True or False????

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True or False????

• The best things in life are free.

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Unit 1 Economics

• Introduction to Economics

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Topic 1 Definition of Economics
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Economics

• studies how scarce resources are used to fulfill
  societys needs and wants

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Scarcity
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Scarcity

• condition where wants are greater than
  resources
• Because scarcity exists, choices must be made

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Resources

• anything that helps produce a good or service
  (also called factors of production)

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The Four Factors of Production

• Types of Resources

Land
Labor
Capital
Entrepreneurship
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The Four Factors of Production

• Land natural resources (Water, Sun, Oil,
  Trees, Stone, etc.)

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The Four Factors of Production

• Labor Workers (manual laborers, lawyers,
  doctors, teachers, waiters, etc.)

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The Four Factors of Production

• Capital
• Resources that are used to create other goods
  (tools, tractors, machinery, buildings,
  factories, etc.)

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The Four Factors of Production

• Entrepreneurship Organizes
• other resources

Ultimate goal Make profit
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The Four Factors of Production
Classify the Factors of Production in the
following scenario
You decide to order a pizza to satisfy your
wants. First, you picked up the telephone and
gave your order to the owner that entered it into
her computer. This information came up on the
chief bakers monitor in the kitchen and he
assigned it to one of his cooks. The cook was
busy mixing dough out of salt, flour, eggs, and
milk. The cook finished mixing dough, washed
his hands in the sink, and prepared your pizza
using tomato sauce, cheese, and sausage. He then
placed the pizza in the oven. Within 10 minutes
the pizza was cooked and placed in a cardboard
box. The delivery person then grabbed your pizza,
jumped in the company car, and delivered it to
your door.
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The Four Factors of Production
Classify the Factors of Production in the
following scenario
You decide to order a pizza to satisfy your
wants. First, you picked up the telephone and
gave your order to the owner that entered it into
her computer. This information came up on the
chief bakers monitor in the kitchen and he
assigned it to one of his cooks. The cook was
busy mixing dough out of salt, flour, eggs, and
milk. The cook finished mixing dough, washed
his hands in the sink, and prepared your pizza
using tomato sauce, cheese, and sausage. He then
placed the pizza in the oven. Within 10 minutes
the pizza was cooked and placed in a cardboard
box. The delivery person then grabbed your pizza,
jumped in the company car, and delivered it to
your door.
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Resources

• Resources are interdependent of one another
• Have to have all resources in order to make a
  product/service

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Needs

• Necessary for survival

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Wants

• Not necessary for survival

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• In order for a product to have value, it must be
  scarce and provide utility (usefulness)

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Conspicuous Consumption

• Purchase of items to impress others

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Topic 2 principles of economics
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1. People Economize

• People make decisions based on what THEY think
  will benefit them the most

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2. All choices involve a cost

• Opportunity Cost highest valued alternative
  given up when a choice is made
• There is no such thing as a free lunch
• Nothing is FREE!!!!

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Video clip

• Dumpster Diving - extreme couponing

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Incentives influence behavior
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4. Rules influence individual choices
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5.Voluntary trade creates wealth

• Video clip trading up

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Answer the following questions the way an
economist would
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1. Making a choice means

• A. deciding among many possibilities
• B. being able to get everything
• C. not thinking about future consequences
• D. considering a daily horoscope

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2. People throughout the world usually make
decisions

• A. impulsively choosing quickly without much
  thought
• B. generously thinking of the needs of others
• C. randomly leaving the outcome up to chance
• D. purposefully considering costs and benefits

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3. Which of the following best explains the
relationship between choices and incentives?

• A. incentives motivate people to make certain
  types of choices
• B. incentives rarely influence personal choices
• C. incentives make it difficult to predict what
  choice people will make
• D. incentives have nothing to do with choices

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4. A hungry economist decides to buy a bag of
potato chips which of the following would best
explain his decision?

• A. the chips cost less than the other snacks
• B. the chips came in the largest bag
• C. the chips offer a greater benefit to him than
  the other snacks
• D. there are no other choices available

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In Economics decisions are made at the MARGIN
MARGINAL additional
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• Stop Watch

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Marginal Utility

• Additional usefulness of consuming ONE more
  product
• Diminishing Marginal Utility As more is consumed
  the additional usefulness is LESS

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Diminishing Marginal Utility

• Squidward - too many krabby patties
• When a person acquires more units of an item,
  ADDITIONAL UTILITY will go down

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of donuts consumed Total utility Marginal utility
0 - -
1 5
2 12
3 20
4 25
5 28
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of donuts consumed Total utility Marginal utility
0 - -
1 5 5
2 12 7
3 20 8
4 25 5
5 28 3
Increasing marginal utility occurred with
donuts?? Diminishing marginal utility occurred
with donuts??
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• A rational person will weigh the additional
  utility (MU) against the additional costs (MC)
• Marginal Cost additional cost of consuming ONE
  more item

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How can a person maximize their utility???

• MUltMC Dont do it
• MUgtMC Do it
• MUMC Do it and STOP
• utility maximized here

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Assume it cost 10 to see each movie. Complete
the chart below.
of movies Total utility Marginal utility Total cost Marginal cost
0 0
1 15
2 25
3 32
4 35
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Assume it cost 10 to see each movie. Complete
the chart below.
of movies Total utility Marginal utility Total cost Marginal cost
0 0 -
1 15 15
2 25 10
3 32 7
4 35 3
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Assume it cost 10 to see each movie. Complete
the chart below.
of movies Total utility Marginal utility Total cost Marginal cost
0 0 0 0
1 15 15 10
2 25 10 20
3 32 7 30
4 35 3 40
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Assume it cost 10 to see each movie. Complete
the chart below.
of movies Total utility Marginal utility Total cost Marginal cost
0 0 0 0 0
1 15 15 10 10
2 25 10 20 10
3 32 7 30 10
4 35 3 40 10
How many movies should be seen if a person wishes
to maximize their utility???
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Assume pizza cost 2.00 a slice. Complete the
chart in your notes and determine the number of
slices that will maximize utility
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How many pieces of pizza should you eat?????
Pizza slices Total utility Marginal utility Total cost Marginal cost
0 0 0 0 0
1 8 8 2 2
2 14 6 4 2
3 19 5 6 2
4 23 4 8 2
5 25 2 10 2
6 26 1 12 2
7 26 0 14 2
8 24 -2 16 2
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Pizza slices Total utility Marginal utility Total cost Marginal cost
0 0 0 0 0
1 8 8 2 2
2 14 6 4 2
3 19 5 6 2
4 23 4 8 2
5 25 2 10 2
6 26 1 12 2
7 26 0 14 2
8 24 -2 16 2
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Calculate Marginal Utility
of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit
0 0 0
1 8 8
2 14 6
3 19 5
4 23 4
5 25 2
6 26 1
7 26 0
8 24 -2
Marginal Cost
2
2
2
2
2
2
2
2
2
You will continue to consume until Marginal
utility Marginal Cost
How many pizzas would you buy if the price per
slice was 2?
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Maximizing utility if choosing between 2 items

• Must calculate the Marginal utility per price of
  each item. Bang for your Buck
• Formula for calculating marginal utility per
  price MU/Price
• Calculating MU/P allows you to compare products
  with different prices  

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Example Where to go on vacation?? ?
You plan to take a vacation and want to maximize
your utility. Based on the info below, which
should you choose?
MU/P


Destination Marginal Utility Price
Tahiti 3000 3,000
Chicago 1000 500
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Example Where to go on vacation?? ?
You plan to take a vacation and want to maximize
your utility. Based on the info below, which
should you choose?
Destination Marginal Utility Price
Tahiti 3000 3,000
Chicago 1000 500
MU/P
3000/3000 1
1000/500 2
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Topic 3 Types of Economics
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microeconomics

• studies small specific segments of the economy
• Examples profits at McDonalds
• Demand for gasoline

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macroeconomics

• studies the economy as a wholewould look at a
  countrys entire economy
• Example poverty in the U.S.
• International Trade

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Micro or Macro???

• Ferris Beullers day off

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Topic 4 ECONOMIC MODELS
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Production Possibilities Curve

• A production possibilities curve (PPC) is a model
  that shows alternative ways that an economy can
  use its scarce resources
• This model graphically demonstrates scarcity,
  trade-offs, opportunity costs, and efficiency.

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PPC

• Each point represents a specific combination of
  goods that can be produced given resources
  available.

A B C
boats 9 7 4
trucks 4 7 9
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PPC

• 4 Key Assumptions
• Only two goods can be produced
• Full employment
• All resources are fully utilized
• Technology is fully utilized

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PPC

• Point inside (D) unemployment
• Point outside (E) unattainable given current
  resources
• Points on curve (A,B,C) efficient
• All resources being utilized
• Economy at full employment

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PPC shows Opportunity Cost
Example
1. The opportunity cost of moving from a to b is
2 Bikes
2.The opportunity cost of moving from b to d is
7 Bikes
3.The opportunity cost of moving from d to b is
4 Computers
4.The opportunity cost of moving from d to c.
2 computers

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PPC can show two different types of costs
constant and increasing

• Constant Cost opportunity cost of moving from
  one point to the other is always the same
• Increasing cost opportunity cost of moving from
  one point to the other gets bigger

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Constant opportunity cost Opportunity cost is
always the SAME
A B C D E
pizza 4 3 2 1 0
calzones 0 1 2 3 4

• Opportunity Cost of moving from a-b, b-c, c-d,
  and d-e?

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Constant opportunity cost

• Resources are easily adaptable for producing
  either good
• Ex pizza and calzones

• Results in a straight line PPC

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Increasing opportunity cost Opportunity costs
increase as more of a good is produced
A B C D E
PIZZA 20 19 16 10 0
ROBOTS 0 1 2 3 4

• Opportunity Cost of moving from a-b, b-c, c-d,
  and d-e?

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Increasing opportunity cost

• As you produce more of any good, the opportunity
  cost will increase
• Why??? Resources are NOT easily adaptable to
  producing both goods

• Results in a BOWED OUT PPC

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Constant vs. Increasing Opportunity Cost
Resources for corn and wheat are more easily
adaptable to each other than resources for cactus
and pineapples
Corn
Cactus
Wheat
Pineapples
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Per Unit Opportunity Cost
Per unit opportunity cost Doesnt look at
total costs, looks at the cost of ONE more item

Cost Gain
Per Unit Opportunity Cost
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Per Unit Opportunity Cost Cost/Gain

• 1. Ron has resources to produce 20 pizzas or 200
• burgers
• To make ONE pizza, John must give up _________
  burgers
• To make ONE burger, John must give up ___________
  pizza
• John has resources to produce 100 pizzas or 200
  burgers
• To make ONE pizza, John must give up __________
  burgers
• To make ONE burger, John must give up ___________
  pizza
•  
•  

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PER UNIT Opportunity Cost
Cost Gain
How much each marginal unit costs
Example
1. The PER UNIT opportunity cost of moving from a
to b is
2/2 1 Bike
2.The PER UNIT opportunity cost of moving from b
to c is
3/2 Bikes
3.The PER UNIT opportunity cost of moving from c
to d is
4/2 2 Bikes
4.The PER UNIT opportunity cost of moving from d
to e is
5/2 Bikes
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Practice per unit Opportunity cost
A B C D E
Autos 0 2 4 6 8
missiles 30 27 21 12 0

• 1.What is the per unit cost of moving from point
  D to point E?
• 12/2 6 missiles
• What is the per unit cost of moving from point C
  to point B?
•  2/6 1/3 autos
• What is the per unit cost of moving from point C
  to point D?
•  9/2 missiles
• What is the per unit cost of moving from point B
  to point A?
• 2/3 autos

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• Practice handout PPC (front page)

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Shifting the Production Possibilities Curve
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Production Possibilities
4 Key Assumptions of PPC Only two goods can be
produced Full employment Resources
maximized Technology maximized
3 reasons the PPC will shift 1. Change in
resource quantity or quality 2. Change in
Technology 3. Change in Trade
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Inward shift of PPC

• Indicates decrease in economy
• Happens due to
• - destruction of resources
• Less trade
• Decline in quality of resources

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Outward shift in PPC

• Indicates increase in economy (Economic growth)
• Happens due to
• -increase in /quality of resources
• - Technology
• - More Trade

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AB is original PPC

• What happens???
• 1. BP Oil Spill in the Gulf
• 2. Better technology in producing both items
• 3. Many workers unemployed
• 4. Significant increases in education
• 5. Full employment

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• Practice handout PPC (back page)

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Topic 5 Economic Systems

• All societies must answer 3 economic questions
• 1. what will be produced
• 2. how will it be produced
• 3. who will get what
• the way the questions are answered determine a
  countrys economic system

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The Bead Game

• Stop Watch

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Traditional economies

• economic questions answered by past

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Command Economies

• economic questions answered by government
• (communism and socialism)

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Video clip

• command vs market

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Command Economies

• Advantages
• 1.Equal incomes means no extremely poor people
• 2.Capable of quick change

• Disadvantages
• 1.No incentive to work harder
• 2. No Competition poor quality

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Market Economy

• economic questions answered by people

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Market Economies

• Advantages
• 1.Economic freedom
• 2.Competition better quality goods
• 3.Incentive to make a profit

• Disadvantages
• 1.Unequal distribution of wealth
• 2.Economic loss

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CONSUMER SOVEREIGNTY

• Consumer is ruler of the market
• Consumers determine which products are successful

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The Invisible hand - Adam Smith

• The concept that societys goals will be met as
  individuals seek their own self-interest.
• Example Society wants fuel efficient cars
• Profit seeking producers will make more.
• Competition between firms results in low prices,
  high quality, and greater efficiency.
• The government doesnt need to get involved since
  the needs of society are automatically met.
• Competition and self-interest act as an invisible
  hand that regulates the free market.

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The invisible hand Adam Smith

• Video clip
• I, pencil

• It is not from the benevolence of the butcher,
  the brewer, or the baker that we expect our
  dinner, but from their regard to their own
  self-interest.

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Mixed Economy

• elements of the all economic systems together
  (government and people answer economic questions)

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Topic 6 Circular Flow of a market economy

• Shows the interdependence between business and
  households

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Resource Market
Income
Income
Resources
Resources (Factors of Production)
Individuals
Businesses
Goods and Services
Goods and Services
Spending
spending
Product Market
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The Circular Flow of a market economy

• The Product Market-The place where goods and
  services produced by businesses are sold to
  households.
• Households demand Firms supply
• The Resource (Factor) Market-The place where
  resources (land, labor, capital) are sold to
  businesses.
• Firms demand, households supply

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TOPIC 7 MARKET STRUCTURES
Pure Monopoly
Perfect Competition
Monopolistic Competition
Oligopoly
Most competition least
competition

According to the demonstration which
group Represented each structure????
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Market competition demo

• 1. Each food item represents the SIZE of each
  firm with in the structure.
• 2. TYPES of items each group has??
• 3. COMPETITION within group??

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TOPIC 7 MARKET STRUCTURES
Pure Monopoly
Perfect Competition
Monopolistic Competition
Oligopoly
Imperfect Competition

Most competition least
competition
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Perfect Competition

• Number of firms Many (thousands) of small firms
  
• Choice for Consumers many
• Type of Good identical products
• Market Entry very easy, no barriers to entry
• Amount of competition Great deal more than any
  other structure

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Perfect competition

• Example Agricultural products

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Monopolistic Competition
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Characteristics of monopolistic competition

• Number of firms hundreds of small companies
• Choice for consumers many
• Type of Good product DIFFERENTIATION
• Market Entry easy, little barriers to entry
• Amount of competition a lot non-price
  competition

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Examples monopolistic competition

• Retail stores
• Restaurants
• Pizza

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Oligopoly

• Number of firms Few large companies
• Choice for Consumers Few
• Type of Good similar or different
• Market entry difficult to enter barriers exist
  
• Amount of Competition LITTLE
• One firms actions have impact on other firms
• Brand name recognition important

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Examples Oligopoly

• Soft drinks
• Cereal
• Athletic apparel

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Example of how one firm in oligopoly impacts
another

• I love Lucy clip

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Monopoly

• Number of firms Single Seller
• Choice for consumers ONE
• Type of Good unique no substitutes
• Amount of Competition none (usually illegal
  because of this)
• Market Entry Impossible

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Example Monopoly

• Utility companies

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ID the market structure

• Business 1 Ive got plenty of competition. If I
  tried to raise my price, Id lose business to the
  large firms that dominate our industry. I wait
  for them to raise prices and I follow along
  behind.

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• Business 2 New shops like mine are opening all
  the time there are hundreds of us. I have to
  spend money on advertising to convince people
  that my shop is unique and different.

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• Business 3 I cant afford to advertise it
  would eat up what little profit I make. Besides,
  what good would it do? My product is the same as
  everyone elses.

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Business 4 My product is like no one elses. I
work hard to make sure my firm stays out in front
to avoid cutthroat competition.