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INTRODUCTION TO
   ECONOMICS
Choices, Choices, Choices, . . .
Part 1: The
  Basics
WHAT IS ECONOMICS???
Economics – the study of how individuals
and societies make decisions about ways
to use scarce resources to fulfill wants and
needs.
What does THAT mean?!!??!!
The Study of Economics
Macroeconomics
– The big picture: growth,
  employment, etc.
– Choices made by large
  groups (like countries)


Microeconomics
– How do individuals make
  economic decisions
ECONOMICS: 5 Economic
         Questions
Society (we) must figure out

WHAT to produce (make)
HOW MUCH to produce
(quantity)
HOW to Produce it
(manufacture)
FOR WHOM to Produce
(who gets what)
WHO gets to make these
decisions?
What are resources?
Definition: The things used to make other
goods
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 Wants
NEEDS – “stuff” we must have to survive,
generally: food, shelter, clothing



WANTS – “stuff” we would really like to
have (Fancy food, shelter, clothing, big
screen TVs, jewelry, conveniences . . .
Also known as LUXURIES
VS.
TRADE-OFFS
You 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 have
done instead of come to school today?




These are all Trade-Offs! Thanks for being
here!
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 MONEY

If I buy a                       Then I
pizza…                           can’t afford
                                 the
                                 movies…




             Q: What is the opportunity cost of buying pizza?
Production
So how do we get all
this “stuff” that we
have to decide about?
Decisions, decisions
…
PRODUCTION, cont.
Production is how       STUFF – Goods and
much stuff an           Services.
individual, business,
country, even the       Goods – tangible (you
WORLD makes.            can touch it) products
                        we can buy
But what is “STUFF”?
                        Services – work that
                        is performed for
                        others
Factors of Production
So, what do we need to make all of this Stuff?
4 Factors of Production
LAND – Natural Resources
– Water, natural gas, oil, trees (all the stuff we find on,
  in, and under the land)
LABOR – Physical and Intellectual
– Labor is manpower
CAPITAL - Tools, Machinery, Factories
– The things we use to make things
– Human capital is brainpower, ideas, innovation
ENTREPRENEURSHIP – Investment $$$
– Investing time, natural resources, labor and capital
  are all risks associated with production
Which Factor of Production?
Which Factor of Production?
Which Factor of Production?
Which Factor of production?
THREE parts to the Production
          Process
Factors of Production – what we need to make
goods and services

Producer – company that makes goods and/or
delivers services

Consumer – people who buy goods and services
(formerly known as “stuff”)

    Which Came First?
Production Process

     Land

                                               Goods

     Labor
                   Production/Manufacturing
                           “Factory”                     Consumers

    Capital

                                              Services

Entrepreneurship
Capital Goods and Consumer
             Goods
Capital Goods: are
used to make other
goods



Consumer Goods:
final products that are
purchased directly by
the consumer
CHANGES IN PRODUCTION
Specialization –
dividing up production
so that Goods are
produced efficiently


                         Hardee’s makes
                         hamburgers, not
                         shoes!!

Nike makes shoes, not
hamburgers
CHANGES IN PRODUCTION

Division of Labor –
different people
perform different jobs
                           You do your
to achieve greater        job, and I will
efficiency (assembly     do my Job and
                         we will be more
line).                     EFFICIENT
CHANGES IN PRODUCTION
Consumption – how
much we buy
(Consumer
Sovereignty)
 The DELL store is
 empty because….



                     Everyone is at the
                     APPLE STORE!!!
CHANGES IN PRODUCTION
If we INCREASE land, labor, capital we
INCREASE production
– Many entrepreneurs invest profit back into production

If we DECREASE land, labor, capital we
DECREASE production

BUT WHY would we ever DECREASE
production?
The Circular Flow Model
PRODUCTION, cont. again
 A measure of the production of an entire
 country in one year is

                 GDP
The total peso value of ALL final Goods and
  Services
produced 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
Part 2: Costs and Revenues
Costs and Revenues
Cost – the total
amount of money it
takes to produce an
item (to pay for ALL
Factors of
Production).
Costs and Revenues

Revenues – the total
amount of peso a
company or the
government takes in.
Costs and Revenues
Fixed Costs – the
amount of money a
business MUST pay each
month or year (like rent
and Capital expenses).
Costs and Revenues
Variable Costs – the
amount of money a
business pays that
changes over time (Labor
and Raw Materials).
Costs and Revenues
Total Costs = Fixed +
Variable Costs.
Costs and Revenues - Chart
Marginal Costs – the
additional Cost of the
NEXT UNIT produced.




       Margin=Extra
       Space
Costs and Revenues
Profit – the difference
between Total Costs
and Revenues. This
is WHY you’re in
BUSINESS (Profit
Motive!)
– Profit=Revenues-Total cost

– Profit Motive=why you are
  in business---to make
  MONEY
     (principles of Capitalism)
Costs and Revenues
Cost Benefit Analysis
– weighing the
Marginal Costs vs.
the Marginal Benefits
of producing an item               Marginal
or making any           Marginal   Costs
economic decision. If   Benefits
the Benefit is
GREATER than the
Cost, then business
does it.
Cost-Benefit Analysis
Immediate or short term satisfaction can
lead to missing the long-term benefits.#7

              For Example

Immediate spending on cheap stuff
instead of long-term savings will lead to
lower economic prosperity.
Part 3: Comparative
     Economics
Traditional Economies
Def: Economic
Questions answered by
custom
Predominately
Agricultural
 Developing or “3rd
World”
Trade and barter
oriented
Low GDP & PCI (per
capita income = avg.
inc.)
Command Economies
Def: Economic
questions answered by
the government
Very little economic
choice
No private ownership
Communism
Old Soviet Union, old
Communist China,
Cuba and North Korea
Karl Marx
19th century German
economist
Author of “Communist
Manifesto” and “ Das
Kapital”
– Government should
  control economy and
  distribute goods and
  services to the people
Founder of
revolutionary
socialism and
communism
Communism Falls
Market reforms in China in the
mid 1970s.

Fall of the Berlin Wall in 1989.

Collapse of the Soviet Union
1991.

Free Market Capitalism (w/
some Mixed Economies) the
only show in town.
Free Market (Capitalist) Economies
Economic questions
answered by
producers and
consumers
Limited government
involvement
Private property rights
Wide variety of
choices and products
U.S., Japan
Adam Smith
18th century Scottish
economist
Published “The Wealth of
Nations” in 1776
Explained the workings of
the free market within
capitalist economies
Invisible hand of the
market
Adam Smith (cont.)
Laissez-faire - Government stays out of
business practices “hands off” to let the
market place determine production,
consumption and distribution.

Individual freedom and choice
emphasized.
Principles of Capitalism
Competition – more
businesses means
lower prices and
higher quality
products for
consumers (US!) to
buy.
Principles of Capitalism
Voluntary Exchange –
businesses and
consumers MUST be
free to buy or sell
what and when they
want.
Principles of Capitalism
Private Property –
  Individuals and
  businesses MUST be
  able to get the
  benefits of owning
  their OWN property.
  Government doesn’t
  control it.
Principles of Capitalism
Consumer
Sovereignty –
consumers get to
make free choices
about what to buy
and this helps drive
production
(Demand drives
Supply).
Principles of Capitalism
              Profit Motive – people
              want to make or save
              $$$$. Their “Self
              Interest” motivates
              Capitalism.
Principles of Capitalism
Social Safety Net –
“Mixed Economy” idea
that says the government
should NOT allow people
to suffer in economic
crisis (natural part of
Capitalism’s “Business
Cycle”), but provide
security instead – Social
Security, Unemployment
Insurance, etc.
Mixed Economy/Socialism
Government involvement
and ownership and control
of property, of decision
making, and companies.
Government control of
business
Social “safety net” for
people
Socialism
Common in Europe, Latin
America, and Africa
John Maynard Keynes
The Invisible Hand
doesn’t always work.

“The long run is a
misleading guide to
current affairs. In the
long run we are all
dead.” or . . . the
trouble is people eat
in the short run.
Keynesian Economics (cont.)
Government should intervene in economic
emergencies through tax and spending
(Fiscal Policy) and changing the money
supply (Monetary Policy).
This is done to smooth out the business
cycle (expansion and recession) and keep
inflation low.
Part 4: Labor Issues
LABOR
Wages – what companies      Salary – the amount of
pay employees for their     pay a person gets over a
labor (usually based upon   year (especially for
an hourly rate).            “professional” jobs).

Blue Collar                 White Collar
Manufacturing, work with    ‘Office’ jobs
hands                       Usually control production
Usually the ‘labor’ in
production
When Production Decreases
Downsizing – laying off employees to save costs.

Outsourcing – sending jobs and manufacturing overseas
or contracting to outside companies to save money.

Bankruptcy – government allows business to restructure
it’s debt, but now all profits go to paying off debt rather
than to the owners/investors.

Out of Business – lose all your business, money, and
profits.

The current trend in the U.S. is that manufacturing jobs
are declining
How does ‘Labor’ protect itself?
Labor Unions: organization of workers
who have banded together to achieve
common goals
 – Wage protection
 – Workplace safety
 – Benefits
 – Job protection
Collective Bargaining and Strikes
Collective
Bargaining
– Representatives of
  the Union and the
  company negotiate
  a contract for the
  workers; usually
  they rely on
  compromise
Strikes
– When an agreement
  can’t be reached,
  workers stop
  working to try to
  force the hand of the
  company

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Introduction to economics

  • 1. INTRODUCTION TO ECONOMICS Choices, Choices, Choices, . . .
  • 2. Part 1: The Basics
  • 3. WHAT IS ECONOMICS??? Economics – the study of how individuals and societies make decisions about ways to use scarce resources to fulfill wants and needs. What does THAT mean?!!??!!
  • 4. The Study of Economics Macroeconomics – The big picture: growth, employment, etc. – Choices made by large groups (like countries) Microeconomics – How do individuals make economic decisions
  • 5. ECONOMICS: 5 Economic Questions Society (we) must figure out WHAT to produce (make) HOW MUCH to produce (quantity) HOW to Produce it (manufacture) FOR WHOM to Produce (who gets what) WHO gets to make these decisions?
  • 6. What are resources? Definition: The things used to make other goods
  • 7. BUT, there’s a Fundamental Problem: SCARCITY: unlimited wants and needs but limited resources
  • 8. Choices, Choices Because ALL resources, goods, and services are limited – WE MUST MAKE CHOICES!!!!
  • 9. 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?
  • 10. Wants and Needs, Needs and Wants NEEDS – “stuff” we must have to survive, generally: food, shelter, clothing WANTS – “stuff” we would really like to have (Fancy food, shelter, clothing, big screen TVs, jewelry, conveniences . . . Also known as LUXURIES
  • 11. VS.
  • 12. TRADE-OFFS You 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!
  • 13. Trade-Offs, cont. IN YOUR JOURNAL: What COULD you have done instead of come to school today? These are all Trade-Offs! Thanks for being here!
  • 14. 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)
  • 15. 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 MONEY If I buy a Then I pizza… can’t afford the movies… Q: What is the opportunity cost of buying pizza?
  • 16. Production So how do we get all this “stuff” that we have to decide about? Decisions, decisions …
  • 17. PRODUCTION, cont. Production is how STUFF – Goods and much stuff an Services. individual, business, country, even the Goods – tangible (you WORLD makes. can touch it) products we can buy But what is “STUFF”? Services – work that is performed for others
  • 18. Factors of Production So, what do we need to make all of this Stuff?
  • 19. 4 Factors of Production LAND – Natural Resources – Water, natural gas, oil, trees (all the stuff we find on, in, and under the land) LABOR – Physical and Intellectual – Labor is manpower CAPITAL - Tools, Machinery, Factories – The things we use to make things – Human capital is brainpower, ideas, innovation ENTREPRENEURSHIP – Investment $$$ – Investing time, natural resources, labor and capital are all risks associated with production
  • 20. Which Factor of Production?
  • 21. Which Factor of Production?
  • 22. Which Factor of Production?
  • 23. Which Factor of production?
  • 24. THREE parts to the Production Process Factors of Production – what we need to make goods and services Producer – company that makes goods and/or delivers services Consumer – people who buy goods and services (formerly known as “stuff”) Which Came First?
  • 25. Production Process Land Goods Labor Production/Manufacturing “Factory” Consumers Capital Services Entrepreneurship
  • 26. Capital Goods and Consumer Goods Capital Goods: are used to make other goods Consumer Goods: final products that are purchased directly by the consumer
  • 27. CHANGES IN PRODUCTION Specialization – dividing up production so that Goods are produced efficiently Hardee’s makes hamburgers, not shoes!! Nike makes shoes, not hamburgers
  • 28. CHANGES IN PRODUCTION Division of Labor – different people perform different jobs You do your to achieve greater job, and I will efficiency (assembly do my Job and we will be more line). EFFICIENT
  • 29. CHANGES IN PRODUCTION Consumption – how much we buy (Consumer Sovereignty) The DELL store is empty because…. Everyone is at the APPLE STORE!!!
  • 30. CHANGES IN PRODUCTION If we INCREASE land, labor, capital we INCREASE production – Many entrepreneurs invest profit back into production If we DECREASE land, labor, capital we DECREASE production BUT WHY would we ever DECREASE production?
  • 32. PRODUCTION, cont. again A measure of the production of an entire country in one year is GDP The total peso value of ALL final Goods and Services produced in a country in a year. (GROSS DOMESTIC PRODUCT)
  • 33. 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
  • 34. Part 2: Costs and Revenues
  • 35. Costs and Revenues Cost – the total amount of money it takes to produce an item (to pay for ALL Factors of Production).
  • 36. Costs and Revenues Revenues – the total amount of peso a company or the government takes in.
  • 37. Costs and Revenues Fixed Costs – the amount of money a business MUST pay each month or year (like rent and Capital expenses).
  • 38. Costs and Revenues Variable Costs – the amount of money a business pays that changes over time (Labor and Raw Materials).
  • 39. Costs and Revenues Total Costs = Fixed + Variable Costs.
  • 40. Costs and Revenues - Chart Marginal Costs – the additional Cost of the NEXT UNIT produced. Margin=Extra Space
  • 41. Costs and Revenues Profit – the difference between Total Costs and Revenues. This is WHY you’re in BUSINESS (Profit Motive!) – Profit=Revenues-Total cost – Profit Motive=why you are in business---to make MONEY (principles of Capitalism)
  • 42. Costs and Revenues Cost Benefit Analysis – weighing the Marginal Costs vs. the Marginal Benefits of producing an item Marginal or making any Marginal Costs economic decision. If Benefits the Benefit is GREATER than the Cost, then business does it.
  • 43. Cost-Benefit Analysis Immediate or short term satisfaction can lead to missing the long-term benefits.#7 For Example Immediate spending on cheap stuff instead of long-term savings will lead to lower economic prosperity.
  • 44. Part 3: Comparative Economics
  • 45. Traditional Economies Def: Economic Questions answered by custom Predominately Agricultural Developing or “3rd World” Trade and barter oriented Low GDP & PCI (per capita income = avg. inc.)
  • 46. Command Economies Def: Economic questions answered by the government Very little economic choice No private ownership Communism Old Soviet Union, old Communist China, Cuba and North Korea
  • 47. Karl Marx 19th century German economist Author of “Communist Manifesto” and “ Das Kapital” – Government should control economy and distribute goods and services to the people Founder of revolutionary socialism and communism
  • 48. Communism Falls Market reforms in China in the mid 1970s. Fall of the Berlin Wall in 1989. Collapse of the Soviet Union 1991. Free Market Capitalism (w/ some Mixed Economies) the only show in town.
  • 49. Free Market (Capitalist) Economies Economic questions answered by producers and consumers Limited government involvement Private property rights Wide variety of choices and products U.S., Japan
  • 50. Adam Smith 18th century Scottish economist Published “The Wealth of Nations” in 1776 Explained the workings of the free market within capitalist economies Invisible hand of the market
  • 51. Adam Smith (cont.) Laissez-faire - Government stays out of business practices “hands off” to let the market place determine production, consumption and distribution. Individual freedom and choice emphasized.
  • 52. Principles of Capitalism Competition – more businesses means lower prices and higher quality products for consumers (US!) to buy.
  • 53. Principles of Capitalism Voluntary Exchange – businesses and consumers MUST be free to buy or sell what and when they want.
  • 54. Principles of Capitalism Private Property – Individuals and businesses MUST be able to get the benefits of owning their OWN property. Government doesn’t control it.
  • 55. Principles of Capitalism Consumer Sovereignty – consumers get to make free choices about what to buy and this helps drive production (Demand drives Supply).
  • 56. Principles of Capitalism Profit Motive – people want to make or save $$$$. Their “Self Interest” motivates Capitalism.
  • 57. Principles of Capitalism Social Safety Net – “Mixed Economy” idea that says the government should NOT allow people to suffer in economic crisis (natural part of Capitalism’s “Business Cycle”), but provide security instead – Social Security, Unemployment Insurance, etc.
  • 58. Mixed Economy/Socialism Government involvement and ownership and control of property, of decision making, and companies. Government control of business Social “safety net” for people Socialism Common in Europe, Latin America, and Africa
  • 59. John Maynard Keynes The Invisible Hand doesn’t always work. “The long run is a misleading guide to current affairs. In the long run we are all dead.” or . . . the trouble is people eat in the short run.
  • 60. Keynesian Economics (cont.) Government should intervene in economic emergencies through tax and spending (Fiscal Policy) and changing the money supply (Monetary Policy). This is done to smooth out the business cycle (expansion and recession) and keep inflation low.
  • 61. Part 4: Labor Issues
  • 62. LABOR Wages – what companies Salary – the amount of pay employees for their pay a person gets over a labor (usually based upon year (especially for an hourly rate). “professional” jobs). Blue Collar White Collar Manufacturing, work with ‘Office’ jobs hands Usually control production Usually the ‘labor’ in production
  • 63. When Production Decreases Downsizing – laying off employees to save costs. Outsourcing – sending jobs and manufacturing overseas or contracting to outside companies to save money. Bankruptcy – government allows business to restructure it’s debt, but now all profits go to paying off debt rather than to the owners/investors. Out of Business – lose all your business, money, and profits. The current trend in the U.S. is that manufacturing jobs are declining
  • 64. How does ‘Labor’ protect itself? Labor Unions: organization of workers who have banded together to achieve common goals – Wage protection – Workplace safety – Benefits – Job protection
  • 65. Collective Bargaining and Strikes Collective Bargaining – Representatives of the Union and the company negotiate a contract for the workers; usually they rely on compromise Strikes – When an agreement can’t be reached, workers stop working to try to force the hand of the company