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ECONOMICS

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ECONOMICS

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  1. ECONOMICS What does it mean to me? • Part II: • Scarcity • Opportunity cost • Supply & demand

  2. The essential question in Economics is:Scarcity

  3. Scarcity: Insufficient supply of something where “insufficient” is interpreted relative to the desires of a group of people. For instance, antiques are valued for their scarcity….

  4. 1.) Everything we want is not freely available from nature. We have unlimited wantsandlimited resources.

  5. 2.) Everyone must give up something to get more of other things, called trade-offs.

  6. 3.) It takes resources to get “things.” Those resources could be used to make “other things.”

  7. 4.) In market settings, goods have positive prices. y Economists generally use quadrant 1 to graph their equations. Quadrant II Quadrant I x Quadrant III Quadrant IV

  8. 5.) For public policies as well as private decisions, there can be NO benefits without costs.

  9. Some economists argue that we are worse off because of the FDA (Food and Drug Administration). What are the “costs” of having a government administrative agency control the food and drugs a society can consume?

  10. What are the advantages of government imposed speed limits on public highways? What are the “costs” to you of having your speed limited?

  11. Scarcity is NOT: • the same as poverty. (eg. Goods can be scarce in United States AND Somalia. However, scarcity isn’t going away; poverty might.) • the same as shortage.(eg. Whether you have a shortage or not depends upon how you handle the rationing problem made necessary by scarcity)

  12. If I have 5 CDs to give away, how should we decide to ration them? • Share equally • Survival of the fittest • Arbitrary decision • Random selection • Vote • Blackmail • Scavenger Hunt • Wait in line • Contest • Force • Lottery • Auction • Age • Strongest • Government decree • Barter In a market economy, PRICE is the mechanism used to ration goods.

  13. So……you’ve made a decision--what incentives affected it? What if those incentives changed?

  14. When P = cost of doing A (When the PRICE goes UP, the cost of doing ANYTHING goes UP) $30 $20 $10 PRICE 100 200 300 QUANTITY

  15. Never say “need” or “can’t afford. Everyone can afford anything...they just make choices….. NEED: At the price I face and the amount I can afford, I want it…..

  16. This “choice” must be among alternatives. If there is no alternative or if you “can’t choose” for some reason, then it is not an economic problem.

  17. Scarcity implies thatCHOICESmust be made.

  18. Sleep • Food • Drink • Education • Intimacy • Sports • TV • Music Most choices (not all…but many) are of the “little more” or “little less” variety, rather than the “all or nothing” variety.

  19. It is marginal benefits and costs that matter. Marginal benefits fall with quantity. P R I C E QUANTITY

  20. Opportunity Cost: The next best alternative given up to get something.

  21. Things have prices... Decisions have costs…..

  22. ALL ACTIVITIES HAVE COSTS BECAUSE OF SCARCITY (School, date, consumer decisions, producer decisions, etc.) Marginal costs rise with quantity--since marginal benefits fall with quantity, we stop doing things at some “best” amount.

  23. How this looks on a graph: MC (marginal cost) SUPPLY P RI CE EQUALIBRIUM DEMAND MB (marginal benefit) (Food, sleep, date, study, etc.) A too little A* A too high QUANTITY

  24. FULL costs matter (not a portion or just money). In the 1970s, President Jimmy Carter said that the bicycle was the most efficient means of transportation. What did he mean?

  25. Costs are subjective…..like benefits. This means that costs and benefits are particular to a given person…..they exist only in each individuals’ mind.

  26. Jodi Foster went to Yale University at a time when she had a big movie career. What were her costs? benefits?

  27. Costs must be in the future, since they come from current decisions. “Sunk” costs and “historical” costs don’t matter…..they are irrelevant to current decisions. For example: Those who died in Vietnam are “sunk” costs.

  28. Let’s look at the graph again: S (supply) MC (marginal cost) P RI CE E (equalibrium) D (demand) MB (marginal benefit) (Food, sleep, date, study, etc.) A too little A* A too high QUANTITY

  29. This graph also illustrates two economic laws: LAW of SUPPLY LAW of DEMAND

  30. LAW of SUPPLYstates that producers are willing and able to produce more of a good as its price rises. S (supply) $80 $70 $60 $50 $40 $30 $20 $10 0 MC (marginal cost) P RI CE 100 200 300 400 500 600 (Food, sleep, date, study, etc.) QUANTITY

  31. LAW of DEMANDstates that consumers are willing and able to consume less of a good as its price rises. $80 $70 $60 $50 $40 $30 $20 $10 0 P RI CE MB (marginal benefit) D (demand) 100 200 300 400 500 600 (Food, sleep, date, study, etc.) QUANTITY

  32. Putting these two curves together gives us the point ofEQUALIBRIUM S (supply) $80 $70 $60 $50 $40 $30 $20 $10 0 P RI CE E (equalibrium) D (demand) 100 200 300 400 500 600 (Food, sleep, date, study, etc.) QUANTITY

  33. In a market economy, the price of a good signals to consumers the cost of producing a good.MARKET PRICEalso signals to producers the value that consumers place on a good. Market price coordinates the actions of consumers (demand) and producers (supply).

  34. What happens when changes occur in the economy? How do these changes affect supply and demand?

  35. This month the government expects 100,000 immigrants to enter the U.S. Does this example affect the supply curve or the demand curve?

  36. Chart I: Demand increase (P ; Q ) This month the government expects 100,000 immigrants to enter the U.S. S E1 P RI CE P1 P0 E0 D1 D0 Q0 Q1 QUANTITY

  37. Gas prices increase dramatically. What happens to the market for big automobiles? Does this example affect the supply curve or the demand curve?

  38. Chart II: Demand decrease (P ; Q ) Gas prices increase dramatically. What happens to the market for big automobiles? S P RI CE P0 E0 P1 E1 D0 D1 Q1 Q0 QUANTITY

  39. Plentiful oil fields are discovered in Nevada. What happens to the market for oil? Does this example affect the supply curve or the demand curve?

  40. Chart III: Supply Increase (P ; Q ) Plentiful oil fields are discovered in Nevada. What happens to the market for oil? S0 S1 P RI CE P0 E0 P1 E1 D Q0 Q1 QUANTITY

  41. A drought has depleted the corn crop. What happens to the market for corn? Does this example affect the supply curve or the demand curve?

  42. Chart IV: Supply Decrease (P ; Q ) A drought has depleted the corn crop. What happens to the market for corn? S1 S0 P RI CE P1 E1 P0 E0 D Q1 Q0 QUANTITY

  43. The End Compiled by Virginia H. Meachum Coral Springs High School