Chapter 1 - Economics

1. Chapter 1 - Economics Foundations & Models

2. Terms • Macroeconomics– studies the economy as a whole ex: the U.S. unemployment rate is 5% • Microeconomics – studies how households & firms make choices and government’s influence on their choices ex: the unemployment rate in Elmira, NY is 6%

3. Terms (cont) • Normative statement– “what should or ought to be” ex: it is too cool out today • Positive statement– “what is” – the facts ex: it is 65 degrees today • Social Science– economics studies human behavior in making choices

4. Terms • Needs – things required to survive: food, water, shelter, clothing • Wants – luxuries or highly desired things that make life easier: ex: better food, clothing… • Resources – productive inputs needed to provide goods & services: natural, human & capital (machine, tools, factories, etc.)

5. What is Economics? • The study of the choices people make to attain their goals, given their scarce resources • Scarcity - the basic economic problem - it always exists - people’s unlimited wants exceed limited productive resources

6. Everyone in the World has… Basic Needs food water clothing shelter Unlimited Wants restaurant food bottled water designer clothes a mansion

7. the problem is… there are not enough resources to meet the world’s unlimited wants http://www.youtube.com/watch?v=-zkISyPNlrY

8. Who does everyone include? • Individuals and societies are forced to make choices • Businesses want to satisfy needs and wants of consumers • Government wants to provide goods or services not fully provided by business or at all

9. 3 Basic Economic Questions • Whatto produce • How to produce • For whomto produce What determines who or how these questions are answered? An economic system organizes what, how, and for whom to produce

10. Economic Systems • Command Economy (centrally planned) – government authority decides what, how, and for whom to produce ex: China • Market (Free Enterprise or Capitalism) Economy - households and firms interact in the market to decide how to allocate economic resources

11. Modern Economies • Traditional Economy – custom or past precedence answers the 3 basic economic questions • The Mixed Economy - all modern economies are “Mixed Economies” – with central planning, market & tradition guiding decisions Note: most decisions are made in the market where buyers & sellers come together exchange voluntarily

12. Market economiesare more efficient Productive Efficiency occurs at the lowest possible cost Allocative Efficiency occurs because production follows consumer preferences (where MB = MC) Why? Profit motivates businesses to produce what people want and in the least-cost way Equity in the market (through competition) provides a fair distribution of economic benefits Voluntary Exchange between buyers & sellers ensures both types of efficiency are achieved So which economic system is preferred and why?

13. Use Economic Models– simplified versions of reality; analyze real-world situations Economic Variables – something measurable with different values So what do can we do to ensure we what resources we have efficiently?

14. A scale model A fashion model Are all models similar?

15. Because of scarcity, people 1) are rational – weigh benefits & costs of actions (marginal analysis) handout 1 2) respond to economic incentives ex: it is less costly for a bank to deal with robbers ($1,200) than to spend thousands on security ($10,000 to $50,000) homework question 11 3) make optimal decisions at the margin homework question Why use economic models at all?

16. Decisions at the Margin • Most decisions are rarely “all or nothing” ex: “I’m going to eat but won’t have any fun” • Marginal (extra or additional) Analysis looks at the utility (satisfaction) and benefits or costs from using resources • Tradeoffs – giving up part of one thing so that you can have something else

17. The table shows the personal values and costs & benefits. Numbers are in money amounts to show value in terms of goods & services. Minutes Spent Marginal Marginal Styling Hair Benefit Cost 1 15 cents 1 cent 2 14 2 3 13 3 4 12 4 5 11 5 6 10 6 7 9 7 8 8 8 9 7 9 What is the value (benefit) of the first minute spent styling your hair? _____ Its opportunity cost? The MB _____ & MC ____ of the second minute? How many minutes would you ideally spend styling your hair? Why? What happens a minute beyond that point? Marginal Reflections

18. Decisions at the Margin:Tradeoffs Old Country Food vs. The Movies Food vs. Entertainment Need vs. Want The Optimal Choice: Where MB = MC

19. Productive Resources • Factors of Production used to produce goods or services (3) 1) Natural – anything unaltered ex: land, mineral, water, fish, timber, Payment: rent Use determined by productivity, demand & supply 2)Human (labor) – mental and physical Payment: wage Use determined by productivity, demand & supply

20. Productive Resources (cont) 3) Capital (machines, tools, factory) – anything produced to produce something else ex: the farmer’s tractor, silo for the bread company’s factory, machines, bread bag Payment: interest Use determined by productivity, demand & supply

21. Non-productive are? 1) Entrepreneurship– the decision- making, risk-taking, innovation of people who start the business Payment: economic profit (over and above payment for natural, human, and capital inputs) 2) Money– merely facilitates exchange necessary to obtain resources easily