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Keystone Economics
A Starter Guide Connecting What You Know With What You Must Understand
To thrive in the 21st Century Global Economy
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What comes to your mind when you hear the word, “Economics”?
$
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An increase in demand in the short run and the long run. The market starts in a long—ruu equilibrium, shown as point A in panel (a). In this equilibrium, each firm makes zero profit, and the price equals the minimum average total cost. Panel (b) shows what happens in the short run when demand rised from D1 to D2. The equilibrium goes
An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in the business. Suppose, for instance, that Helen had instead left this money deposited in a savings account that pays in interest rate of 5%, she would have earned $15,000 per year. To own her cookie factory, therefore, Helen has given up $15,000 a year in interest income.
To see how a firm goes about mazimizing profit, we must consider fully how to measure its total revenue and its total cost. Total revenue is the easy part: it equals the quantity of output the firm produces times the price at which it sells its output. By contrast, the measurement of a firm’s total cost is more sbtle.
One of the Ten Principles of Economics in Chapter 2 is that people face tradeoffs. Probably no tradeoff is more obvious or more important in a person’s life thatn the tradeoff between work and leisure. The more hours you spend working, the fewer hours you have to watch TV, have dinner with friends, or pursue your favorite hobby. The tradeoff between labor and leisure lies behind the labor supply curve.
Movements of workers from region to region, or country to country, is an obvious and often important source of shifts in labor supply. When immigrants come to the United States, for instance, the supply of labor in the United States increases and the supply of labor in the immigrants’ home countries contracts. In fact, much of the policy debate about immigration centers on its effect on labor supply and, thereby,equilibrium in the labor market.
stically competitive industry. In both panels of this figure, the profit=maximizing quantity is found at the intersection of the marginal-revenue and marginal-cost curves.
The efficiency of a tax system refers to the costs it imposes on taxpayers. There are two costs of taxes beyond the transfer of resources from the taxpeyer to the government. The first is the distortion in the allocation of resources that arises as taxes alter
Do you see a jumble of Economic Terms and graphs that all run together in your mind?…
Quantity0
Price
Demand
Quantity0
Price
P = MC P = MR(demandcurve)
MC
ATC
MC
ATC
MR
Efficientscale
P
Quantityproduced
Quantity produced =Efficient scale
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Sometimes it feels like economics…
It’s not so tough to understand. After all, you live economics every day of your life
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…and sometimes it feels like you are just going about your life
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Our goal is to help you integrate economics into your life. Like the climbing wall, this is an effort to give you a toehold on economic understanding. We hope it will provide enough to get you started, and a desire to learn more.
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There are 9 basic Economic Principles woven into your everyday life.
• We all make choices• TANSTAAFL (There Ain’t No Such Thing As A Free Lunch!)• All choices have consequences• Economic systems influence choices• Incentives produce “predictable” responses• Do what you do best, trade for the rest• Economic thinking is marginal thinking• Quantity and quality of resources impact living standards• Prices are determined by the market forces of supply and
demand and are constantly changing.
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When you understand the Keystone Principles, you will
• Understand How
• Understand Why
• Make Better Choices
• Become Empowered
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How Do We Define Economics?• The study of the allocation of scarce
resources– Resources : human, natural, capital, and
entrepreneurial. These productive resources are used to create the goods and services people want.
– Scarce : wants exceed resources– Allocation: deciding who gets it?
• In other words, who does what, how do they do it, and for whom do they do it?
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#1 We All Make Choices
• Scarcity forces us to choose
• Unlimited wants, limited resources
• Not making a choice is itself a choice
• Active, not passive
• Children need a framework for making choices that is best begun early
• Factors driving choices can be material, behavioral, moral, or some combination of all three.
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#1 We ALL Make Choices
Most of us
want to
maximize
our
benefits
BENEFITS
While minimizing our costs.
COSTS
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#2 TANSTAAFL™
• There• Ain’t• No
• Such• Thing
• As• A
• Free• Lunch
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#2 TANSTAAFL™
• Everything has a cost!• Don’t confuse “cost” with “price”• Opportunity Cost – the 2nd best choice (it is “The Road Not Taken”)• Costs are measured in many ways
– Material– Monetary– Labor v. foregone leisure– Time– Morality– Security
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#3 Choices Have Consequences
• Consequences lie in the future
• Predictability improves decision-making
• Observe patterns to make predictions
• Unpredictability leads to inconsistent decision-making
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#3 Choices Have Consequences
• Theory of unintended consequences
• Our character is the consequence of thousands of choices made throughout our lives.
• Understanding the past can help us start in the present to make choices that can change the future!
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1. Identify the problem2. Analyze alternative solutions and select the
two best3. Make a list of the foreseeable positive and
the negative consequences of each choiceBe sure to differentiate between the short-
run and long run when evaluating consequences
4. Select the best choice
Applying Costs, Choices, and Consequences to make sound decisions
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Pros Cons Pros Cons
Choice #2
My Decision: ____________________
_______________________________
Defining the Problem: _______________
_________________________________
Choice #1
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#4 Economic Systems Influence Choices
An “economic system” is the way societies organize themselves to answer the three basic questions of economics:• What to Produce?• How to Produce It?• For Whom to Produce It?
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# 4 - Economic Systems Influence Choices
Traditional Economies – A system that answers the what, how, and for whom questions by following what has always been done in the past. These economies are usually characterized by subsistence living and limited trade.
There are three basic systems. Most economies have some elements of all three.
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#4 - Economic Systems Influence Choices
• Command Economies – The answers to the economic questions above are made by a central authority, usually “the state.”
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• Market Economies – Decision-making carried out by buyers and sellers at mutually agreeable terms. Such economies are characterized by the decentralization of decision-making.
Because the United States is primarily a market economy, Keystone Principles focus on the daily impact of this system.
# 4 - Economic Systems Influence Choices
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#4 – Economic Systems Influence Choices
The main difference between economic systems:
• Who owns the resources
• Who incurs the costs of resources
• Who receives the benefits from resource utilization
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#4 – Economic Systems Influence Choices
A model of the Circular Flow
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#5 Incentives produce “Predictable” Responses
• Monetary and non-monetary. • That which is subsidized or rewarded will increase,
and that which is taxed or penalized will decrease.• To change behavior, change the incentive. • Sometimes it is only with hindsight that
“predictability” becomes obvious!
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#6 Do What You Do Best, Trade for the Rest.
(As long as the trade is voluntary, both parties are better off).
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#6 Do What You Do Best, Trade for the Rest
•Trying to produce everything yourself limits both production and consumption
• What do you “do best”?
•Sell what you produce at low opportunity cost.
•Buy what you would produce at a high opportunity cost.
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#6 Do What You Do Best, Trade for the Rest
• Trade works best when there is– Honesty– Transparency– Expected Gain for both
parties
• The gain for both parties does not need to be equal in order to be valuable.
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#6 Do What You Do Best, Trade for the Rest
•Trading goods and services with others adds value to seemingly disparate parties. This provides the incentive to ease social and political tension among people and nations.
Parity between trading partners is desirable.
Power and information disparities can make trade involuntary.
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#7 Economic Thinking is Marginal ThinkingIn thinking economically, economists coined the term “marginal” to describe the cost or benefit of attaining one one moremore unit of something.
Key QuestionDo the marginal benefits exceed marginal costs?
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Sunk Costs
Generally, we tend to “hang on” to questionable decisions made in the past because we want to get value out of time, effort, or dollars dedicated to some prior activity. We say, “I can’t sell my house, sell a stock, quit working toward a degree in art history, stop studying for a test, fire Smith, or change occupations because of all my time, dollars, or energy that I’ve already put in.” Your time, dollars, and energy are sunk costs and are gone.
#7 Economic Thinking Is Marginal Thinking
Doing one more thing is not always a good economic choice, and can be counterproductive.
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#8 Quantity and Quality of Resources Impact Living Standards.
The four factors of productiono Natural Resources (Land)o Human Resources (Labor)o Capital Resources (Equipment)o Entrepreneurial Resources (risk, profit motive)
•There are two ways for any given sector of an economy to grow – by taking growth from another sector and adding it to one’s own, or by growing the economy as a whole with all sectors participating in that growth (although not necessarily equally).•Over time, living standards rise by increasing the output of one or more of the four factors, even if the other three remain stable.
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#8 Availability and quality of resources influence living standards.
• To increase capital resources– technological changes• To increase human resources – better education, better skills,
higher birth rate, removal of age, race, gender and other barriers to employment
• To increase natural resources – environmental controls, land management
• To increase entrepreneurial resources – establishment of private property, patent and copyright laws, access to financial markets, friendly tax and regulatory policy
Here are some ways we can grow our resources:
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#8 Availability and quality of resources influence living standards.
Everyone is better off if we can grow our economy from this
Entrepreneurial Resources
Capital Resources
Natural Resources
Human Resources
TO THIS!
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• Supply and demand are the two words that economists use most often because they are the forces that make market economies work.
• These concepts work most efficiently in COMPETITIVE markets.
# 9 Prices are determined by the market forces of supply and demand.
The LAW OF DEMAND states that, other things being equal, the quantity demanded of a good falls when the price of the good rises, and rises when the price falls.
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# 9 Prices are determined by the market forces of supply and demand.
Price
Quantity
$2.00
$4.00
$6.00
1 2 3 4
Supply
Demand
$8.00
Equilibrium Quantity
Equilibrium Price
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# 9 Prices are determined by the market forces of supply and demand.
– Tastes– Costs of Substitute Goods/Services (hot dogs and
hamburgers– Costs of Complementary Goods/Services (hot
dogs and mustard)– Changes in income – Number of Buyers in the market– Expectations
Price is not the only determinant of demand. The demand curve can change (shift) because of such things as:
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·Shifts in supply are the result of changes in:Resource CostsCosts of Producing Other Goods with the Same ResourcesTaxes and/or SubsidiesTechnological ChangeExpectationsNumber of Sellers
# 9 Prices are determined by the market forces of supply and demand.
The LAW OF SUPPLY states that, other things being equal, the quantity of a good supplied rises when the price of the good rises, and falls when the price falls.
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# 9 Prices are determined by the interaction of supply and demand.
A specific scenario might help make the relationship clearer. How do we answer the question, “Why does a gallon of gas cost $3.00 this week, $3.50 next week and then $3.25 the following week?”
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#9 Prices are determined by the intersection of supply and demand
Market for GasolinePrice (per gallon)
Quantity
Supply
Demand
$3.00
9M Barrels
Demand II
$3.50
12M Barrels
Supply II
$3.25
13M Barrels
$0
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Resources for Teachers
You do not have to re-invent the wheel to teach economics!
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