What is Economics? Economics is the study of how people seek to satisfy their needs & wants by making choices.
What is Scarcity? What is a need? What is a want? Scarcity is the limited quantities of resources to meet unlimited wants. Something that is necessary for survival (air, water, etc.) An item that we desire that is not essential to survival. Scarcity
What is considered a Good? Shoes Shirts cars What is considered a Service? Haircuts Dental checkups tutoring Goods & Services
Factors of Production • Land • All natural resources to produce goods and services • Labor • The effort that a person devotes to a task for which that person is paid • Capital • Any human-made resource that is used to produce other goods and services
Opportunity Cost • The most desirable alternative given up as a result of a decision • Example: • Nations often chose to build up their military (they produce more guns), they give up producing more food and other resources in turn (butter), “Guns or Butter”
Trade-Offs • Trade-offs are all the alternatives that we give up whenever we choose one course of action over another. • Example: • If you join the soccer team you give up time watching TV after school
Definitions • Cost of Living: • the average cost of food, clothing, and other necessary or usual goods and services paid by a person, family, etc., or considered as a standard by the members of a group. • Real Wage: • The term real wages refers to wages that have been adjusted for inflation. • Inflation: • Inflation is the persistent rise in the general price level as measured against a standard level of purchasing power.
The FOPs: C Capital: Human (intelligence/skills); Financial (Money); Physical (tools, equipment, buildings/factories) Entrepreneurs: “Risk Takers” – people who risk savings in order to gain a profit; increase competition by bringing new g/s to the market; lower prices E L Land: Consists of any natural resources (raw materials; land for people to build homes/offices; trees, oil) L Labor: Fluctuates (growth/decline; life expectancy; work skills) and can impact an economy’s productivity
3 BEQs (Basic Economic Questions) 1. What to Produce? Usually based on available FOPs in an economy. How to Produce? Usually based on available technology and decided based on EFFICIENCY. 2. For Whom Are we producing? Go for the “target audience” – where the demand is. 3.
Economic Systems • Command: • BEQs decided by central authority – set the needs and goals of a country (often use quotas) • ADV: Economies can change quickly (no debate) • DISAD: doesn’t meet n/w of people; lacks incentives; lack consumer goods; little to no innovation • Are individuals Free to make Economic Decisions? • Traditional: • BEQs dictated by tradition, ritual, habit • Everyone knows their role • Little change, no risk, no new ideas, stable • Are individuals Free to make Economic Decisions?
Economic Systems • Market: • BEQs decided by supply and demand (consumers; producers) • NO gov’t involvement • ADV: lots of g/s; Laissez-Faire; satisfies n/w; incentives; innovation; private ownership • DISAD: mkt failures (monopolies); rewards only productive resources • Are individuals Free to make Economic Decisions? • Mixed-Market: • Most BEQs are determined by demand • SOME gov’t interference • ADV: protects consumers; preserves competition; private AND public ownership; incentives • DISAD: More gov’t regulation and involvement • Are individuals Free to make Economic Decisions?
Basic Concepts... TINSTAAFL There Is No Such Thing As AFree Lunch Even when a g/s appears to be “free”, there is always a cost involved (labor and wages, RM used to make the g/s, someone else paid along the way) Ex: “Buy One Get One Free” – you are paying for the first one, but the price had been increased so that profit is still being made on the second; AND somebody somewhere got paid to make that second good…so it’s not “free” Paradox of Value Diamonds VS. Water Theory Diamonds are rare, limited, and a WANT…..expensive Water is abundant and a NEED….more affordable Thus, when something is SCARCE, it creates value (regardless of need or want) When something is not scarce, it’s cheap.
Basic Concepts... Economic Interdependence • Economies are DEPENDENT on each other: • Actions in one part of the world or country have an impact on other parts of the world or country. • For example – a candy bar purchased at Stewart’s may have been manufactured in New York, but the sugar, cocoa and corn syrup came from all over the world Specialization: Division of Labor • Adam Smith: The Wealth of Nations, (1776): • “Economies/Workers are MOST EFFICIENT when they produce what they are best at” (The Invisible Hand) • Assembly Line – specialize in one task instead of many • Trade – produce and trade your most efficient FOPS
Topic 2: Day 2The PPF The Production Possibilities Frontier
Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours ofsleep 3 hours of sleep Review: Thinking at the Margin • When you decide how much more or less to do, you are thinking at the margin.
The Production Possibilities Frontier • Axis: categories of goods & services or specific goods or services on 1 axis and 1 on another • Using the factors of production to make one product means that fewer resources are left to make something else • The production possibilities frontier is the line that shows the maximum possible output for that economy.
Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 a (0,15) 8 b (8,14) Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Production Possibilities Frontier 0 15 8 14 14 12 18 9 20 5 21 0
The PPF Production Possibilities Frontier What does the PPF show? The various combinations of TWO g/s produced using all FOPS efficiently What does each point represent? A= B= C= D= E= B E Guns A D C Butter
Production Possibilities Frontier Unattainable; Without growth Wartime B E Normal Production Guns A D C Peacetime Butter Attainable; depression
What does this all mean? • Point A: normal production 50/50 • Point B: wartime (80/20) • Point C: post war (30/70) • Point D: underutilization (unemployment) • Point E: can’t produce enough unless more factors of production (population growth & borrow money) increase shift right more FOPs = more production
Production Possibilities Graph 25 20 15 10 5 S Shoes (millions of pairs) a (0,15) b (8,14) c (14,12) g (5,8) d (18,9) A point of underutilization e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Efficiency • Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.
When the PPF shifts to the right, it means that there was an increase in FOPS (more capital, labor, etc) What would it mean if the PPF shifted to the left?
Law of Increasing Costs • As production switches from 1 item to another, more and more resources are necessary to increase production of the 2nd item • Therefore, the opportunity cost increases
Factors Considered when Granting Credit • Income; ability to pay • Debt • Bill Payment or Credit History
Annual fee - A flat, yearly charge similar to a membership fee. • Finance charge - The dollar amount you pay to use credit. Besides interest costs, this may include other charges such as cash-advance fees, which are charged against your card when you borrow cash from the lender.
Grace period - A time period, usually about 25 days, during which you can pay your credit-card bill without paying a finance charge. • Annual percentage rate (APR) - The yearly percentage rate of the finance charge
Interest rates on credit-card plans change over time. • Fixed rate - A fixed annual percentage rate of the finance charge • Variable rate - Prime rate (which varies) plus an added percentage (For example, your rate may be PR + 3.9 percent.) • Introductory rate - A temporary, lower APR that usually lasts for about six months before converting to the normal fixed or variable rate (This is a hot topic -- more about it later.) http://www.cnn.com/video/#/video/politics/2007/12/04/cafferty.file.debt.cnn?iref=videosearch http://www.cnn.com/video/#/video/bestoftv/2008/01/11/me.howard.single.mom.tips.cnn?iref=videosearch http://www.cnn.com/video/#/video/business/2009/01/06/bts.velshi.calls.cnn?iref=videosearch http://www.cnn.com/video/#/video/bestoftv/2008/01/29/howard.debt.cnn?iref=videosearch
Other Types of Credit • Outside of credit card, there are many other ways to obtain credit. • Both public and private lenders offer loans with varying rates of interest.
Mortgages • When buying a house, most people choose to take out a mortgage. • Length of mortgages range from 10 to 40 years. • 20- and 30- year mortgages are most popular. • Mortgage interest rates are largely dependent on the strength of the national economy. http://www.cnn.com/video/#/video/business/2009/02/03/dcl.cr.mortgage.debt.cnn?iref=videosearch http://www.cnn.com/video/#/video/bestoftv/2008/10/13/soros.financial.crisis.1.cnn?iref=videosearch
Student Loans • Nearly half of all college students receive some form of federal financial aid. • Over two thirds of all student loans are lent by the government.
Student Loans • Most student loans are have very low interest, around five percent. • Loans are determined based on need. • Repayment of loans begins when the student has finished or stopped attending college. • Student loans can sometimes be forgiven for people entering the military and careers in education and public service.
What are they? • pay investor a fixed amount of interest at regular intervals for a fixed amount of time
Three Components of Bonds • interest rate that the bond issuer will pay the bondholder • time at which payment to the bondholder is due • amount that an investor pays to purchase the bond & that will be repaid to the investor at maturity
Not all bonds are held to maturity • Some may be bought or sold, & their price may change • Yield is the annual rate of return on the bond if the bond were held to maturity
Advantages to the Issuer • relatively safe • Once the bond is sold, the coupon rate doesn’t change • do not own a part of the company
Disadvantages • Company must make fixed interest payments, even in bad years when it does not make money • firm maintains financial health, its bonds may be downgraded to a lower bond rating & thus may be harder to sell unless they are offered at a discount
Savings Bonds • Low denomination bonds issued by the U.S. government • help pay for public works • no risk of default
Treasury Bonds, Bills, & Notes • U.S. Treasury Department • Offer different lengths of maturity • Safest investments in terms of default risk
Municipal Bonds • finance such improvements as highways, state buildings, libraries, parks, & schools • Interest paid on these is not subject to income taxes at the federal level or issuing state
Corporate Bonds & Junk Bonds • Issued by corporations to help raise money to expand their businesses • Junk Bond: high-yield securities, are lower-rated, & potentially higher paying
Financial Asset Markets • Classified according to the length of time for which bonds are lent • Capital Markets • Money is lent for periods longer than a year • Money markets • Money is lent for periods of less than a year
Return and Liquidity Savings accounts have greater liquidity, but in general have a lower rate of return. Certificates of deposit usually have a greater return but liquidity is reduced. Return and Risk Investing in a friend’s Internet company could double your money, but there is the risk of the company failing. In general, the higher potential return of the investment, the greater the risk involved. Risk and Return Return is the money an investor receives above and beyond the sum of money initially invested.
Certificates of Deposit Certificates of deposit (CDs) are available through banks, which use the funds deposited in CDs for a fixed amount of time. CDs have various terms of maturity, allowing investors to plan for future financial needs. Money Market Mutual Funds Money market mutual funds are special types of mutual funds. Investors receive higher interest on a money market mutual fund than they would receive from a savings account or a CD. However, assets in money market mutual funds are not FDIC insured. Other Types of Financial Assets
What is the FDIC? • Ensures customer deposits if a bank fails • Insure losses up to $100,000
What is the Federal Reserve? • Influences & controls the money supply
Financial Intermediaries Savers make deposits to… Financial Institutions that make loans to… Investors Commercial banks Savings & loan associations Savings banks Mutual savings banks Credit unions Life insurance companies Mutual funds Pension funds Finance companies The Flow of Savings and Investments Financial intermediaries accept funds from savers and make loans to investors.