Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. If you continue browsing the site, you agree to the use of cookies on this website. See our User Agreement and Privacy Policy.

Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. If you continue browsing the site, you agree to the use of cookies on this website. See our Privacy Policy and User Agreement for details.

Like this presentation? Why not share!

3,438 views

3,242 views

3,242 views

Published on

No Downloads

Total views

3,438

On SlideShare

0

From Embeds

0

Number of Embeds

407

Shares

0

Downloads

0

Comments

0

Likes

10

No embeds

No notes for slide

- 1. Unit #1 Basic Economic Principles
- 2. What is Economics? <ul><li>Is the study of how people choose to use their limited resources to satisfy their unlimited wants </li></ul><ul><li>Important Parts of Economics– </li></ul><ul><li>CHOICES </li></ul><ul><li>SCARCITY </li></ul>
- 3. Scarcity <ul><li>The fundamental problem all societies face… </li></ul><ul><ul><li>Scarcity is the condition that results because people have limited resources but unlimited wants </li></ul></ul><ul><ul><li>Wants > Resources </li></ul></ul><ul><li>Task! Identify a scarce resource. </li></ul><ul><li>EVERYTHING IS SCARCE! </li></ul>
- 4. <ul><li>What to produce? </li></ul><ul><li>How to produce? </li></ul><ul><li>For whom to produce? </li></ul>Three Basic Economic Questions 3 Q’s are answered in order to make decisions about the ways limited resources will be used.
- 5. Answering the 3 basic economic questions in a Market Economy [i.e., U.S.] <ul><li>What to produce? </li></ul><ul><ul><li>What should we devote our resources to? </li></ul></ul><ul><ul><li>What do the consumers want? </li></ul></ul><ul><li>How to produce? </li></ul><ul><ul><li>What methods should be used in production? </li></ul></ul><ul><ul><li>What is most efficient? </li></ul></ul><ul><li>For whom to produce? </li></ul><ul><ul><li>Who can afford the product? </li></ul></ul>
- 6. How do we satisfy our economic wants? <ul><li>We buy goods or services! </li></ul><ul><li>Good – a physical object (tangible) that has been produced for sale </li></ul><ul><ul><li>Durable – last 3+ years </li></ul></ul><ul><ul><li>Nondurable – last up to 3 years </li></ul></ul><ul><li>Servic e – work done by someone else for which someone is willing to pay </li></ul>
- 7. How do we make goods & services? <ul><li>Use Factors of Production - The productive resources that go into producing goods and services </li></ul><ul><li>Production Equation </li></ul><ul><ul><li>LAND + LABOR + CAPITAL = GOOD/SERVICE </li></ul></ul><ul><li>inputs output </li></ul>
- 8. Factors of Production <ul><li>LAND </li></ul><ul><ul><li>Also called Natural Resources </li></ul></ul><ul><ul><li>Consider them “gifts of nature” such as air, soil, minerals, water, and plants </li></ul></ul><ul><li>LABOR </li></ul><ul><ul><li>Also called Human Resources </li></ul></ul><ul><ul><li>Includes physical and mental activities that go into producing goods/services </li></ul></ul><ul><li>CAPITAL </li></ul><ul><ul><li>Includes tools, machines, buildings, and technologies </li></ul></ul><ul><li>ENTREPRENEUR </li></ul><ul><ul><li>Risk taker who is responsible for combining land, labor, and capital to produce goods and services </li></ul></ul>Task! Why are entrepreneurs the driving force in our economy?
- 9. Economic Interdependence <ul><li>What does ‘interdependence’ mean? </li></ul><ul><li>Is our world becoming economic interdependent or independent? </li></ul><ul><li>Economic Interdependence: the actions of one part of the country (world) has an impact on what happens elsewhere </li></ul>
- 10. Circular Flow of Economic Activity Circular Flow of Economic Activity Flow of Money Flow of Resources & Products Revenue Consumer Spending Income Factor Payments Buy Factors of Production to Make Stuff Sell Goods & Services Buy Goods & Services Sell Factors of Production Product Market Individuals Households Factor Market Business Firms
- 11. Understanding how all parts fit together <ul><li>Circular Flow of Economic Activity </li></ul><ul><li>Represents a market economy </li></ul><ul><ul><li>2 main “markets” </li></ul></ul><ul><ul><ul><li>Product Market: Factor Market: where goods and services where the 4 factors of are bought/sold production are bought/sold </li></ul></ul></ul><ul><li>Shows interdependence between businesses and individuals </li></ul>
- 13. Making Choices to Deal With Scarcity <ul><li>People seek to maximize their utility when making decisions. This requires them to consider tradeoffs . </li></ul><ul><ul><li>Utility – the satisfaction of benefit a person receives from consuming a good or service </li></ul></ul><ul><ul><li>Tradeoffs – the exchange of one benefit or advantage for another (alternate choices) </li></ul></ul>
- 14. Examples… <ul><li>Some choices are easy to make… </li></ul><ul><ul><li>Hmm… Should I have pizza or a hoagie for lunch today? </li></ul></ul><ul><li>Other decisions are agonizing… </li></ul><ul><ul><li>Should I get out of bed and go to school today or should I sleep in? </li></ul></ul><ul><li>ALL TRADEOFFS HAVE ADVANTAGES! </li></ul>
- 15. Opportunity Cost <ul><li>When comparing the top 2 choices, it is the BENEFIT of the next best alternative that must be sacrificed to satisfy a want. </li></ul>Opportunity Cost – The best thing we give up to get what we want
- 16. How Do You Make Your Choices? <ul><li>People make decisions based on their marginal utility , or the extra satisfaction they gain from one additional unit of a good/service. </li></ul><ul><li>Law of Diminishing Marginal Utility says that as we get more of something, the pleasure we derive from it tends to decrease and we usually stop buying it! </li></ul>
- 17. Why it Matters <ul><li>Understanding the opportunity costs/tradeoffs of different choices in life makes you a better decision-maker! </li></ul><ul><li>You always have to give something up…”There’s No Such Thing As a Free Lunch” </li></ul><ul><li>Individuals, Businesses, & Societies incur tradeoffs when making decisions </li></ul>
- 18. Visualizing the Relationship…
- 19. How Can We Measure What We Gain and Lose When Making Choices?
- 20. Production Possibilities Frontier (PPF) <ul><li>An economic model that shows how an economy might use its resources to produce two goods </li></ul><ul><ul><li>Each point on the curve represents the use of all productive resources </li></ul></ul><ul><ul><li>A PPF is used to calculate the opportunity cost of moving production from one point to another </li></ul></ul>
- 21. The Classic Guns and Butter example: B A C D E F Guns Butter 10,000 20,000 30,000 40,000 50,000 100,000 95,000 85,000 70,000 50,000 40,000 At point A, all resources are used for butter Moving from point A to point B requires shifting resources out of butter and into guns. At point F. all resources are used for Guns.
- 22. Productivity <ul><li>A PPF can help us see how efficient our choices are. </li></ul><ul><li>Productivity - measurement of how efficiently we are utilizing our resources </li></ul><ul><li>An economy producing on the curve = using their resources to produce the MAXIMUM amount of goods/services </li></ul>
- 23. Locations on a PPF <ul><li>Efficient Point : place where an economy is achieving as much output as possible from a given amount of resources – occurs at any point on the curve . </li></ul><ul><li>Inefficient Point – place where the economy is not functioning as it could be – occurs at any point inside the curve </li></ul><ul><li>Unattainable Point – place where the economy cannot produce, given its current resources – occurs at any point outside the curve </li></ul>
- 24. Butter 10 8 6 4 2 0 2 4 6 8 10 Guns Q: How can an economy produce at the unattainable point? A: Be more productive/efficient and/or gain new resources (curve shifts outward) C D A B Efficient points Inefficient point Unattainable point, given current resources
- 25. Food Computer 4 3 2 1 1 2 3 4 O.C. between 1 and 2 computers = 1 Food Unit O.C. between 3 and 4 computers = 1 Food Unit Constantly giving up the same quantity of food to get additional computers STRAIGHT-LINE PPFs Constant O.C.
- 26. BOWED-OUT PPFs Varying/Increasing O.C. Principle of Increasing Costs: As a society produces more of one product, the O.C. of producing that product increases because we are using more resources that are poorly suited to produce it .
- 27. Economic Systems <ul><ul><li>An economic system is the way a society coordinates the production and consumption of goods & services. </li></ul></ul><ul><ul><li>How a society answers the three basic economic questions determines which type of economic system they are! </li></ul></ul><ul><ul><li>Three Types of Economic Systems: </li></ul></ul><ul><ul><ul><li>Command </li></ul></ul></ul><ul><ul><ul><li>Traditional </li></ul></ul></ul><ul><ul><ul><li>Market </li></ul></ul></ul>
- 29. Review of Economic Systems <ul><li>A traditional economy relies on custom and tradition to dictate production and consumption </li></ul><ul><li>In a command economy , decisions about production and consumption are made by a powerful ruler or central authority </li></ul><ul><li>In a market economy , individual producers and consumers coordinate economic activity. </li></ul>
- 30. The American Economic System <ul><li>We have a mixed economy! </li></ul>COMMAND MARKET
- 31. Influence of Adam Smith <ul><li>17 th Century Scottish Economist who wrote The Wealth of Nations </li></ul><ul><li>Ideas – </li></ul><ul><ul><li>The Government should not interfere with the workings of the economy </li></ul></ul><ul><ul><ul><li>Based upon laissez-faire , meaning “let them do” </li></ul></ul></ul><ul><ul><li>Economic Freedom is essential for prosperity </li></ul></ul><ul><ul><ul><li>Based upon the invisible hand theory – an individual’s pursuit of economic self-interest can promote the well-being of society as a whole </li></ul></ul></ul><ul><ul><li>Credited with creating capitalism (a free market economy) </li></ul></ul>
- 32. Capitalism/Market Economy Roots… <ul><li>Smith’s ideas were used in the 1700s-1800s: </li></ul><ul><ul><li>Entrepreneurs, known as capitalists , grew wealthy by accumulating capital & devoting them to industrial production </li></ul></ul><ul><ul><li>Time period became known as the INDUSTRIAL REVOLUTION </li></ul></ul><ul><li>Results: </li></ul><ul><ul><li>Positive – more jobs, urban growth, more and better quality goods/services available, standard of living improved, technology expanding (ex. Railroads) </li></ul></ul><ul><ul><li>Negative – work under harsh conditions, long hours, low wages, slums developing in cities, unsanitary conditions in factories and cities </li></ul></ul>
- 33. Rise of Command Economies <ul><li>Workers blamed their poverty on the wealthy capitalists </li></ul><ul><li>Caused new economic thinking to develop…rise of socialism and communism </li></ul><ul><ul><li>Karl Marx and Friedrich Engels published The Communist Manifesto in 1848 </li></ul></ul>
- 34. What type of economy is best?
- 35. The U.S. mixed economy <ul><li>In a mixed economy… </li></ul><ul><ul><li>Individuals: </li></ul></ul><ul><ul><ul><li>Own the factors of production </li></ul></ul></ul><ul><ul><ul><li>Possess freedom to produce or consume </li></ul></ul></ul><ul><ul><ul><li>Must operate under confines of law </li></ul></ul></ul><ul><ul><li>Government: </li></ul></ul><ul><ul><ul><li>Protects workers and consumers </li></ul></ul></ul><ul><ul><ul><li>Regulates business and preserves competition </li></ul></ul></ul><ul><ul><ul><li>Provide public goods/benefits </li></ul></ul></ul>
- 36. Circular Flow of Economic Activity – Mixed Economy Flow of Money Flow of Resources & Products Government Revenue Consumer Spending Income Factor Payments Buy Factors of Production to Make Stuff Sell Goods & Services Buy Goods & Services Sell Factors of Production Product Market Individuals Households Factor Market Business Firms
- 37. U.S. Economic System Characteristics (pages 50-53 ) <ul><li>1. Economic freedom (“laissez-faire”) </li></ul><ul><li>2. Limited government </li></ul><ul><li>3. Equal opportunity </li></ul><ul><li>4. Competition </li></ul><ul><li>5. Profit motive </li></ul><ul><li>6. Property Rights </li></ul><ul><li>7. Binding Contracts </li></ul>

No public clipboards found for this slide

Be the first to comment