What is Economics?

1. What is Economics?

2. I. What is Economics? A. Definition: Economics is a social science that deals with how consumers, producers, and societies choose among the alternative uses of scarce resources in the process of producing, exchanging, and consuming goods and services

3. II. What do we mean by scarce resources? A. Scarcity refers to the finite quantity of resources that are available to meet society’s needs

4. B. What are resources? 1. 3 kinds a. Natural resources (land) land water minerals biological

5. b. Human resources (labor) c. Manufactured resources (capital) machines & equipment structures

6. C. Because resources are scarce we have to make choices about how best to use them 1. Choice has a time dimension a. Going to college today increases earning potential in the future

7. 2. Choice has an opportunity cost a. Interest that could have been earned from money spent on a car b. Salary that could have been earned at a job instead of going to college

8. 3. Choice leads to specialization a. Choose to use resources for what they are best suited for b. Teacher pays someone to provide medical advise, work on car, etc. c. U.S. exports grains and imports coffee

9. III. 2 branches of economics A. Microeconomics 1. Focuses on the economic actions of individuals or specific groups

10. B. Macroeconomics 1. Focuses on aggregates, totals, big groups a. Wealth of a whole country b. Policies that effect the nation growth of the economy inflation unemployment monetary policy fiscal policy

11. Policy defined: • A high-level overall plan embracing the general goals and acceptable procedures especially of a governmental body

12. IV. Alternative economic systems A. Definition of an economic system: “The institutional means by which resources are used to satisfy human desires.”

13. 1. Institutions a. Laws ex: protecting private property & enforcing contracts b. Habits & customs ex: businesses display their prices & consumers usually pay that price c. Ethics ex: bureaucrats give you a license for a business without being paid a bribe

14. B. Capitalism 1. A free market economic system in which individuals own resources & have the right to employ their time & resources however they choose, with minimal legal constraints from government.

15. C. Socialism 1. A centrally planned economic system in which resources are generally collectively owned & government decides how resources are to be used.

16. D. Mixed economic system 1. An economic system in which some markets are not entirely free to determine price. Government may control selected markets & a welfare system may influence the labor market.

17. 2. The U.S. is mostly a capitalist system with several aspects of a mixed economy. a. Minimum wage law controls minimum price paid for labor b. Prices controlled in some ag and utility markets

18. Alfred Marshall • Father of Modern economics • Example of raspberry patch

19. Supply & Demand Curve • Be able to draw this Figure • X & Y Axis • Line for consumers • Line for Producers • If the price is above the equilibrium, what happens? • Lower consumer demand • Higher production

20. Look at Box 7.2 • Can you find anything wrong with this? • In the paragraph they say increasing fertilizer and they are talking seed • Can you see what is meant by diminishing marginal returns? • Why does the curve go down at the end? • When you plant too many seeds, yield actually decreases

21. See Box 7.2, Figure C • Explain what that graph means • Is it a producer or consumer curve? • Fewer inputs increase yield more at the low end • More inputs do not increase yield as much to the high end

22. Box 7.2 Figure E • Explain the meaning of the Figure • If you want a producer to make more product, they will have to sell the product for more than the marginal cost increase to produce it • Or in other words the producer has to make a profit greater than the input costs

23. Combining Goods into Groups • Aggregate supply and demand • All food lumped together, or • All vegetables or fruits lumped together • Apples are expensive, so I will eat fewer apples but more oranges, which are cheaper

24. Read Box 7.3 and explain its meaning • First published in 1776

25. What increases the price of food? • The number of people in the economy increases • The people become more affluent • People’s taste changes • Willing to spend more of their income the better food • The price of other non-food items goes up, making better food more appealing • Pleasure per dollar • Spend $4 for a very small container of Haagendazs ice cream (I can buy 5 quarts For $6)

26. Higher population does what to this graph? • Price • Quantity

27. What happens to price? • Price • Quantity

28. If the resources to produce food become more available, what happens? • Price • Quantity

29. What happens to price? • Price • Quantity

30. What happens if? • Technology increases efficiency of production? • Mechanization reduces labor costs? • Fertilizer prices go up? • Weather in Brazil is wet during soybean harvest? • Household incomes increase by 10%?

31. Concept of Elasticity • This is a measure of consumer response to changes in supply of a good, or changes in income • If prices of apples goes up, then people eat fewer apples and more oranges or grapes, etc. • That means the price is highly elastic • The demand curve is not very steep • Small changes in price result in large changes in demand Price Quantity Quantity

32. Concept of Elasticity • If the price of rice goes up, and you are used to eating rice three times per day, you are still going to buy rice • The price of rice is not very elastic • The demand curve is steep • Large changes in price result in small changes in demand Price Quantity Quantity

33. Income Elasticity of Demand • The percentage change of consumption of something • Book gives example of eating rice • If a poor person looses 1% income, they may eat less rice • If a rich person looses 1% income, they may give up something else • Studies show • Increases in income result in ‘more food consumption’ (or so the book says, I like better: they spend more on food) • As income gets even higher, food spending continues upward but not as fast

34. Graph 7.6a (What is it saying?)

35. Graph 7.6b (What is it saying?)

36. Graph 7.6c (What is it saying?)

37. Graph 7.6d (What is it saying?)

38. Inferior Goods • As income rises, demand for a good goes down • Why is cassava considered an inferior good? • Cassava provides the most calories for the dollar, but does not taste great • An increase in price of bread causes what to happen among the poorer people, consumption wise? • Increase in consumption – why? • They have to cut down on meat and other goods. Thus they buy more bread to meet their caloric needs

39. Inferior Goods (cont.) • Example of people of Africa with Maize • By the way, what is maize? • Maize is corn to Europeans • Corn are any of the small grains (wheat, oats, barley, rye)

40. 7.7 What does it tell us?