Economic PrinciplesEconomic Principles http://www.youtube.com/watch?v=yoVc_S_...

Unit 1 Vocab

Economic ModelsEconomy

All activity that affects production, distribution & use of goods & services

Economists use economic models to study the economy

They study past and present to predict the future

Based on assumptions

Businesses & government make decisions based on models

Economic Principles Economics: Study of how decisions are

made when resources are limited.

Scarcity: Not enough income, time, and resources to satisfy every desire. Faces individuals, businesses, and countries.

Economics must answer the questions of what, how, and whom when dealing with production.

SCARCITY IS THE FUNDAMENTAL ECONOMIC PROBLEM

Because of Scarcity we must answer 3 questions in economicsWhat to Produce?How to Produce?Whom to produce for?

Assessment Activity:

Good Price

Gum $ . 50

Soda $1.oo

Movie Ticket

$5.00

All economic questions and problems arise from scarcity. Economics assumes people do not have the resources do satisfy all of their wants. Therefore, we must make choices about how to allocate those resources. We make decisions about how to spend our money and use our time. This activity will focus on the central idea of economics- every choice involves a cost.

Let's say you have five dollars. What would you like to spend it on? There are a million things you would love to spend five bucks on, but let's imagine there are only three things out there you really want to buy: gum, soda, and movie tickets. Look at the price chart to the right and answer the questions.

Questions:1. How many sodas can you buy instead of one movie

ticket?2. How many packs of gum can you buy instead of one

soda?3. If buy 4 packs of gum, how many sodas could you

have bought?

For example, if you go to the movies you have to give up a certain amount of gum and soda. If you are a sodaholic, you have to give up five sodas. If you are gum fanatic, you surrender ten packs of gum. But, the opportunity cost of a movie is not five sodas and ten packs of gum. It is five sodas or ten packs of gum.

Which of the following best describes scarcity?

A. Not enough goods for everyone

B. Not enough resources to provide every desire

C. Lack of desire to produce enough resources

D. The amount that people want

What is the fundamental economic problem?

1. Money2. Time3. Scarcity4. Economics

All of the following are questions we must ask because of scarcity except:

1. When to produce?2. How to produce?3. What to produce?4. Whom to produce

for?

Goods and Services Good: Anything manufactured.

Service: Something people do for others.

Needs and Wants Need: Basic item for survival.

Want: Anything including and beyond needs.

Factors of Production 1. Capital2. Land and Natural Resources3. Labor4. Entrepreneurship or

management

Capital

Capital goods: All tools, buildings, and machinery businesses use to make goods and provide services. Same as Resources

Land and Natural Resources

All land used for the business.Natural resources are things

that come form the earth such as water and minerals.

All energy is considered a natural resource.

LaborHired workers to help in production.Labor earns money, which they use to buy other goods and services.

Division of Labor: Separating a big job into smaller jobs. Each person is responsible for doing one job. (Assembly line).

Entrepreneurship Entrepreneurs are people willing to

take risks in business.

Plan and supervise production.

Decision makers.

With a neighbor, list the land, labor, capital, and entrepreneur that went into making each of the following (you can list more than one item for each…)

Your shoes iPodDominos pepperoni pizza

Trade-off and Opportunity Cost Scarcity forces people to make choices.Trade-off: Decision that must be made

when choosing between items.Opportunity cost: Value of the next best

alternative that was given up when a choice was made. Involves time or money.

When choosing to do something, you lose. You lose the ability(opportunity) to do something else.

____________________________________________Production Possibilities: The

combinations of goods and services that can be produced from a fixed amount of resources.

What was the opportunity cost of passing the Health Care Bill?

A. More people will have health care coverage.

B. Grandparents will be put to sleep because of Death Panels.

C. Obama will become the Devil and the Four Horseman will arrive.

D. The government will have less money to spend on other services like the military.

How do you make trade-offs with your time? What do you give up?

Consider time studying, time with friends, or time sleeping.

Business CostsFixed Costs

Expense is the same no matter how much is produced Example - Rent

Variable Costs Expenses that change with number of items produced.

Fixed Costs + Variable Costs = Total CostMarginal Cost

extra cost of producing one additional unit of outputMarginal Benefit /Revenue

additional benefit after all costs are accounted for producing one more unit

Cost Benefit Analysis economic model used to compare marginal costs &

benefits of a decision – Which should be greater the benefits or the costs??

Considerations for Businesses

Productivity - Measure of the amount of output produced by a given

amount of inputs in a specific period of time. In other words – How resources are being used efficiently to produce goods and services.

Specialization Takes place when people, businesses, regions & countries

concentrate on goods or services that they can produce better than anyone else

Examples – China and electronics Human Capital

Sum of the skills, abilities & motivations of people How would businesses and employee’s benefit from this?

ProductivityGoes up when more output can be

produced when scarce resources are used efficiently

Requires labor and human capital Increases when businesses invest

in human capital Increases with specialization

What is an example of a fixed cost of doing business?

1. Wages2. Cost of fuel3. Price of materials4. Rent on a building

Economic systems

Gross Domestic Product (GDP)

Measure of an economy’s size & success (monetary measure - $16.72 trillion 2013 est. #1)

Total value of all the final goods & services produced in a country during a single yearUsed cars not counted in GDP because second

hand sales are not countedUsed to measure standard of living (quality of life

based on the possession of necessities and luxuries that make life easier) in a country

Measures quantity not quality

Gross Domestic Product (GDP) cont.

Per Capita GDP – total GDP divided by the country’s population U.S. was $52,800 2013 est. #14

Compared yearly to check growth of countryHigher GDP from previous year =

growing economyLower GDP from previous year =

shrinking economy

Economic SystemsThree major types:

TraditionalCommandMarket

The distinguishing factors are the role of government in the economy and the decision making for production.

Traditional Economy Economic decisions are made by

customs handed down through generations.Hunting, farming, and gathering.No technology.Activities center around the family.Men and women have defined

social roles.Found in rural, non-industrialized

areas. (Africa, S. America, Asia)

Traditional Economies

Command EconomyGovernment makes all economic decisions.

(China, N. Korea, Vietnam, Cuba, and the former Soviet Union). Advantages:

The Govt. can set prices of goods.Set low prices for consumers and give

help to factories. Disadvantages

No competition.Factories are poorly run and shortages

are common. No individual freedoms.

Command Economies – Former Soviet Union

Command Economies – North Korea

Video

Slideshow

Command Economies - Cuba

Market EconomyDecisions are made by the principles of

supply and demand. People buy, sell, and produce what ever

they want. People can work where they want. Individual freedoms

Capitalism: Private citizens own most means of production – land, labor, capital & entrepreneurship – to make a profit.

Free Enterprise: Freedom of businesses to compete for profit without govt. interference.

7 Characteristics of a Market Economy1.Markets – exchanges here determine prices of goods & services. It’s the free and willing exchange of goods and services between buyers and sellers.2.Consumer Sovereignty – the consumer is ‘king’ of the market

• They are the ones who determine what products will be produced

• It exists only in Market based economies3.Economic freedom – freedom of choice with consequences

• Example – an entrepreneur starts a business and it fails. The gov’t usually will not help out.

4.Private Property Rights – the freedom to own, use, or dispose of our own property as long as it doesn’t interfere with the rights of others.

5. Competition – struggle between buyers and sellers to get the best products and the lowest prices.

• Capitalism thrives on competition• Rewards the most efficient producers

6.Profit Motive – the driving force that encourages individuals and organizations to improve their material well-being.

• Purpose is to raise the standard of living• It is the reason for growth in a market system

7. Voluntary Exchange – act of buyers and sellers freely and willingly engaging in market transactions

• Both buyers & sellers must feel a benefit

Mixed EconomyAny combination of Economic systems.

The United States is a mixed economy because capitalism and free enterprise exist with government regulations.

The U.S. govt. provides services such as highways, postal system, and transportation.

Some government regulation.At certain times, govt. can take

control of the means of production.

ActivityOn the paper provided, NEATLY create a

4 square of the types of economies we just discussed – Command, Traditional, Market, and Mixed.

Be sure to include several characteristics, examples, and pictures. These will be hung up and people should be able to easily understand the differences in each of the economies.

Warm up 1. Economic system where the government

makes all of the economic decisions? 2. Economic system that is a combination of

command and market economies? 3. Total dollar value of all final goods and services

produced in a country during a single year? 4. Consumers are ‘king’ of the market because

they decide what produces will be produced? 5. Characteristic of a market economy that

describes the struggle between buyers and sellers to get the best products and the lowest prices?

6. This is based on private ownership of the means of production and can decide how to use them to use them to make a profit?

Capitalism & Free Enterprise

The U.S. economy is built on a market economy, but government still plays a role

Free Enterprise – minimum gov’t interferenceCapitalism – private citizens own and use factors of production (land, labor, capital, & entrepreneurship) to make a profit.

The Drawbacks of capitalism

The Drawbacks of capitalism

The Rise of Capitalism2 concepts developed

People work for economic gainGovernment should have a limited role

1200s C.E. trade routes opened between Europe & the EastSilk Roads, Marco Polo

Throughout hundreds of years trade increasedDevelopment of ideas of wealthAdam Smith

Scottish EconomistWealth of Nations

Basic Principles of EconomicsIndividuals who seek profit benefit all of societyLaissez-Faire – to leave alone

The government should not interfere in the marketGovernment’s only role should be to ensure free competition

Adam Smith and The Wealth of Nations

Socialism Socialism – belief that the means of production

should be owned & controlled by society either directly or through the gov’t

Karl Marx Wrote “The Communist Manifesto” Socialist – believed industrialized nations divided

into bourgeoisie (entrepreneurs) & proletariat (workers)

Predicted revolution of the proletariat Believed socialism would develop into

communism

CommunismCommunism – one class would

evolve where property would be commonly held & there would be no need for government

Built on the idea of socialism

Transitioning Economies

Former Soviet Union & the Soviet Bloc Inefficiency of command economies led

to no or very small growthTransition of this type of economy led to

transition from Communism to Democracies

Why would a transition be hard?

NAFTANorth America Free

Trade Agreement (NAFTA) – agreement between Canada, Mexico, and the USA where tariffs were almost completely eliminated (“free trade”)

Began on Jan. 1, 1994