productive people. A nation is wealthier if its citizens Are more productive. It is the ability of people to produce products and trade in free markets that creates a nation’s wealth.

One man Adam Smith’s 1 pin per. Pin Factory = 1 pin] could do One man Adam Smith’s 1 pin per. Pin Factory = 1 pin] could do maybe famous day [1 man Example Now if there is specialization 1 man draws the wire out 1 man straightens the wire 1 man cuts the wire 1 man sharpens the point 1 man flattens the head There are 18 distinct operations - some perform 2 or 3 operations 10 people do 48, 000 pins per day 1 man = 4, 800 pins per day Three circumstances come from this specialization. 1. Increased dexterity (learning by doing) 2. Saving time (lose time when you move to different operations) 1. Invention of machines (fosters inventiveness) inventiveness

Introduction to Economics The Production Possibilities Curve What basic economic concepts can it be Introduction to Economics The Production Possibilities Curve What basic economic concepts can it be used to model? ·Scarcity, tradeoffs, opportunity cost, economic growth, efficiency, unemployment. 10 Italy's PPC B Robots What is the PPC? The PPC illustrates the possible combinations of goods or services that can be produced by a single nation, firm, or individual using resources efficiently What does it show? That nothing is free and that everything has an opportunity cost. If society wants more pizzas, it must give up robots. D A C Pizzas 200 Understanding the PPC: The graph above shows that Italy can produce EITHER 10 robots OR 200 pizzas, or some combination of the two products, as long as it remains on or within its PPC. A point inside the PPC is attainable but not desirable. A point outside the PPC is desirable but unattainable.

Introduction to Economics The Production Possibilities Curve Italy's PPC Assumptions about the PPC: Robots Introduction to Economics The Production Possibilities Curve Italy's PPC Assumptions about the PPC: Robots ·The PPC is attainable only if a nation achieves full-employment of its productive resources ·The nation's resources are fixed in quantity ·Assumes the nation must chose between only two goods ·The economy is closed, i. e. does not trade with other countries ·Represents only one country's economy Questions to consider about the PPC: 10 9 A E B 7 D C 2 65 130 Pizzas 1) Which point(s) are attainable and desirable? WHY? 2) Which point(s) are attainable but not desirable? WHY? 3) Which point(s) are unattainable? Is this point desirable? Explain. 4) Which point will mean more consumption in the future? Explain. 5) Which point means more consumption now? Explain. 6) Why is the PPC bowed outwards? 7) How does the PPC illustrate opportunity cost? Tradeoff? Scarcity? 195

Introduction to Economics The Production Possibilities Curve 1) Which point(s) are attainable and desirable? Introduction to Economics The Production Possibilities Curve 1) Which point(s) are attainable and desirable? ·Points on the PPC (A, B and C) are attainable through full employment, and thus desirable because they represent efficient use of Italy's resources. 3) Which point(s) are unattainable? Is this point desirable? ·Point E is beyond Italy's production possibilities and is thus unattainable. It is desirable because it represents greater consumption of both pizzas and robots. 10 9 Robots 2) Which point(s) are attainable but not desirable? ·Point D is inside the PPC, thus represents inefficient use of resources, and most likely high unemployment, and is thus undesirable. Italy's PPC A E B 7 D C 2 65 130 195 Pizzas 4) Which point will mean more consumption in the future? ·Point A represents more consumption in the future, because Robots are a capital good, used to make other products for consumption. If Italy produces more robots now, it may mean more consumer goos in the future. 5) Which point means more consumption now? ·Point C because pizza is a consumer good. Households don't buy and use robots, but they do like to eat pizzas. 6) Why is the PPC bowed outwards? ·The Law of Increasing Opportunity Cost

Introduction to Economics The Production Possibilities Curve Pizzas and Robots: Assume Italy was producing Introduction to Economics The Production Possibilities Curve Pizzas and Robots: Assume Italy was producing 200 pizzas and 0 robots. Surely, many of the resources (land, labor and capital) being used to make pizzas would be better suited to making robots. As Italy starts making its first two robots it has to give up very few pizzas, since only those resources that are suited for robot production will be used. At first, 2 robots "cost" Italy only 5 pizzas. But as the country makes more and more robots, the opportunity cost increases, because at some point pizza makers will have to build robots. As Italy approaches 10 robots, the opportunity cost of the last two robots is 130 pizzas, as resources better suited for pizza production are employed in robot factories. Robots Rationale: Economic resources are not completely adaptable to alternative uses. Many resources are better at producing one type of good than at producing others. 10 9 8 7 6 5 4 3 2 1 0 Italy's PPC constant opportunity cost A B C D 20 40 60 80 100 120 140 160 180 200 Pizzas Italy's PPC 10 9 8 7 6 5 4 3 2 1 0 increasing opportunity cost A Robots Law of increasing opportunity cost: As the production of a particular good increases, the opportunity cost of producing an additional unit rises. B C D 20 40 60 80 100 120 140 160 180 200 Pizzas

Introduction to Economics The Production Possibilities Curve Italy's PPC 9 How does the PPC Introduction to Economics The Production Possibilities Curve Italy's PPC 9 How does the PPC illustrate: A B Robots 7 ·Scarcity? ·Tradeoffs? ·Decisions? ·Resources? ·Opportunity costs? ·Actual output? ·Potential output? E D C 2 65 130 Pizzas 195 And some more challenging ones: ·Unemployment? ·Economic growth? ·Economic development?

Introduction to Economics The Production Possibilities Curve Italy's PPC 9 How does the PPC Introduction to Economics The Production Possibilities Curve Italy's PPC 9 How does the PPC illustrate: A B Robots 7 ·Scarcity? ·Tradeoffs? ·Decisions? ·Resources? ·Opportunity costs? ·Actual output? ·Potential output? E D C 2 65 130 Pizzas 195 And some more challenging ones: ·Unemployment? ·Economic growth? ·Economic development?

PRODUCTION POSSIBILITIES Robots (thousands) Q 14 13 12 11 10 9 8 7 6 PRODUCTION POSSIBILITIES Robots (thousands) Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unemployment & Underemployment Shown by Point U More of either or both is possible U 1 2 3 4 5 6 7 8 Pizzas (hundred thousands) Q

PRODUCTION POSSIBILITIES Notes. . . Economic Growth Robots (thousands) Q 14 13 12 11 PRODUCTION POSSIBILITIES Notes. . . Economic Growth Robots (thousands) Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 The ability to produce a larger total output - a rightward shift of the production possibilities curve caused by. . . 1 2 3 4 5 6 7 Pizzas (hundred thousands) 8 Q

PRODUCTION POSSIBILITIES Notes. . . Robots (thousands) Q 14 Economic Growth 13 12 11 PRODUCTION POSSIBILITIES Notes. . . Robots (thousands) Q 14 Economic Growth 13 12 11 10 9 8 7 6 5 4 3 2 1 1. Increase in resources - 2. Better resource quality - More of either or both is possible 3. Technological advances - 1 2 3 4 5 6 7 8 Pizzas (hundred thousands) Q

C A P I T A L G O O D S AB PPC C A P I T A L G O O D S AB PPC C G D F E Consumer Goods 40. At what letter is there unemployment [recession]? F recession 41. What letters represent resources being used in their most productive manner? [full employment, full manner production, and best available technology] A, B, C, D, E 42. What letter represents an improvement in technology, technology therefore a new PPC frontier line? G 43. The (straight line/curve) illustrates the “line of increasing cost”? 44. The (straight line/curve) illustrates the “law of constant cost. ” 45. At what letter would there be the most economic growth in the future if a country were producing there now? A 46. What is the opportunity cost when moving from “C” to “D”; Capital Consumer E to B; & do we have to give anything up when moving from F to D? no B D

PPC Practice Questions 1. An economy that is fully employing all its productive resources PPC Practice Questions 1. An economy that is fully employing all its productive resources but allocating less to investment than to consumption will be at which of the following positions on the PPC to the right? a. A b. B c. C d. D e. E 2. Which of the following best explains the shape of the PPC for the two-commodity economy shown above? a. Opportunity cost of producing another unit of each stays the same. b. Opportunity cost of producing another unit of each decreases c. Opportunity cost of producing another unit of each increases 3. Which of the following is true of the PPC on the right? a. Point Q is attainable but undesirable. b. Point R is unattainable but undesirable. c. A technological improvement of watches would move the economy from T to P. d The opportunity cost of moving from S to T is the # of watches given up. 4. If we move from B to C on the graph (right), the opportunity cost is? a. AH units of good Y b. OG units of good Y c. EF units of good X d. HG units of good Y A H G O B C

PPC Practice Questions [continued] 5. Which of the following would cause the PPC shown PPC Practice Questions [continued] 5. Which of the following would cause the PPC shown (right) to shift outward? a. Reopening steel plants that had been closed b. Rehiring laid-off workers Missiles c. Using machinery for missile production instead of steel production d. Using machinery for steel production instead of missile production e. Developing a more efficient steelmaking process 6. Base on the graph (right), which statements are true? I. The opportunity cost of moving from P to R is 10 units of Y. II. The opportunity cost of moving from R to P is 8 units of X. III. The opportunity cost of moving from Q to R is 0 units. a. I only b. III only c. I & II only d. I, II, & III Steel X

Introduction to Economics Product and Resource Markets What is a Market? A place where Introduction to Economics Product and Resource Markets What is a Market? A place where buyers and sellers come together In economics, we will study two types of market Product Markets Households buy goods and services produced by firms Resource Markets Firms buy productive resources from households

Introduction to Economics Product and Resource Markets Product Markets Who are the buyers? Households Introduction to Economics Product and Resource Markets Product Markets Who are the buyers? Households Who are the sellers? firms What is bought and sold? goods and services Resource Markets Who are the buyers? firms Who are the sellers? households What is bought and sold? Capital, land, labor Which way does money flow? from households to firms Which way does money flow? What are the goals of firms and households? Maximize profit (firms) and utility (households) Maximize income (households), minimize costs (firms) Why does everyone benefit? Because exchanges are mutual and voluntary From firms to households Because exchanges are mutual and voluntary

Introduction to Economics Product and Resource Markets Resource Market: ·Households supply productive resources (land, Introduction to Economics Product and Resource Markets Resource Market: ·Households supply productive resources (land, labor, capital) ·Firms buy productive resources from households. In exchange for their productive resource, firms pay households: -Wages: payment for labor -Rent: payment for land -Interest: payment for capital -Profit: payment for entrepreneurship ·Firms seek to minimize their costs in the resource market ·Firms employ productive resources to make products, which they sell back to households in the product market Product Market: ·Consumers buy goods and services from firms ·Households use their money incomes earned in the resource market to buy goods and services ·Expenditures by households become revenues for firms ·Firms seek to maximize their profits ·Households seek to maximize their utility (happiness) Notice the CIRCULAR FLOW of resources and money between these two markets!

Introduction to Economics The Circular Flow of Resources Expenditures / revenue Product market Goods/Services Introduction to Economics The Circular Flow of Resources Expenditures / revenue Product market Goods/Services Firms Households Factors of production Resource market Income: W I R P Questions: ·Give three examples of resource owners. ·Give three examples of transactions you made this week in the product market. ·Give an example of a transaction you or your family made this month in a factor market. ·What resources or "input factors" do households provide in the resource market? ·What determines the prices of land, labor, capital and entrepreneurship in a factor market? ·Where do households get the money to buy goods and services in the product market? ·Where do business firms get the money to pay households for their resources? ·How does the circular flow diagram illustrate interdependence in a market economy?

Introduction to Economics The Circular Flow of Resources Resource Market Product Market Firms employ Introduction to Economics The Circular Flow of Resources Resource Market Product Market Firms employ productive resources to Productive resources: Households provide make finished goods and services. They firms with the productive resources they sell their products to households in need to produce goods and services exchange for money. -Land -Labor Mutual benefits and Households spend -Capital voluntary exchange -Entrepreneurship their income from the sale of Resource payments: Firms pay households for their resources, using revenue from the sale of their goods and services, which creates income for households -Rent -Wages -Interest -Profit their resources. ·Households make expenditures on goods and services ·Firms earn revenue, which is needed to cover their costs. Any revenue earned beyond all costs is considered economic profit. ·The goal of households is to maximize happiness (utility) ·The goal of firms is to maximize profits NCEE Workbook Activity (TR-TC)Circular Flow 5: The

Introduction to Economics Introduction to Trade What is trade? Trade is one of the Introduction to Economics Introduction to Trade What is trade? Trade is one of the concepts fundamental to the field of economics. Voluntary exchanges between individuals and firms in resource and product markets involving the exchange of goods, services, land, labor and capital is a type of trade. International trade involves the exchange of resources, goods, services, assets (both real and financial) across national boundaries. Trade makes everyone better off, and leads to a more efficient allocation of society's scarce resources. "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 interest. We address ourselves, not to their humanity but to their selflove, and never talk to them of our necessities but of their advantages" - Adam Smith "The Wealth of Nations" Discuss. . .

Introduction to Economics Introduction to Trade Adam Smith, the father of modern Economics. ·Lived Introduction to Economics Introduction to Trade Adam Smith, the father of modern Economics. ·Lived 1723 -1790 ·Leading thinker of the Scottish Enlightenment ·Two great works: Theory of Moral Sentiments (1759) and The Wealth of Nations (1776) ·Believed that humans acting in their own self-interest would lead to benefits for society as a whole, since the pursuit of self-interest naturally leads individuals to meet the wants and needs of those around them. On mutual benefits of trade: "Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. " On self-interest: "Every man…is first and principally recommended to his own care; and every man is certainly, in every respect, fitter and abler to take care of himself than of any other person. " Discussion Question: What IS the "invisible hand" that makes all this work?

Introduction to Economics Introduction to Trade Abraham Lincoln was once advised to buy cheap Introduction to Economics Introduction to Trade Abraham Lincoln was once advised to buy cheap iron rails from Britain to finish the transcontinental railroad. He replied, "It seems to me that if we buy the rails from England, then we've got the rails and they've got the money. But if we build the rails here, we've got our rails and we've got our money. " To paraphrase: "If I buy meat from the butcher, then I get the meat and he gets my money. But if I raise a cow in my backyard for three years and slaughter it myself, then I've got the meat and I've got my money. " Why don't we keep cows in our backyard? Source: "Naked Economics" by Charles Wheelan Discussion Questions: 1. Why do nations trade? 2. What is specialization? 3. How does a nation determine what it should specialize in? 4. How do nations benefit from trade?

Introduction to Economics Introduction to Trade Three facts help answer this question: ·Uneven distribution Introduction to Economics Introduction to Trade Three facts help answer this question: ·Uneven distribution of land, labor and capital resources ·Efficient production requires different combinations of resources ·People may simply prefer products made in other countries due to non-price attributes Labor-intensive goods -Examples: -Where? Land-intensive goods -Examples: -Where? Capital-intensive goods -Examples -Where? What does Switzerland specialize in? Why? China? US? India? UK?

Introduction to Economics Comparative advantage and the PPC Comparative Advantage: A country has a Introduction to Economics Comparative advantage and the PPC Comparative Advantage: A country has a comparative advantage in production of a certain product when it can produce that product at a lower relative opportunity cost than another country. Production Possibilities Analysis: Specialization is economically desirable because it results in more efficient production. 39 PPC - Korea PPC - USA How much do apples "cost"? apples ·in the US? -> 1 a = 1/3 c 24 ·in Korea? -> 1 a = 1/2 c How much do cell phones "cost" ·in the US? -> 1 c = 3 a 13 cell phones 12 cell phones ·in Korea? -> 1 c = 2 a Should the countries trade? Why or why not?

Introduction to Economics Comparative advantage and the PPC United States: Specialize in apples -> Introduction to Economics Comparative advantage and the PPC United States: Specialize in apples -> trade apples for cell phones with Korea should be willing to trade 1 apple for anything up to, but not beyond, 1/2 cell phone. Before trade, 1 apple could only be get America 1/3 cell phone. The US has gained from trade. Korea: Specialize in cell phones -> trade cell phones for apples with the US. The US should be willing to exchange up to three apples for one cell phone. Before trade, Korea could only get two apples for each cell phone it gave up. Korea has gained from trade. Trading possibilities line USA 36 apples Terms of trade: 39 The "real exchange rate" between apples and cell phones will depend on the relative success of the US and Korea at the negotiating table. The red dashed lines represent the best possible outcome for both countries. cell phones 13 Trading possibilities line Korea 24 19. 5 12 cell phones

Introduction to Economics Comparative advantage and the PPC Specialization: Introduction to Economics Comparative advantage and the PPC Specialization: "The use of the resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services. " ·What a person, company or country should specialize in depends on the task for which it has the lowest opportunity costs. ·Countries should specialize based on the products for which they have a comparative advantage ·Terms of trade: terms that are mutually beneficial to the two countries in trade. Where the trade leaves both countries better off than they were originally ·Gains from Specialization and Trade: Specialization based on comparative advantage improves global resource allocation. Each country would result in a larger global output with the same total inputs or world resources and technology. Conclusion: "Specialization and trade based on comparative advantage increases the productivity of a nation's resources and allows for greater total output than would otherwise be possible. "

Introduction to Economics Comparative advantage and the PPC Production possibilities tables: Countries' production possibilities Introduction to Economics Comparative advantage and the PPC Production possibilities tables: Countries' production possibilities can be displayed using tables. These tables come in two types, Output and Input tables. Input Problem Output Problem Reading the table: Given a fixed amount of resources, Mexico and the USA can choose between the following alternatives. Soybeans Reading the table: In order to produce one ton of output, Mexico and the USA must use the following amount of resources. (in acres of land) Avocados Soybeans Avocados Mexico 15 60 Mexico 16 8 USA 30 90 USA 8 6 How to decide who should specialize in what: ·Identify the opportunity costs of soybeans and avocados in Mexico and the USA ·The countries should specialize in the one for which they have the lower opportunity cost. ·Cross multiplication trick. (maximize output and minimize inputs)

Introduction to Economics Comparative advantage and the PPC Another way to determine who should Introduction to Economics Comparative advantage and the PPC Another way to determine who should specialize in what using production possibilities tables: CROSS MULTIPLY! Input Problem Output Problem Avocados Soybeans Mexico 15 60 = 1800 Mexico 30 8 16 = 64 6 = 96 X X USA Avocados Soybeans 90 = 1350 For an output problem, simply cross multiply and then choose the highest level of output. Output is maximized when the US specializes in soybeans and Mexico in avocados. USA 8 For an input problem, cross-multiply and then choose the combination that uses the least amount of inputs. Inputs are minimized when the US specializes in soybeans and Mexico in avocados.

Introduction to Economics Comparative advantage and the PPC Soybeans Avocados Soybeans 30 15 Mexico Introduction to Economics Comparative advantage and the PPC Soybeans Avocados Soybeans 30 15 Mexico 15 60 USA 30 90 PPC shows the two countries potential output. 60 Avocados 90 ·Who should specialize in what? ·Illustrate the possible gains from trade on the two PPCs

Introduction to Economics Unit 1 Definitions Economic growth: An increase in total output (and Introduction to Economics Unit 1 Definitions Economic growth: An increase in total output (and income) or per capita output (and income) of a nation over a period of time. Can be illustrated by an outward shift of the PPC Economic development: a sustained increase in the standard of living of the people of a nation. Characterized by improvements in health, education, life expectancy, and per capita income. Positive and normative concepts: ·Positive concepts are those rooted in fact. They are observable and definitive. Example: The average income of Americans HAS increased by 2. 5% per year since 1970. ·Normative concepts are those rooted in opinion. They are statements of what should be rather than what is. Example: American incomes should be higher given the increases in productivity since the 1970 s.

Introduction to Economics Unit 1 Definitions Ceteris Paribus: Translates to Introduction to Economics Unit 1 Definitions Ceteris Paribus: Translates to "all else equal". Economists assume "ceteris paribus" in all of their models. The purpose is to simplify an economic event down to one or two observable variables, understanding that other factors could change that affect the model. Example: "ceteris paribus", an increase in price of a good will lead to a decrease in the quantity demanded by consumers. The ceteris paribus means that other factors besides price are NOT changing, (i. e. the price of other goods or the incomes of consumers). Utility: The economists word for happiness. Economists assume that rational consumers always behave in a way that maximizes their utility. Free vs. Economic goods: ·Free goods are those that are desired but not limited. A free good is available in as great a quantity as desired with zero opportunity cost to society. Air is a free good. Sunlight is a free good ·Economic goods are those that are desired and limited. This is most resources and goods in society. They are economic because the supply is limited, therefore there is a price attached to them, or an opportunity cost associated with their use.

Models in Economics A model is a simplified representation of a real situation that Models in Economics A model is a simplified representation of a real situation that is used to better understand reallife situations. Ceteris Paribus The “other things equal” assumption means that all other relevant factors remain unchanged. 65

Scientific Thinking • The Association. Causation Issue • The Fallacy of Composition • The Scientific Thinking • The Association. Causation Issue • The Fallacy of Composition • The Ceteris Paribus Assumption

“How much? ” is a decision at the margin. • You make a trade-off “How much? ” is a decision at the margin. • You make a trade-off when you compare the costs with the benefits of doing something. • Decisions about whether to do a bit more or a bit less of an activity are marginal decisions. 67

Marginal Analysis • Making trade-offs at the margin: comparing the costs and benefits of Marginal Analysis • Making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. • The study of such decisions is known as marginal analysis. • Ex. : Hiring one more worker, studying one more hour, eating one more cookie, buying one more CD 68