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FUNDAMENTALS OF ECONOMICS

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FUNDAMENTALS OF ECONOMICS

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  1. FUNDAMENTALS OF ECONOMICS

  2. Economics is the study of how we can best increase a country’s wealth with the resources that we have available to us.

  3. Marginal Benefit is the additional satisfaction or value one obtains from an activity or product. • Marginal Cost is the additional cost or sacrifice one makes of participating in an activity or purchasing a product.

  4. Economic Decision-Making You decide to participate in an activity (going to college, buying something, etc.) as long as your marginal benefit exceeds your marginal cost.

  5. The Production Possibilities Curve A production possibilities curve represents outcome or production combinations that can be produced with a given amount of resources.

  6. The Production Possibilities Curve GUNS E 600 C F 500 B 400 G A 300 D ROSES 350 500 580 700

  7. Economic Growth If an economy is operating at a point on the production possibilities curve, all resources are used, and they are utilized as efficiently as possible. GUNS E 600 C F 500 B 400 G A 300 D ROSES 350 500 580 700

  8. Economic Growth Is Caused by: Increases in Resources Advances in Technology

  9. Your Own Personal PPC If two possible outcomes in your own personal life are job earnings and educational credits, then your PPC looks as follows: Job earnings E 30000 C F 23000 B 16000 G A 12000 D College credits 23 10 30 18

  10. Three Economic Systems are: • Capitalism • Communism • Socialism

  11. Capitalism Characteristics • The role of the government is limited to the most essential functions. • All prices are determined in the free market (supply and demand).

  12. Communism Characteristics • Government makes all decisions regarding production, prices, wages, interest rates, and income distribution.

  13. Socialism (Mixed Economy) Characteristics • Most economic decisions are made by the private sector, but the role of the government is significant. Government spending and taxes are relatively high.

  14. Economic Growth and Economic Systems • Countries with the highest overall economic standard of living have the freest markets (more elements of capitalism). • Examples: Hong Kong, the United States, Japan, Taiwan, Great Britain, Canada, Sweden, South Korea, and Singapore.

  15. Economies around the World Most industrialized countries are mixed economies, but they also have many capitalist elements. Characteristics include • Substantial activity in the private sector (businesses and households). Prices are determined by demand and supply. • A significant role by federal and local governments.

  16. The Role of Government The role of most governments around the world includes: • Spending on defense, roads, legal system, public services and education • Redistributing incomes through taxes and subsidies • Passing laws and imposingregulations • Implementing price controls • Conducting monetary policyto affect inflation,interest rates, and employment

  17. Important Concepts and Definitions We will discuss the following concepts: • The simple circular flow • The circular flow with government and foreign markets • Nominal and real prices and incomes • Positive and normative economic statement • The fallacy of composition • The fallacy of cause and effect

  18. The Simple Circular Flow Supply of Products ProductsMarket Purchases of (Demand for) Products Households Businesses Supply of Labor and Resources Resource(Inputs) Market Purchases of (Demand for) Labor and Resources

  19. The circular flow with government and foreign markets (see next slide). This is a more complex (more realistic) model.

  20. Foreign Markets Supply of Products ProductsMarket Purchases of Products Products Services Services Government Households Businesses Taxes Taxes Resource(Inputs) Market Supply of Labor and Resources Purchases of (Demand for) Labor and Resources

  21. Nominal and Real Prices • Nominal prices are expressed in current dollars. • Real prices are adjusted for inflation. Enough money to purchase 3 gallons of gasoline a few years ago. Not enough to purchase 2 gallonstoday.

  22. Positive and Normative Economic Statements • Apositive statement can be proven or dis-proven. • Anormative statement is an opinion or value judgment.

  23. Which is the Normative and Which is the Positive Economic Statement? • Statement I: The minimum wage should increase to $8.50. • Statement II: If the minimum wage increases, then firms’ cost of production rises.

  24. The Fallacy of Composition • Fallacy: what is good for one person (or one group) is good for all persons (or all groups).

  25. The Fallacy of Cause and Effect • Because A happens before B, A must be automatically the cause of B.

  26. Cause and Effect Fallacy Example A: The car industry in country X has not done well. B: The economy of country X has not done well. Did A cause B?

  27. Critical Thinking Guidelines • Question the source. • Question the assumptions. • Question how the variables are defined. • Question the validity ofthe statement. • Question the statistics. • Think like an economist.

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