Economics

1. Economics

2. Why study economics? • Welcome to the exciting world of economics! • Affects daily lives • Helps us to make informed decisions • Helps us become more effective citizens

3. Economic Reasoning: Why are We A Nation of Couch Potatoes? • Definition: The social science that deals with how society allocates scarce resources among its unlimited wants and needs by examining alternatives and considering the opportunity costs for each alternative • Economic reasoning can be used to explain a wide range of human behavior.

4. Key Idea #1: Scarcity • Chief economic problem—faced in all societies • Condition of having to choose among alternatives • Idea of limited resources and unlimited wants and needs • Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives. • Scarce good versus free good

5. How Do You Know When Scarcity Forces You to CHOOSE Something Is Scarce? SCARCITYCHOICE

7. Opportunity Cost: the foregone alternative Think: “next-best”

8. Scarcity IS:Even in the face of abundance . . . What’s scarce when you’re in the Mall of America? at the all-you-can-eat buffet?

9. Key Idea #2: Choice • Scarcity leads us to choose between alternatives • Choices are on an individual (micro) and societal (macro) level • Three economic questions • What should be produced? • How should goods and services be produced? • For whom should goods and services be produced?

10. People’s Choices are always RATIONAL Rational choice = choosing the alternative that has the greatest excess of benefits over costs. If ALL choices are rational, then the challenge is to understand the decision-maker’s perception of costs and benefits.

11. Key Idea #3: Opportunity Cost • Definition: the value of the best alternative forgone when making any choice • Most important concept in economics • TINSTAAFL

12. Why are We A Nation of Couch Potatoes? • Which well known people do Americans tend to admire? • How are Americans’ exercise and diet habits changing?

13. Why are We A Nation of Couch Potatoes? • On the one hand, Americans admire people who look slender and physically fit.

14. Why are We A Nation of Couch Potatoes? • On the other hand, according to the Center of Disease Control and Prevention • ~25% of Americans are getting enough exercise • ~35% are overweight • Percentage of children who are overweight has doubled since the early 1970s

15. Why are We A Nation of Couch Potatoes? • Economic Mystery: Why do an increasing number of Americans, the same people who admire the trim, slender look so often featured in the media, exercise too little and eat too much?

16. True or False? • Few Americans know that exercising more and eating less can help many people become healthier. • Exercise and a healthful diet are free. • In jobs that involve physical work, exercise is like a fringe benefit. • The price of food has been increasing. • Passive modes of entertainment like-TV and video games-are popular. • Common jobs in the past-in mining, farming, and manufacturing-were much safer than today’s jobs in technology, law and finance.

17. Solve the Mystery! • Read Activity 1 and answer the questions on a separate sheet of paper (10 minutes).

18. Guide to Economic Reasoning • People choose. • People’s choices involve costs. • People respond to incentives in predictable ways (monetary, nonmonetary, positive, negative). • People create economic systems that influence economic choices and incentives • People gain when they trade voluntarily. • People’s choices have consequences that lie in the future.

19. Applying Economic Reasoning to Couch Potatoes! • What are some of the costs associated with failure to exercise enough and being overweight? • What incentives might influence people to exercise less and eat more? • How might you solve the mystery? • What are some ways to change the incentives associated with exercise and diet?’

20. Article Tasks Step 1 • Please read and code your assigned article. • Put an * by any material you think is a main idea. • Put an ! by any material you think is surprising or interesting. • Put a ? by any material you do not understand/have questions about.

21. Article Tasks Step 2 • Get in groups of 4 people with the same article and answer the questions about your article.

22. Article Tasks Step 3 • Find a partner (based on article numbers) who did not read the same article as you and do the following: • Summarize the article for your partner. • Identify and explain at least one item from each coding category (*,!, ?) • Explain how your article relates to the Couch Potato lesson (Does it contradict or support the lesson? How and why?)

23. The Economic Way of Thinking: What differentiates economics from other social sciences? • Economists emphasize the role of opportunity costs in analyzing choice • Opportunity cost versus opportunity benefit (what is gained by making a particular choice) • Expected benefits of alternatives will affect choices • As set of alternatives change, choices change

24. Choices impose costs; people receive benefits and incur costs when they make decisions. The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up. Opportunity Cost:

25. Opportunity Cost Analysis What was the 1st decision you made this morning?

26. Opportunity Cost = the Next-Best Alternative Identifying Opportunity Cost: What are the considered alternatives? Prioritize the alternatives – What is the best and what is the “next-best”? What would you do – not what could you do? What does the decision-maker perceive to be the benefits of each alternative?

27. Opportunity Cost Analysis Decision Maker: YOU

28. Opportunity Cost Analysis Decision Maker: YOU More sleep

29. Opportunity Cost Analysis: Decision Maker = YOU More sleep X

30. Opportunity Cost Analysis: Decision Maker = YOU

31. Use the concept of opportunity cost to discuss the following questions: Who might choose to get bumped from a flight? Should Tiger Woods mow his own lawn? What is the cost of attending college? for LeBron James? for you?

32. The Economic Way of Thinking: What differentiates economics from other social sciences? • Motivation for choices is to maximize value of some objective/and objectives defined by self interest • Business owners motivation is to maximize profit • Consumers make choices to maximize satisfaction (utility) • Self interest doesn’t necessarily mean that people are greedy/selfish

33. The Economic Way of Thinking: What differentiates economics from other social sciences? • Motivation for choices is to maximize value of some objective/and objectives defined by self interest • Economists study all sorts of choices: how people choose life partners, voting, drug use etc.

34. The Economic Way of Thinking: What differentiates economics from other social sciences? • Individuals maximize choices by using marginal decision making • Margin—current level of activity • Marginal decision making– deciding to do a little more or a little less of something

35. People respond to incentives in predictable ways. • Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways. • Incentives may be positive or negative. • Incentives may be monetary or non-monetary.

36. Microeconomics/Macroeconomics • Microeconomics branch of economics that examines the choices and interaction of individuals concerning one product, firm, or one industry (how individual producers and consumers respond to changes in market) • Macroeconomics the branch of economics that examines the behavior of the whole economy at once unit of analysis not individual but economy as a whole

37. Micro or macro? You decide • Comparing unemployment rates of Germany and the United States • How the price of milk is determined • The impact of preservation of wilderness areas on the logging industry and on the price of lumber • Increases in US consumer demand

38. Importance of Economic Theory • Theory: simplified description of reality • Why is theory important even if it is sometimes incorrect or can’t predict outcomes 100% of the time? • Model: simplified form of reality which shows the relationship between different factors • Economic theory simplifies reality

39. Ceteris Paribus Assumption • All other things unchanged • Assumption that only one variable changes at a time • Economists do this because they want to get a general sense of the direction of relationships

40. Normative versus Positive Statements • Normative- a statement that makes a value judgment • Positive-a statement of fact or a hypothesis

41. Normative or Positive? You decide! • Ms. Hartsfield is shorter than most students at SMCHS. • Ms. Hartsfield has two of the cutest babies ever! • Ms. Hartsfield has two children. • Ebenezer is a cloth snowman.

42. Chapter 2Confronting Scarcity: Choices in Production

43. Review What is the economic way of thinking? Scarcity forces us to choose and economists analyze opportunity costs when analyzing choices People are motivated to maximize their self interest Individuals maximize choices by engaging in marginal decision making

44. Factors of Production Definition: resources available to an economy for the production of goods and services Factors of production (FOP) create utility. Utility is the value or satisfaction that people derive from the goods or services they consume

45. Factors of Production Land (natural resources)-resources of nature that can be used in the production of goods and services Must be found in nature Expansion occurs through: Discovery of more Discovery of new use New ways of extraction

46. Factors of Production Labor-human factor in production Natural ability Human capital Increase labor through Increasing number of people available Increasing human capital

47. Factors of Production Capital-resources produced for use in the production of goods and services Resource must have been produced Resource can be used to produce other goods and services THIS DOES NOT MEAN FINANCIAL CAPITAL (money)

48. Factors of Production Entrepreneurs change the way that the factors of production are used by putting new technologies to work Entrepreneur person who seeks to earn profits by finding new ways to organize the factors of production (sometimes classified as the fourth factor of production) Technology knowledge that can be applied to production of goods and services

49. Case in Point: Technology Cuts Costs, Boosts Productivity and Profits Read p. 41 Who are the winners and losers from technology? Consumers Producers Workers

50. Land, labor or capital? An unemployed factory worker A college professor The SMCHS library Yellowstone National Park An untapped deposit of natural gas The White House A power plant