Docstoc

THE ECONOMIC WAY OF THINKING

Document Sample
THE ECONOMIC WAY OF THINKING Powered By Docstoc
					THE ECONOMIC WAY OF
THINKING
Chapter 1
          Scarcity: The Basic Economic Problem

   KEY CONCEPTS
     Economics — study of how people use resources to
      satisfy wants
        how individuals/societies choose to use resources

        organizes, analyzes, interprets data about economic

         behaviors
        develops theories, economic laws to explain economy,

         predict future
    SCARCITY: THE BASIC
          ECONOMIC PROBLEM
   Scarcity
       is the economic problem of
        having seemingly
        unlimited human
        needs and wants, in a
        world of limited resources.


   Why does it exist?
       It exists because wants
        are unlimited and
        resources are limited
BASIC ECONOMIC PRINCIPLES
PRINCIPLE 1: PEOPLE HAVE WANTS

   Wants — desires that can
    be met by consuming
    products
    Needs — things
    necessary for survival
    Scarcity — lack of
    resources available to
    meet all human wants,
    not a temporary shortage

 People make choices about all
  their needs and wants
 Wants are unlimited, ever
  changing
 BASIC ECONOMIC PRINCIPLES
 PRINCIPLE 2: SCARCITY AFFECTS
 EVERYONE


 Scarcityaffects which goods and services
 are provided
     Goods — physical objects that can be bought
     Services — work one person does for another
     for pay
     Consumer — person who buys good or service
     for personal use
     Producer — person who makes a good or
     provides a service
THREE BASIC ECONOMIC
QUESTIONS
 Every society must answer three
 basic economic questions because of
 scarcity.

 Societiesanswer these questions
 differently, leading to a variety of
 economic systems.
THREE BASIC ECONOMICS
QUESTIONS
   Question 1: What Will Be Produced?


       Societies must decide on mix of goods to
        produce
         depends on their natural resources

       Some countries allow producers and
        consumers to decide
       In other countries, governments decide
       Must also decide how much to produce;
        choice depends on societies’ wants
THREE BASIC ECONOMICS
QUESTIONS
   Question 2:
    How Will It Be
    Produced?
       Production decisions involve
        using resources efficiently
           Influenced natural resources


       Societies adopt different
        approaches
           labor-intensive methods
            versus capital-intensive
            methods depends on
            availability
THREE BASIC ECONOMICS QUESTIONS

   Question 3:
    For Whom Will It Be
    Produced?

       How goods and services are
        distributed involves two
        questions
         how should each person’s share
          be determined?
         how will goods and services be
          delivered to people?
 THE FACTORS OF PRODUCTION
Factors of production
 resources needed to
  produce goods and
  services
    1. land
    2. labor
    3. Capital
    4. entrepreneurship
     supply is limited
THE FACTORS OF PRODUCTION

Factor    1: Land
     Land means all natural
     resources on or under the
     ground
     includes water, forests,
      wildlife, mineral deposits
THE FACTORS OF PRODUCTION

Factor    2: Labor
     Labor is all the human
     time, effort, talent used to
     make products
     physical and mental effort

      used to make a good or
      provide a service
THE FACTORS OF PRODUCTION
 Factor   3: Capital
     Capital is a producer’s physical
     resources
      includes tools, machines, offices,
       stores, roads, vehicles
      sometimes called physical capital or
       real capital
    Workers invest in human capital —
     knowledge and skills
      workers with more human capital are
       more productive
THE FACTORS OF PRODUCTION
 Factor   4: Entrepreneurship
     Entrepreneurship — vision, skill,
     ingenuity, willingness to take risks
    Entrepreneurs anticipate consumer
     wants, satisfy these in new ways
      develop new products, methods of
       production, marketing or distributing
      risk time, energy, creativity, money to
       make a profit
             Making Economic Choices


 Two   factors affect economic decisions:
   1.    Incentives — benefits that encourage
        people to act in certain ways
   2.   Utility — benefit or satisfaction gained from
        using a good or service


 Choices vary between individuals based on what is
 best for him / her
MAKING ECONOMIC
     CHOICES
   Factor 1: Motivations for
    Choice
      People motivated by
       incentives, expected
       utility, desire to
       economize

       They weigh costs against
        benefits to make
        purposeful choices

       Motivated by self-interest
MAKING ECONOMIC
     CHOICES
   Factor 2: No Free Lunch

       All choices have a
        cost
          choosing one thing

           means giving up
           another, or paying
           a cost
          cost can take form

           of money, time,
           other thing of value
TRADE-OFFS AND OPPORTUNITY
COST
   Trade-off
       is alternative people
        give up when they
        make a choice
         usually means
          giving up some,
          not all, of a thing
          to get more of
          another
TRADE-OFFS AND OPPORTUNITY
COST
   Example of a Trade Off
       Jessica wants to earn college credit over
        summer
         semester-long university course offers
          more credits
         six-week high school course leaves
          time for vacation
TRADE-OFFS AND OPPORTUNITY
COST
   Opportunity cost is value of next-best
    alternative a person gives up
        not the value of all possible alternativ es



       Example of Opportunity Cost
       Dan chooses to work for six months so he can
        travel for six months
          opportunity cost = six months of salary
VIDEO CLIP: OPPORTUNITY COST
OPPORTUNITY COST ACTIVITY
    In a group of 2 -3 consider this scenario:
    You have won $1,000. Create a chart
     with these columns:
      What will you buy?

      What will you gain from each choice?

      What do you give up with each choice?
       (What’s the opportunity cost?)
ANALYZING ECONOMIC CHOICES
 Cost-benefit     analysis:
    examines the costs and expected
     benefits of choices
     one of most useful tools for evaluating
      relative worth of economic choices
ANALYZING ECONOMIC CHOICES
   Marginal Costs and Benefits

       Marginal cost
         additional cost of using one more unit of a

          good or service
       Marginal benefit
         additional benefit of using one more unit of a

          good or service
            ANALYZING PRODUCTION
            POSSIBILITIES

   KEY CONCEPTS
       Production possibilities curve (PPC) is one model (graph)
         PPC shows the maximum goods or services that can be produced from
          limited resources
         also called production possibilities frontier


   PPC
       PPC based on assumptions:
         resources are fixed
         all resources are fully employed

         only two things can be produced

         technology is fixed
     GRAPHING THE POSSIBILITIES
   Production Possibilities Curve
     PPC runs between extremes of
      producing only one item or the other
     Data is plotted on a graph; lines
      joining points is PPC
           shows maximum number of one item
            relative to other item
       PPC shows opportunity cost of each
        choice
           more of one product means less of the
            other
WHAT WE LEARN FROM PPCS
     Efficiency — producing the maximum
     amount of goods and services possible

     Underutilization — producing fewer goods
     and services than possible
WHY IS THE PPC A CURVE?
 Law    of increasing opportunity costs
     as production switches from one
      product to another, more resources
      needed to increase production of
      second product
    Reasons for increasing cost of making more of
     one product
       need new resources, machines, factories

       must retrain workers

    Costs paid by making less and less of other
     product
LET’S LOOK AT SOME EXAMPLES
   PPC Practice
CHANGING PRODUCTION
POSSIBILITIES
   A country’s supply of resources changes over time
     Example: U.S. in 1800s grew, gained
      resources, workers, new technology
     new resources mean new production
      possibilities beyond frontier
 Increased production shown on PPC as shift of
  curve outward
 Increase in total output called economic growth
PPF—THE CURVE
   What Does Guns And
    Butter Curve Mean?
       In a theoretical
        economy with only two
        goods, a choice must be
        made between how much
        of each good to produce.
       As an economy produces
        more guns (military
        spending) it must reduce
        its production of butter
        (food), and vice versa. 
MICROECONOMICS AND
MACROECONOMICS
   Microeconomics
       Microeconomics examines specific, individual
        elements in an economy
           prices, costs, profits, competition, consumer and producer
            behavior
       Some Topics of Interest: business organization, labor
        markets, environmental issues
MICROECONOMICS AND
MACROECONOMICS
   Macroeconomics
       Macroeconomics studies sectors — combination of all
        individual units
           Includes consumer, business, public or government sectors
       Macroeconomics studies national or global topics:
           monetary system, business cycle, tax policies, international
            trade
EXAMPLES OF MACRO AND MICRO
 Which   is it?
 1.   National Unemployment Figures Rise
 2.   World Trade Organization Meets
 3.   Shipbuilder Wins Navy Contract
 4.   Cab Drivers on Strike!
 5.   Gasoline Prices Jump 25 Cents

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:4
posted:10/31/2013
language:English
pages:34