WHAT IS ECONOMICS???Economics – the study of how individualsand societies make decisions about waysto use scarce resources to fulfill wants andneeds.What does THAT mean?!!??!!
The Study of EconomicsMacroeconomics– The big picture: growth, employment, etc.– Choices made by large groups (like countries)Microeconomics– How do individuals make economic decisions
ECONOMICS: 5 Economic QuestionsSociety (we) must figure outWHAT to produce (make)HOW MUCH to produce(quantity)HOW to Produce it(manufacture)FOR WHOM to Produce(who gets what)WHO gets to make thesedecisions?
What are resources?Definition: The things used to make othergoods
BUT, there’s a Fundamental Problem:SCARCITY: unlimited wants and needs but limited resources
Choices, Choices Because ALL resources, goods, and services are limited – WE MUST MAKE CHOICES!!!!
Why Choices?We make choices about how we spend our money, time, and energy so we can fulfill our NEEDS and WANTS.What are NEEDS and WANTS?
Wants and Needs, Needs and WantsNEEDS – “stuff” we must have to survive,generally: food, shelter, clothingWANTS – “stuff” we would really like tohave (Fancy food, shelter, clothing, bigscreen TVs, jewelry, conveniences . . .Also known as LUXURIES
TRADE-OFFSYou can’t have it all (SCARCITY – remember?) so you have to choose how to spend your money, time, and energy. These decisions involve picking one thing over all the other possibilities – a TRADE-OFF!
Trade-Offs, cont.IN YOUR JOURNAL: What COULD you havedone instead of come to school today?These are all Trade-Offs! Thanks for beinghere!
A special kind of Trade-Off is an OPPORTUNITY COST =The Value of the Next Best Choice(Ex: Sleeping is the opportunity cost of studying for a test)
Opportunity Costs This is really IMPORTANT – when you choose to do ONE thing, its value (how much it is worth) is measured by the value of the NEXT BEST CHOICE. – This can be in time, energy, or even MONEYIf I buy a Then Ipizza… can’t afford the movies… Q: What is the opportunity cost of buying pizza?
ProductionSo how do we get allthis “stuff” that wehave to decide about?Decisions, decisions…
PRODUCTION, cont.Production is how STUFF – Goods andmuch stuff an Services.individual, business,country, even the Goods – tangible (youWORLD makes. can touch it) products we can buyBut what is “STUFF”? Services – work that is performed for others
Factors of ProductionSo, what do we need to make all of this Stuff?
4 Factors of ProductionLAND – Natural Resources– Water, natural gas, oil, trees (all the stuff we find on, in, and under the land)LABOR – Physical and Intellectual– Labor is manpowerCAPITAL - Tools, Machinery, Factories– The things we use to make things– Human capital is brainpower, ideas, innovationENTREPRENEURSHIP – Investment $$$– Investing time, natural resources, labor and capital are all risks associated with production
THREE parts to the Production ProcessFactors of Production – what we need to makegoods and servicesProducer – company that makes goods and/ordelivers servicesConsumer – people who buy goods and services(formerly known as “stuff”) Which Came First?
Production Process Land Goods Labor Production/Manufacturing “Factory” Consumers Capital ServicesEntrepreneurship
Capital Goods and Consumer GoodsCapital Goods: areused to make othergoodsConsumer Goods:final products that arepurchased directly bythe consumer
CHANGES IN PRODUCTIONSpecialization –dividing up productionso that Goods areproduced efficiently Hardee’s makes hamburgers, not shoes!!Nike makes shoes, nothamburgers
CHANGES IN PRODUCTIONDivision of Labor –different peopleperform different jobs You do yourto achieve greater job, and I willefficiency (assembly do my Job and we will be moreline). EFFICIENT
CHANGES IN PRODUCTIONConsumption – howmuch we buy(ConsumerSovereignty) The DELL store is empty because…. Everyone is at the APPLE STORE!!!
CHANGES IN PRODUCTIONIf we INCREASE land, labor, capital weINCREASE production– Many entrepreneurs invest profit back into productionIf we DECREASE land, labor, capital weDECREASE productionBUT WHY would we ever DECREASEproduction?
PRODUCTION, cont. again A measure of the production of an entire country in one year is GDPThe total peso value of ALL final Goods and Servicesproduced in a country in a year. (GROSS DOMESTIC PRODUCT)
World GDP Total GDP 2005 11 Korea, Rep. 787,624(millions of US dollars) 12 India 785,468 1 United States 12,455,068 13 Mexico 768,438 2 Japan 4,505,912 14 Russian Federation 3 Germany 2,781,900 763,720 4 China 2,228,862 15 Australia 700,672 5 United Kingdom 2,192,553 16 Netherlands 594,755 6 France 2,110,185 a 17 Switzerland 365,937 7 Italy 1,723,044 18 Belgium 364,735 8 Spain 1,123,691 19 Turkey 363,300 9 Canada 1,115,192 20 Sweden 354,115 10 Brazil 794,098 21 Saudi Arabia 309,778
Costs and RevenuesCost – the totalamount of money ittakes to produce anitem (to pay for ALLFactors ofProduction).
Costs and RevenuesRevenues – the totalamount of peso acompany or thegovernment takes in.
Costs and RevenuesFixed Costs – theamount of money abusiness MUST pay eachmonth or year (like rentand Capital expenses).
Costs and RevenuesVariable Costs – theamount of money abusiness pays thatchanges over time (Laborand Raw Materials).
Costs and RevenuesTotal Costs = Fixed +Variable Costs.
Costs and Revenues - ChartMarginal Costs – theadditional Cost of theNEXT UNIT produced. Margin=Extra Space
Costs and RevenuesProfit – the differencebetween Total Costsand Revenues. Thisis WHY you’re inBUSINESS (ProfitMotive!)– Profit=Revenues-Total cost– Profit Motive=why you are in business---to make MONEY (principles of Capitalism)
Costs and RevenuesCost Benefit Analysis– weighing theMarginal Costs vs.the Marginal Benefitsof producing an item Marginalor making any Marginal Costseconomic decision. If Benefitsthe Benefit isGREATER than theCost, then businessdoes it.
Cost-Benefit AnalysisImmediate or short term satisfaction canlead to missing the long-term benefits.#7 For ExampleImmediate spending on cheap stuffinstead of long-term savings will lead tolower economic prosperity.
Traditional EconomiesDef: EconomicQuestions answered bycustomPredominatelyAgricultural Developing or “3rdWorld”Trade and barterorientedLow GDP & PCI (percapita income = avg.inc.)
Command EconomiesDef: Economicquestions answered bythe governmentVery little economicchoiceNo private ownershipCommunismOld Soviet Union, oldCommunist China,Cuba and North Korea
Karl Marx19th century GermaneconomistAuthor of “CommunistManifesto” and “ DasKapital”– Government should control economy and distribute goods and services to the peopleFounder ofrevolutionarysocialism andcommunism
Communism FallsMarket reforms in China in themid 1970s.Fall of the Berlin Wall in 1989.Collapse of the Soviet Union1991.Free Market Capitalism (w/some Mixed Economies) theonly show in town.
Free Market (Capitalist) EconomiesEconomic questionsanswered byproducers andconsumersLimited governmentinvolvementPrivate property rightsWide variety ofchoices and productsU.S., Japan
Adam Smith18th century ScottisheconomistPublished “The Wealth ofNations” in 1776Explained the workings ofthe free market withincapitalist economiesInvisible hand of themarket
Adam Smith (cont.)Laissez-faire - Government stays out ofbusiness practices “hands off” to let themarket place determine production,consumption and distribution.Individual freedom and choiceemphasized.
Principles of CapitalismVoluntary Exchange –businesses andconsumers MUST befree to buy or sellwhat and when theywant.
Principles of CapitalismPrivate Property – Individuals and businesses MUST be able to get the benefits of owning their OWN property. Government doesn’t control it.
Principles of CapitalismConsumerSovereignty –consumers get tomake free choicesabout what to buyand this helps driveproduction(Demand drivesSupply).
Principles of Capitalism Profit Motive – people want to make or save $$$$. Their “Self Interest” motivates Capitalism.
Principles of CapitalismSocial Safety Net –“Mixed Economy” ideathat says the governmentshould NOT allow peopleto suffer in economiccrisis (natural part ofCapitalism’s “BusinessCycle”), but providesecurity instead – SocialSecurity, UnemploymentInsurance, etc.
Mixed Economy/SocialismGovernment involvementand ownership and controlof property, of decisionmaking, and companies.Government control ofbusinessSocial “safety net” forpeopleSocialismCommon in Europe, LatinAmerica, and Africa
John Maynard KeynesThe Invisible Handdoesn’t always work.“The long run is amisleading guide tocurrent affairs. In thelong run we are alldead.” or . . . thetrouble is people eatin the short run.
Keynesian Economics (cont.)Government should intervene in economicemergencies through tax and spending(Fiscal Policy) and changing the moneysupply (Monetary Policy).This is done to smooth out the businesscycle (expansion and recession) and keepinflation low.
LABORWages – what companies Salary – the amount ofpay employees for their pay a person gets over alabor (usually based upon year (especially foran hourly rate). “professional” jobs).Blue Collar White CollarManufacturing, work with ‘Office’ jobshands Usually control productionUsually the ‘labor’ inproduction
When Production DecreasesDownsizing – laying off employees to save costs.Outsourcing – sending jobs and manufacturing overseasor contracting to outside companies to save money.Bankruptcy – government allows business to restructureit’s debt, but now all profits go to paying off debt ratherthan to the owners/investors.Out of Business – lose all your business, money, andprofits.The current trend in the U.S. is that manufacturing jobsare declining
How does ‘Labor’ protect itself?Labor Unions: organization of workerswho have banded together to achievecommon goals – Wage protection – Workplace safety – Benefits – Job protection
Collective Bargaining and StrikesCollectiveBargaining– Representatives of the Union and the company negotiate a contract for the workers; usually they rely on compromiseStrikes– When an agreement can’t be reached, workers stop working to try to force the hand of the company