What is Economics?

1. Advanced Placement MicroeconomicsUnit I: Basic Economic ConceptsEssential Question: Why might economics be the most important subject you will ever study?

2. What is Economics? Economics is the study of _________. • Economics is the science of scarcity. • Scarcity is the condition in which our wants are greater than our limited resources. • Since we are unable to have everything we desire, we must make choices on how we will use our resources. • In economics we will study the choicesof individuals, firms, and governments. choices

3. Examples: • You must choose between buying jeans or buying shoes. • Businesses must choose how many people to hire • Governments must choose how much to spend on welfare. How do we define economics? Economics-Social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants. (Essentially, it is the study of how individuals and societies deal with ________) scarcity

4. What is the difference between Micro and Macro Economics?(Video) • MICROeconomics- • Study of small economic units such as individuals, firms, and industries (competitive markets, labor markets, personal decision making, etc.) • MACROeconomics- • Study of the large economy as a whole or in its basic subdivisions (National Economic Growth, Government Spending, Inflation, Unemployment, etc.)

5. How is ‘positive economics’ different from ‘normative economics’?—(Video) How is Economics used? • Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics. • These theories are then applied to fix problems or meet economic goals. This is called policy economics. Positive Statements- Based on facts. Avoids value judgments (what is). Normative Statements- Includes value judgments (what ought to be).

6. Why should we ‘think at the margin? Would you see the movie three times? Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3rd time. Why not? What is the additional benefit and the additional cost?

7. What is Marginal Analysis? In economics, the term marginal = additional “Thinking on the margin”, or MARGINAL ANALYSIS involves making decisions based on the additional benefit vs. the additional cost. For Example: You have been shopping at the mall for a half hour, the additional benefit (marginal benefit) of shopping for an additional half-hour might outweigh the additional cost (marginal cost). After three hours, the additional benefit from staying an additional half-hour would likely be less than the additional cost.

8. What are the 5 Key Economic Assumptions? • Society’s wants are unlimited, but ALL resources are limited (scarcity--Video). • Due to scarcity, choices must be made. Every choice has a cost (a trade-off). • Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.” • Everyone acts rationally by comparing the marginal costsand marginal benefits of every choice. • Real-life situations can be explained and analyzed through simplified models and graphs.

9. Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant)… 1. You want to visit your friend for the weekend 2. You work every weekday earning $100 per day 3. You have three flights to choose from: Thursday Night Flight = $300 Friday Early Morning Flight = $345 Friday Night Flight = $380 Which flight should you choose? Why? Remember to use marginal analysis!

10. What are trade-offs? Trade-offs are all the alternatives that we give up whenever we choose one course of action over others. (Examples: going to the movies) ALL decisions involve trade-offs. The most desirable alternative given up as a result of a decision is known as opportunity cost. • What are the trade-offs of deciding to go to college? • What is the opportunity cost of going to college? • *Discuss these two questions with a neighbor.

11. What are the Factors of Production?(Resources—Video)

12. Homework • Read: Micro 5-Steps, Chapter 5: Fundamentals of Economic Analysis • *Section 5.1: Scarce Resources • Read:Mankiw (textbook), Chapter 1: Ten Principles of Economics • *Section 1: How People Make Decisions • *Section 2: How People Interact • *Section 3: How the Economy as a Whole Works • *Conclusion: What are the 10 principles of economics? • 3. Complete: Morton Student Activity Packet: Unit #1 • *Read & Highlight: Key Ideas • *Activity #1: Do You Think Like an Economist?

13. Bell Ringer: Let’s practice what we learned yesterday. • 4. Which of the following goods would be considered scarce? • Education • Gold • Time • I only • II only • III only • I and II only • I, II and III • 1. Economists are likely to disagree most often over • opportunity costs • normative statements • positive statements • normative and positive statements • they seldom disagree over either normative or positive statements • 2. The crucial problem of economics is • Establishing a fair tax system. • Providing social goods and services • Developing a price mechanism that reflects the relative scarcities of products and resources. • Allocating scarce productive resources to satisfy wants • Enacting a set of laws that protects resources from overuse. • 3. When one decision is made, the next best alternative not selected is called • economic resources • opportunity cost • scarcity • comparative disadvantage • production • 5. It is most accurate to say • A. Normative statements focus on facts while positive statements involve value judgments. • B. Normative statements involve value judgments while positive statements focus on facts. • C. Normative and positive statements both focus on facts and neither involve value judgments. • D. Normative and positive statements both involve value judgments and neither focuses on facts. • E. Normative statements involve value judgments and focus on facts while positive statements only focus on facts.

14. The Production Possibilities Curve (PPC) How will we introduce and use Economic Models? Step 1: Explain concept in words Step 2: Use numbers as examples Step 3: Generate graphs from numbers Step 4: Make generalizations using graph Step 5: Apply generalizations to real world examples and scenarios 14

15. What is the Production Possibilities Curve? • A production possibilities frontier (PPF)is a model that shows alternative ways that an economy can use its scarce resources • This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. • What are the 4 Assumptions when creating the PPC? • Only two goods can be produced • Full employment of resources • Fixed Resources (Ceteris Paribus) • Fixed Technology 15

16. a b c d e f What is a Production “Possibilities” Table? 14 12 9 5 0 0 0 2 4 6 8 10 Bikes Computers Each point represents a specific combination of goods that can be produced given full employment of resources. NOW GRAPH IT: Put bikes on y-axis and computers on x-axis 16

17. How does the PPC graphically demonstrate scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 8 6 4 2 0 Impossible/Unattainable Level of Production (given current resources) A B G C Bikes Efficient Levels of Production D Inefficient/ Unemployed Resources E 0 2 4 6 8 10 Computers 17

18. How do we determine Opportunity Cost? Example: • 1. The opportunity cost of moving from a to b is… 2 Bikes • 2.The opportunity cost of moving from b to d is… 7 Bikes • 3.The opportunity cost of moving from d to b is… 4 Computers • 4.The opportunity cost of moving from f to c is… 0 Computers • 5.What can you say about point G? Unattainable 18

19. When Does Constant Opportunity Cost Occur? • When resources are easily adaptable for producing either good. • Result is a straight line PPC (not common) PRODUCTION POSSIBILITIES A B C D E CALZONES 4 3 2 1 0 PIZZA 0 1 2 3 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. 19

20. What Is the Law of Increasing Opportunity Cost? • As you produce more of any good, the opportunity cost (forgone production of another good) will increase. • Why? Some resources are NOT easily adaptable to producing both goods, so we have to use more of them to produce an additional unit of the other good. PRODUCTION POSSIBILITIES A B C D E PIZZA 18 17 15 10 0 ROBOTS 0 1 2 3 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Result is a bowed out (Concave) PPC (Video)

21. PER UNIT Opportunity Cost • How much each marginal unit costs • = Opportunity Cost • Units Gained Example: • 1. The PER UNIT opportunity cost of moving from a to b is… 1 Bike • 2.The PER UNIT opportunity cost of moving from b to c is… 1.5 (3/2) Bikes • 3.The PER UNIT opportunity cost of moving from c to d is… 2 Bikes • 4.The PER UNIT opportunity cost of moving from d to e is… 2.5 (5/2) Bikes NOTICE: Increasing Opportunity Costs 21

22. When does the Production Possibilities Curve shift left or right? 22

23. PRODUCTION POSSIBILITIES • What are the 4 Key Assumptions? Revisited • Only two goods can be produced • Full employment of resources • Fixed Resources (4 Factors of Production) • Fixed Technology • What are the 3 Shifters of the PPC • 1. Change in resource quantity or quality • 2. Change in Technology • 3. Change in Trade 23

24. PRODUCTION POSSIBILITIES What happens if there is an increase in population or workforce? (Labor) Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Robots Q 1 2 3 4 5 6 7 8 Pizzas 24

25. PRODUCTION POSSIBILITIES What happens if there is an increase in population or workforce? (Labor) Q A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ C’ Robots D’ E’ Q 1 2 3 4 5 6 7 8 Pizzas 25

26. PRODUCTION POSSIBILITIES What if there are technology improvements in pizza ovens ONLY? Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Robots Q 1 2 3 4 5 6 7 8 Pizzas 26

27. Economists are concerned about ‘efficiency’ of markets. Efficiency generally describes the extent to which time, effort or cost is well used for the intended task or purpose. It is often used with the specific purpose of relaying the capability of a specific application of effort to produce a specific outcome effectively with a minimum amount or quantity of waste, expense, or unnecessary effort. 27

28. What Are the Two Types of Economic Efficiency? • Productive Efficiency- • Products are being produced in the leastcostlyway! • This is any point ON the Production Possibilities Curve (because all resources are being used ‘efficiently’) • Allocative Efficiency- • The products being produced are the ones most desired by society! • This optimal point on the PPC depends on the desires of society. 28

29. Productive and Allocative Efficiency • Which points are productively efficient? • Which are allocatively efficient? • What is true about points ‘G’, ‘E’, and ‘F’? Why? 14 12 10 8 6 4 2 0 A B G Bikes C E F D 0 2 4 6 8 10 Computers 29

30. Why Does Investment in Capital Goods (machines, tools, equipment) Cause Increased Future Growth? Panama - FAVORS CONSUMER GOODS Mexico - FAVORS CAPITAL GOODS CURRENT CURVE FUTURE CURVE FUTURE CURVE Capital Goods CURRENT CURVE Capital Goods Consumer goods Consumer goods Panama Mexico 30

31. Homework • Read: Micro 5-Steps, Chapter 5: Fundamentals of Economic Analysis • *Section 5.2: Production Possibilities • Read:Mankiw (textbook), Chapter 2: Thinking Like An Economist • *Section 1: The Economist as a Scientist • **FYI: Who Studies Economics? • *Section 2: The Economist as a Policy Adviser • **In The News: Football Economics • *Section 3: Why Economists Disagree • **In The News: Environmental Economics • *Let’s Get Going • 3. Complete: Morton Student Activity Packet: Unit #1 • *Activity #2: Scarcity, Opportunity Cost and Production Possibilities • *Activity #3: You Don’t Have to Spend a Buck to Have a Cost • *Activity #4: Campus Parking

32. Bell Ringer: Let’s practice what we learned. • On Your Own: Using the examples on slides 24-26 and the information below, draw a PPC showing changes for each of the following scenarios. Draw your PPCs on slides 33-39. Label axes • Pizza and Robots (3) • 1. New robot making technology • 2. Decrease in the demand for pizza • 3. Mad cow disease kills 85% of cows • Consumer goods and Capital Goods (4) • 4. BP Oil Spill in the Gulf • 5. Faster computer hardware • 6. Many workers unemployed • 7. Significant increases in education 32

33. Pizza and Robots1. New robot making technology

34. Pizza and Robots2. Decrease in the demand for pizza

35. Pizza and Robots3. Mad cow disease kills 85% of cows

36. Consumer goods and Capital Goods 4. BP Oil Spill in the Gulf

37. Consumer goods and Capital Goods5. Faster computer hardware

38. Consumer goods and Capital Goods 6. Many workers unemployed

39. Consumer goods and Capital Goods 7. Significant increases in education

40. Question #1: Answer New robot making technology Q A shift only for Robots Why only for Robots? Robots Q Pizzas 40

41. Question #2: Answer Decrease in the demand for pizza Q The curve doesn’t shift! A change in demand doesn’t shift the curve Robots Why doesn’t a change in demand shift the PPC curve? Q Pizzas 41

42. Question #3: Answer Mad cow disease kills 85% of cows Q A shift inward only for Pizza Robots Why does the PPC curve shift inward only for pizzas and not robots? Q Pizzas 42

43. Question #4: Answer BP Oil Spill in the Gulf Q Decrease in resources decrease production possibilities for both Capital Goods (Guns) Why does the whole PPC curve shrink inward? Q Consumer Goods (Butter) 43

44. Question #5: Answer Faster computer hardware Q Quality of a resource improves shifting the curve outward Why does the PPC curve shift outward for both products? Capital Goods (Guns) Q Consumer Goods (Butter) 44

45. Question #6: Answer Many workers unemployed Q The curve doesn’t shift! Unemployment is just a point inside the curve Why doesn’t the PPC curve shift? Capital Goods (Guns) Q Consumer Goods (Butter) 45

46. Question #7: Answer Significant increases in education Q The quality of labor is improved. Curve shifts outward. Why does the PPC curve shift outward? Capital Goods (Guns) Q Consumer Goods (Butter) 46

47. Homework • (Same as last night’s) • Read: Micro 5-Steps, Chapter 5: Fundamentals of Economic Analysis • *Section 5.2: Production Possibilities • Read:Mankiw (textbook), Chapter 2: Thinking Like An Economist • *Section 1: The Economist as a Scientist • **FYI: Who Studies Economics? • *Section 2: The Economist as a Policy Adviser • **In The News: Football Economics • *Section 3: Why Economists Disagree • **In The News: Environmental Economics • 3. Complete: Morton Student Activity Packet: Unit #1 • *Activity #2: Scarcity, Opportunity Cost and Production Possibilities • *Activity #3: You Don’t Have to Spend a Buck to Have a Cost • *Activity #4: Campus Parking

48. Bell Ringer: Let’s practice what we learned. • 3. In which way does a straight-line production possibilities curve differ from a concave production possibilities curve? • A straight-line production possibilities curve has a decreasing opportunity cost. • A straight-line production possibilities curve has a constant opportunity cost. • A straight-line production possibilities curve has an increasing opportunity cost. • A straight-line production possibilities curve does not show opportunity cost • Upward-sloping production possibilities curve. • 4. Which of the following would cause a leftward shift of the production possibilities curve? • An increase in unemployment • An increase in inflation • An increase in capital equipment • A decrease in consumer demand • A decrease in working-age population • 5. Which of the following would cause an outward or rightward shift in the production possibilities curve? • An increase in unemployment • An increase in inflation • An increase in capital equipment • A decrease in natural resources • A decrease in the number of workers • 1. Which of the following is true of the concept of increasing opportunity costs? • It is unimportant in command economies because of central planning. • It suggests that the use of resources to produce a set of goods and services means that as more of one is produced, some of the other must be sacrificed. • It is irrelevant if the production possibilities curve is convex to the origin • It suggests that unlimited wants can be fulfilled. • It means that resources are plentiful and opportunities to produce greater amounts of goods and services are unlimited. • 2. The law of increasing opportunity cost is reflected in the shape of the • Production possibilities curve concave to the origin (“bowed-out”) • Production possibilities curve convex to the origin (“bowed-in”) • Horizontal production possibilities curve • Straight-line production possibilities curve • Upward-sloping production possibilities curve

49. What Is International Trade? Why do countries trade and how is that related to specialization? 49

50. Review: What is Per Unit Opportunity Cost? • Per Unit Opportunity Cost • = Opportunity Cost • Units Gained • Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt? • $10 per shirt • Now, take money out of the equation. Instead of producing 5 shirts you could have made 10 hats. • What is your PER UNIT OPPORTUNITY COSTfor each shirt in terms of hats given up? • 1 shirt costs 2 hats • What is your PER UNIT OPPORTUNITY COSTfor each hat in terms of shirts given up? • 1 hat costs a half of a shirt 50