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Introduction to economics2

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Introduction to economics2

  1. 1. INTRODUCTION TOINTRODUCTION TO ECONOMICSECONOMICS Choices, Choices, Choices, . . .Choices, Choices, Choices, . . .
  2. 2. Part 1: ThePart 1: The BasicsBasics
  3. 3. WHAT IS ECONOMICS???WHAT IS ECONOMICS??? how individuals and societies makehow individuals and societies make decisions about ways to use scarcedecisions about ways to use scarce resources to fulfill wants and needs.resources to fulfill wants and needs.
  4. 4. The Study of EconomicsThe Study of Economics MacroeconomicsMacroeconomics – The big pictureThe big picture – growth, employment, etc.growth, employment, etc. MicroeconomicsMicroeconomics – How individuals makeHow individuals make economic decisionseconomic decisions
  5. 5. ECONOMICS: 5 EconomicECONOMICS: 5 Economic QuestionsQuestions Society must figure outSociety must figure out WHAT to produceWHAT to produce HOW MUCH to produceHOW MUCH to produce HOW to Produce itHOW to Produce it FOR WHOM to ProduceFOR WHOM to Produce WHO makes theseWHO makes these decisions?decisions?
  6. 6. What are resources?What are resources? The things used to make other goods.The things used to make other goods.
  7. 7. BUT, there’s aBUT, there’s a Fundamental Problem:Fundamental Problem: SCARCITY: unlimited wants andSCARCITY: unlimited wants and needs but limited resourcesneeds but limited resources
  8. 8. Choices, ChoicesChoices, Choices Because ALL resources,Because ALL resources, goods, and services aregoods, and services are limited – WE MUST MAKElimited – WE MUST MAKE CHOICES!!!!CHOICES!!!! Don’t take notes. Just listen.
  9. 9. Why Choices?Why Choices? We make choices about how we spend ourWe make choices about how we spend our money, time, and energy so we can fulfillmoney, time, and energy so we can fulfill our NEEDS and WANTS.our NEEDS and WANTS. What are NEEDS and WANTS?What are NEEDS and WANTS? Don’t take notes. Just listen.
  10. 10. Wants and Needs,Wants and Needs, Needs and WantsNeeds and Wants NEEDS – “stuff” we must have to survive,NEEDS – “stuff” we must have to survive, generally: food, shelter, clothinggenerally: food, shelter, clothing WANTS – “stuff” we would really like toWANTS – “stuff” we would really like to have (Fancy food, a nice house, clothing,have (Fancy food, a nice house, clothing, big screen TVs, jewelry, conveniences . . .big screen TVs, jewelry, conveniences . . . Also known as LUXURIESAlso known as LUXURIES
  11. 11. VS.
  12. 12. TRADE-OFFSTRADE-OFFS You can’t have it all (rememberYou can’t have it all (remember SCARCITY?) so you have toSCARCITY?) so you have to choose how to spend yourchoose how to spend your money, time, and energy. Thesemoney, time, and energy. These decisions involve picking onedecisions involve picking one thing over all the otherthing over all the other possibilities – a TRADE-OFF!possibilities – a TRADE-OFF!
  13. 13. Trade-OffsTrade-Offs What COULD you have done instead of comeWhat COULD you have done instead of come to school today?to school today? Why did you make that trade-off?Why did you make that trade-off?
  14. 14. A special kind of Trade-Off is anA special kind of Trade-Off is an OPPORTUNITY COST =OPPORTUNITY COST = The Value of the Next Best ChoiceThe Value of the Next Best Choice (Ex: Sleeping is the opportunity cost of studying for a test)(Ex: Sleeping is the opportunity cost of studying for a test)
  15. 15. Opportunity CostsOpportunity Costs This is really IMPORTANT – when you choose to doThis is really IMPORTANT – when you choose to do ONE thing, its value (how much it is worth) isONE thing, its value (how much it is worth) is measured by the value of the NEXT BEST CHOICE.measured by the value of the NEXT BEST CHOICE. – This can be in time, energy, or even MONEYThis can be in time, energy, or even MONEY If I buy a pizza… Then I can’t afford the movies… Q: What is the opportunity cost of buying pizza?
  16. 16. ProductionProduction So how do we get allSo how do we get all this “stuff” that wethis “stuff” that we have to decide about?have to decide about? Decisions, decisionsDecisions, decisions ……
  17. 17. PRODUCTION, cont.PRODUCTION, cont. Production is makingProduction is making something.something. Production is howProduction is how many goods andmany goods and services a businessservices a business makes.makes. Goods – tangible (youGoods – tangible (you can touch it) productscan touch it) products we can buywe can buy Services – work thatServices – work that is performed foris performed for othersothers
  18. 18. Factors of ProductionFactors of Production So, what do we need to make all of this stuff?So, what do we need to make all of this stuff? Factors of production are the parts necessary toFactors of production are the parts necessary to produce the finished product.produce the finished product.
  19. 19. Factors of ProductionFactors of Production
  20. 20. 4 Factors of Production4 Factors of Production LAND – Natural ResourcesLAND – Natural Resources – Water, natural gas, oil, trees (all the stuff we find on,Water, natural gas, oil, trees (all the stuff we find on, in, and under the land)in, and under the land) LABOR – Physical and IntellectualLABOR – Physical and Intellectual – Labor is manpowerLabor is manpower CAPITAL - Tools, Machinery, FactoriesCAPITAL - Tools, Machinery, Factories – The things we use to make thingsThe things we use to make things – Human capital is brainpower, ideas, innovationHuman capital is brainpower, ideas, innovation ENTREPRENEURSHIP – Investment $$$ENTREPRENEURSHIP – Investment $$$ – Investing time, natural resources, labor and capitalInvesting time, natural resources, labor and capital are all risks associated with productionare all risks associated with production
  21. 21. Which Factor of Production?Which Factor of Production?
  22. 22. Which Factor of Production?Which Factor of Production?
  23. 23. Which Factor of Production?Which Factor of Production?
  24. 24. Which Factor of production?Which Factor of production?
  25. 25. THREE parts to the ProductionTHREE parts to the Production ProcessProcess Factors of Production – what we need to makeFactors of Production – what we need to make goods and servicesgoods and services Producer – company that makes goods and/orProducer – company that makes goods and/or delivers servicesdelivers services Consumer – people who buy goods and servicesConsumer – people who buy goods and services (formerly known as “stuff”)(formerly known as “stuff”) Which Came First?
  26. 26. Production ProcessProduction Process Capital Labor Land Entrepreneurship Production/Manufacturing “Factory” Goods Services Consumers
  27. 27. Capital Goods and ConsumerCapital Goods and Consumer GoodsGoods Capital Goods: areCapital Goods: are used to produce otherused to produce other goodsgoods Consumer Goods:Consumer Goods: final products that arefinal products that are purchased directly bypurchased directly by the consumerthe consumer
  28. 28. CHANGES IN PRODUCTIONCHANGES IN PRODUCTION SpecializationSpecialization –– dividing up productiondividing up production so that Goods areso that Goods are produced efficientlyproduced efficiently Nike makes shoes, not hamburgers McDonalds makes hamburgers, not shoes!!
  29. 29. CHANGES IN PRODUCTIONCHANGES IN PRODUCTION Division of LaborDivision of Labor –– different peopledifferent people perform different jobsperform different jobs to achieve greaterto achieve greater efficiency (assemblyefficiency (assembly line).line). You do your job, and I will do my Job and we will be more EFFICIENT
  30. 30. CHANGES IN PRODUCTIONCHANGES IN PRODUCTION Consumer: someone who buys a product or service.Consumer: someone who buys a product or service. ConsumptionConsumption: how much we buy: how much we buy The DELL store is empty because…. Everyone is at the APPLE STORE!!!
  31. 31. CHANGES IN PRODUCTIONCHANGES IN PRODUCTION If we INCREASE land, labor, capital weIf we INCREASE land, labor, capital we INCREASE productionINCREASE production – Many entrepreneurs invest profit back into productionMany entrepreneurs invest profit back into production If we DECREASE land, labor, capital weIf we DECREASE land, labor, capital we DECREASE productionDECREASE production BUT WHY would we ever DECREASEBUT WHY would we ever DECREASE production?production?
  32. 32. The Circular Flow ModelThe Circular Flow Model
  33. 33. The Circular Flow ModelThe Circular Flow Model
  34. 34. The Circular Flow ModelThe Circular Flow Model
  35. 35. Individuals have money.Individuals have money.
  36. 36. PRODUCTION, cont. againPRODUCTION, cont. again A measure of the production of an entireA measure of the production of an entire country in one year iscountry in one year is GDPGDP The total $ value of ALL final Goods andThe total $ value of ALL final Goods and Services produced in a country in a year.Services produced in a country in a year. (GROSS DOMESTIC PRODUCT)(GROSS DOMESTIC PRODUCT)
  37. 37. World GDPWorld GDP Total GDP 2005 (millions of US dollars) 1 United States 12,455,068 2 Japan 4,505,912 3 Germany 2,781,900 4 China 2,228,862 5 United Kingdom 2,192,553 6 France 2,110,185 a 7 Italy 1,723,044 8 Spain 1,123,691 9 Canada 1,115,192 10 Brazil 794,098 11 Korea, Rep. 787,624 12 India 785,468 13 Mexico 768,438 14 Russian Federation 763,720 15 Australia 700,672 16 Netherlands 594,755 17 Switzerland 365,937 18 Belgium 364,735 19 Turkey 363,300 20 Sweden 354,115 21 Saudi Arabia 309,778
  38. 38. Part 2: ComparativePart 2: Comparative EconomicsEconomics
  39. 39. Traditional EconomiesTraditional Economies Def: EconomicDef: Economic Questions answered byQuestions answered by customcustom PredominatelyPredominately AgriculturalAgricultural Developing or “3Developing or “3rdrd World”World” Trade and barterTrade and barter orientedoriented Low GDP & PCI (perLow GDP & PCI (per capita income = avg.capita income = avg. inc.)inc.)
  40. 40. Command EconomiesCommand Economies Def: EconomicDef: Economic questions answered byquestions answered by the governmentthe government Very little economicVery little economic choicechoice No private ownershipNo private ownership CommunismCommunism Old Soviet Union, oldOld Soviet Union, old Communist China,Communist China, Cuba and North KoreaCuba and North Korea
  41. 41. Karl MarxKarl Marx 1919thth century Germancentury German economisteconomist Author of “CommunistAuthor of “Communist Manifesto” and “ DasManifesto” and “ Das Kapital”Kapital” – Government shouldGovernment should control economy andcontrol economy and distribute goods anddistribute goods and services to the peopleservices to the people Founder ofFounder of revolutionaryrevolutionary socialism andsocialism and communismcommunism
  42. 42. Communism FallsCommunism Falls Market reforms in China in theMarket reforms in China in the mid 1970s.mid 1970s. Fall of the Berlin Wall in 1989.Fall of the Berlin Wall in 1989. Collapse of the Soviet UnionCollapse of the Soviet Union 1991.1991. Free Market Capitalism (w/Free Market Capitalism (w/ some Mixed Economies) thesome Mixed Economies) the only show in town.only show in town.
  43. 43. Free Market (Capitalist) EconomiesFree Market (Capitalist) Economies Economic questionsEconomic questions answered byanswered by producers andproducers and consumersconsumers Limited governmentLimited government involvementinvolvement Private property rightsPrivate property rights Wide variety ofWide variety of choices and productschoices and products U.S., JapanU.S., Japan
  44. 44. Adam SmithAdam Smith 1818thth century Scottishcentury Scottish economisteconomist Published “The Wealth ofPublished “The Wealth of Nations” in 1776Nations” in 1776 Explained the workings ofExplained the workings of the free market withinthe free market within capitalist economiescapitalist economies Invisible hand of theInvisible hand of the marketmarket
  45. 45. Adam Smith (cont.)Adam Smith (cont.) Laissez-faire - Government stays out ofLaissez-faire - Government stays out of business practices “hands off” to let thebusiness practices “hands off” to let the market place determine production,market place determine production, consumption and distribution.consumption and distribution. Individual freedom and choiceIndividual freedom and choice emphasized.emphasized.
  46. 46. Principles of CapitalismPrinciples of Capitalism Competition – moreCompetition – more businesses meansbusinesses means lower prices andlower prices and higher qualityhigher quality products forproducts for consumers (US!) toconsumers (US!) to buy.buy.
  47. 47. Principles of CapitalismPrinciples of Capitalism Voluntary Exchange –Voluntary Exchange – businesses andbusinesses and consumers MUST beconsumers MUST be free to buy or sellfree to buy or sell what and when theywhat and when they want.want.
  48. 48. Principles of CapitalismPrinciples of Capitalism Private Property –Private Property – Individuals andIndividuals and businesses MUST bebusinesses MUST be able to get theable to get the benefits of owningbenefits of owning their OWN property.their OWN property. Government doesn’tGovernment doesn’t control it.control it.
  49. 49. Principles of CapitalismPrinciples of Capitalism ConsumerConsumer Sovereignty –Sovereignty – consumers get toconsumers get to make free choicesmake free choices about what to buyabout what to buy and this helps driveand this helps drive productionproduction (Demand drives(Demand drives Supply).Supply).
  50. 50. Principles of CapitalismPrinciples of Capitalism Profit Motive – peopleProfit Motive – people want to make or savewant to make or save $$$$. Their “Self$$$$. Their “Self Interest” motivatesInterest” motivates Capitalism.Capitalism.
  51. 51. Principles of CapitalismPrinciples of Capitalism Social Safety Net –Social Safety Net – “Mixed Economy” idea“Mixed Economy” idea that says the governmentthat says the government should NOT allow peopleshould NOT allow people to suffer in economicto suffer in economic crisis (natural part ofcrisis (natural part of Capitalism’s “BusinessCapitalism’s “Business Cycle”), but provideCycle”), but provide security instead – Socialsecurity instead – Social Security, UnemploymentSecurity, Unemployment Insurance, etc.Insurance, etc.
  52. 52. Mixed Economy/SocialismMixed Economy/Socialism Government involvementGovernment involvement and ownership and controland ownership and control of property, of decisionof property, of decision making, and companies.making, and companies. Government control ofGovernment control of businessbusiness  Social “safety net” forSocial “safety net” for peoplepeople  SocialismSocialism  Common in Europe, LatinCommon in Europe, Latin America, and AfricaAmerica, and Africa
  53. 53. John Maynard KeynesJohn Maynard Keynes  The Invisible HandThe Invisible Hand doesn’t always work.doesn’t always work.  ““The long run is aThe long run is a misleading guide tomisleading guide to current affairs. In thecurrent affairs. In the long run we are alllong run we are all dead.” or . . . thedead.” or . . . the trouble is people eattrouble is people eat in the short run.in the short run.
  54. 54. Keynesian Economics (cont.)Keynesian Economics (cont.) Government shouldGovernment should interveneintervene in economicin economic emergencies through tax and spendingemergencies through tax and spending (Fiscal Policy) and changing the money(Fiscal Policy) and changing the money supply (Monetary Policy).supply (Monetary Policy). This is done to smooth out the businessThis is done to smooth out the business cycle (expansion and recession) and keepcycle (expansion and recession) and keep inflationinflation low.low.
  55. 55. Part 3: Costs and RevenuesPart 3: Costs and Revenues
  56. 56. Costs and RevenuesCosts and Revenues  Cost – the totalCost – the total amount of money itamount of money it takes to produce antakes to produce an item (to pay for ALLitem (to pay for ALL Factors ofFactors of Production).Production).
  57. 57. Costs and RevenuesCosts and Revenues  Revenues – the totalRevenues – the total amount of $ aamount of $ a company or thecompany or the government takes in.government takes in.
  58. 58. Costs and RevenuesCosts and Revenues  Fixed CostsFixed Costs – the– the amount of money aamount of money a business MUST pay eachbusiness MUST pay each month or year (like rentmonth or year (like rent and Capital expenses).and Capital expenses).
  59. 59. Costs and RevenuesCosts and Revenues  Variable CostsVariable Costs – the– the amount of money aamount of money a business pays thatbusiness pays that changes over time (Laborchanges over time (Labor and Raw Materials).and Raw Materials).
  60. 60. Costs and RevenuesCosts and Revenues  Total CostsTotal Costs = Fixed += Fixed + Variable Costs.Variable Costs.
  61. 61. Costs and Revenues - ChartCosts and Revenues - Chart  Marginal CostsMarginal Costs – the– the additional Cost of theadditional Cost of the NEXT UNIT produced.NEXT UNIT produced. Margin=Extra Space
  62. 62. Costs and RevenuesCosts and Revenues  ProfitProfit – the difference– the difference between Total Costsbetween Total Costs and Revenues. Thisand Revenues. This is WHY you’re inis WHY you’re in BUSINESS (ProfitBUSINESS (Profit Motive!)Motive!) – Profit=Revenues-Total costProfit=Revenues-Total cost – Profit Motive=why you areProfit Motive=why you are in business---to makein business---to make MONEYMONEY  (principles of Capitalism)(principles of Capitalism)
  63. 63. Costs and RevenuesCosts and Revenues  Cost Benefit AnalysisCost Benefit Analysis – weighing the– weighing the Marginal Costs vs.Marginal Costs vs. the Marginal Benefitsthe Marginal Benefits of producing an itemof producing an item or making anyor making any economic decision. Ifeconomic decision. If the Benefit isthe Benefit is GREATER than theGREATER than the Cost, then businessCost, then business does it.does it. Marginal Benefits Marginal Costs
  64. 64. Cost-Benefit AnalysisCost-Benefit Analysis Immediate or short term satisfaction canImmediate or short term satisfaction can lead to missing the long-term benefits.#7lead to missing the long-term benefits.#7 For ExampleFor Example Immediate spending on cheap stuffImmediate spending on cheap stuff instead of long-term savings will lead toinstead of long-term savings will lead to lower economic prosperity.lower economic prosperity.
  65. 65. Part 4: Labor IssuesPart 4: Labor Issues
  66. 66. LABORLABOR  Wages – what companiesWages – what companies pay employees for theirpay employees for their labor (usually based uponlabor (usually based upon an hourly rate).an hourly rate).  Blue CollarBlue Collar  Manufacturing, work withManufacturing, work with handshands  Usually the ‘labor’ inUsually the ‘labor’ in productionproduction  Salary – the amount ofSalary – the amount of pay a person gets over apay a person gets over a year (especially foryear (especially for “professional” jobs).“professional” jobs).  White CollarWhite Collar  ‘‘Office’ jobsOffice’ jobs  Usually control productionUsually control production
  67. 67. When Production DecreasesWhen Production Decreases  DownsizingDownsizing – laying off employees to save costs.– laying off employees to save costs.  OutsourcingOutsourcing – sending jobs and manufacturing overseas– sending jobs and manufacturing overseas or contracting to outside companies to save money.or contracting to outside companies to save money.  BankruptcyBankruptcy – government allows business to restructure– government allows business to restructure it’s debt, but now all profits go to paying off debt ratherit’s debt, but now all profits go to paying off debt rather than to the owners/investors.than to the owners/investors.  Out of BusinessOut of Business – lose all your business, money, and– lose all your business, money, and profits.profits.  The current trend in the U.S. is that manufacturing jobsThe current trend in the U.S. is that manufacturing jobs are decliningare declining
  68. 68. How does ‘Labor’ protect itself?How does ‘Labor’ protect itself? Labor Unions: organization of workersLabor Unions: organization of workers who have banded together to achievewho have banded together to achieve common goalscommon goals – Wage protectionWage protection – Workplace safetyWorkplace safety – BenefitsBenefits – Job protectionJob protection
  69. 69. Collective Bargaining and StrikesCollective Bargaining and Strikes  CollectiveCollective BargainingBargaining – Representatives ofRepresentatives of the Union and thethe Union and the company negotiatecompany negotiate a contract for thea contract for the workers; usuallyworkers; usually they rely onthey rely on compromisecompromise  StrikesStrikes – When an agreementWhen an agreement can’t be reached,can’t be reached, workers stopworkers stop working to try toworking to try to force the hand of theforce the hand of the companycompany

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