Chapter 1: The Economic Way of Thinking

1. Chapter 1: The Economic Way of Thinking

2. Sec. 1: Scarcity: The Basic Economic Problem

3. What is Scarcity? • Wants – • Needs – • People always want more, no matter what they have • wants are unlimited, but resources to fill are limited • Scarcity – • not a temporary shortage, it is a problem facing individuals, businesses, govt., society • Science to study it is called economics

4. Economics – the study of how people choose to use scarce resources to satisfy their wants • Econ involves: • Examining – • Organizing, analyzing, and interpreting data about those economic behaviors • Developing theories and economic laws that explain how the economy works and to predict what might happen in the future.

5. Principle 1: • Choice is central to the use of scarce resources. • Choices about needs – what kind of food • Choices about wants – these are unlimited & ever changing • Principle 2: • Scarcity affects which goods are made and services are provided • Goods – physical objects that can be purchased • Services – work that one person performs for another for payment • Consumer – • Producer –

6. Scarcity Leads to 3 Questions

7. Question 1: • Society must decide the mix of goods and services it will produce • what is produced depends on the natural resources possessed • but resources do not completely control what a country produces • some countries decide by allowing consumers and producers to decide • in other countries, the govt. decides what goods and services will be produced • This question also involves how much to produce • the country must review its wants at any time to decide this

8. Question 2: • This involves using scarce resources in the most efficient ways to satisfy wants • this is also influenced by the natural resources that a society possesses • ex. - growing crops – different approaches • large unskilled labor force – labor intensive methods – few machines • highly skilled labor force – capital intensive – lots of machines

9. Question 3: • This involves how goods will be distributed among people in society • Questions –Need to determine how much people should get how much they pay or equal share • Distribution networks –

10. -the economic resources needed to produce goods and services The Factors of Production

11. Factor 1: • Includes all natural resources found on or under the ground that are used to produce goods and services

12. Factor 2: • is all the human time, effort, and talent that goes in to the making of products

13. Factor 3: • is all the resources made and used by people to produce and distribute goods and services • ex. – • human capital – • ex. – college, job training

14. Factor 4: • Is the combination of vision, skills, ingenuity, and willingness to take risks that is needed to create and run new businesses • most entrepreneurs are innovators • try to anticipate and meet needs of consumers in new ways • new product, method of production, way of marketing or distributing • Are also risk takers – risk time, energy, creativity, money in hope for profit

15. Sec. 2: Economic Choice Today: Opportunity Cost

16. Making Choices -What shapes the economic choices? -incentive – -utility – -“economize” – consider both incentive and utility – -make decisions according to what you believe is the best combination of costs and benefits

17. Factor 1: Factor 2: Every choice involves costs Money, time, or something else of value • Choices are shaped by incentive, expected utility, and the desire to economize • Costs vs. benefits – looking for best mix of costs and benefits • Making decisions – guided by self-interest – looking for ways to maximize utility 

18. Trade-Offs and Opportunity Costs Trade-offs –

19. Example 1: Example 2: Opportunity cost – Alternative over another *choice – work for year vs. work for 6 months and travel for months Selects work for 6 months and travel for 6 months – less income, but visits friends • *choice – semester long course at university vs. 6 week course at high school • selects 6 week course, less credits, but gets summer vacation

20. Analyzing Choices -cost-benefits analysis – -useful tool for individuals, businesses and govt. when to evaluate relative worth of economic choices

21. Example: Max’s Decision-Making Grid • application of cost-benefit analysis is decision-making grid • shows what you get and what you give up when you make choices • costs and benefits change over time, as do goals and circumstances • changes influence decisions people make

22. Example: Marginal Costs and Benefits • marginal costs – • marginal benefit – • analysis is central to study of economics • helps explain the decisions consumers, producers, and govt. make as they try to meet their unlimited wants with limited resources

23. Sec. 3: Analyzing Production Possibilities

24. Graphing the Possibilities • Economic models – • Production Possibilities Curve(PPC) – a graph used to illustrate the impact of scarcity on an economy by showing the maximum number of goods or services that can be produced using limited resources

25. PPC assumptions • Resources are fixed – no way to increase the availability of land, labor, capital and entrepreneurship • All resources are fully employed – there is no waste of any of the factors of production • Only two things can be produced – assumption simplifies the situation and suits the graphic format – one variable on each axis • Technology is fixed – no technological breakthroughs to improve methods of production • -Curve represents border or frontier between what is and what is not possible to produce also called a Production Possibilities Frontier useful for bus. & govt., but can be used by individual

26. Production Possibilities Curve • Figure 1.3 – 5 production possibilities for loaves of bread and bran muffins • Figure 1.4 – graph plotted from data in table – line is the PPC • points represent maximum of one product relative to the other • also shows opportunity cost of one product compared to the other

27. What We Learn From PPCs • No economy operates according to simplified assumptions of PPC • but it spotlights concepts that work in the real world of scarce resources • Efficiency – • Underutilization –

28. Example: Efficiency and Underutilization • Figure 1.5 – guns vs. butter – military vs. consumer production • each point the on curve shows different combination of each, and each represents efficiency • each point inside the curve is underutilization, and points outside the curve are impossible because resources are fixed

29. Law of Increasing Opportunity Costs

30. Example: Increasing Opportunity Costs • Figure 1.5 – switching from guns to butter or butter to guns • each additional unit costs more to make than the last, explains bow shape of curve • reason – making one is different from making the other – new machines, factories, and retrain Workers

31. Changing Production Possibilities • The PPC represents present PP if resources are fixed, but that usually changes over time • additional resources means new PP and the PPC moves outward  • Example: A Shift in the PPC in the 1700s the US occupied only a small area along the Atlantic • 100 yrs. Later, it expanded to the Pacific – meaning the addition of resources, in addition to the added immigrants means additional labor • this is shown on the PPC as a shift of the curve outward – this is called economic growth

32. Sec. 4: The Economist’s Toolbox

33. Working with Data • Economics is something that everyone knows and works with everyday • Economists study this to figure out why some nations are rich or poor and why consumers want one product while others want another product • Statistics –

34. Using Economic Models • Models are based on assumptions and are simplified because they are based on a limited number of variables • models expressed in words, graphs or equations • explain why things are as they are, help predict future economic activity

35. Using Charts and Tables • Look for trends, connections and other interesting relationships • Showing numbers in relation to other numbers can reveal patterns in the data

36. Using Graphs • Graphs are used to ID trends in statistics • Line graph – useful for showing changes over time • Line graphs use 2 sets of numbers or variables – one on horizontal and one on vertical axis • The numbers of what is being used are plotted on the graph and connected to form a line • upward slope – upward trend • downward slope – downward trend • straight line – same slope • curved line – varied slope

37. Bar Graph – useful for comparisons • vividly shows changes in data • Pie Graph – • slices drawn in proportion to the number they represent

38. Microeconomics & Macroeconomics -Microeconomics – -Macroeconomics – is the study of the behavior of the economy as a whole and involves topics such as inflation, unemployment, aggregate demand, and aggregate supply

39. Microeconomics • Micro – • examines specific, individuals elements in the economy • prices, costs, profits, competition, behavior of consumers and producers • areas of specialized concentration • business organization, labor markets, agricultural economics, econ of environmental issues

40. Macroeconomics • Macro – • examines the big picture – economy as a whole • the effect of widespread unemployment on the whole nation • a general rise on prices • studies the consumer sector (household sector), business sector, and public or govt. sector • Sector – • bring a national or global perspective to work • study monetary system, up and down of business cycles, impact of national tax policies on economy, international trade and effect on rich and poor nations

41. Positive Economics and Normative Economics -Positive economics – way of describing and explaining economics as it is and not how it should be, involves verifiable facts - Normative economics –

42. Positive economics Normative economics Based on value judgments goes beyond facts to ask if actions are good, values differ, so then recommendations will • Uses scientific method – • Statements can be tested against real world data and either proved or disproved

43. Adam Smith: Founder of Modern Economics • Born in Kirkcaldy, Scotland in 1723 • Studied and taught literature, logic, and moral philosophy • 1764 – traveled to France – the Enlightenment – result – looked at world in new way

44. -1776 – • challenged idea of mercantilism – govt. controlled trade with its colonies • said free trade would be better • said people behave in ways that satisfy their economic self-interests • an invisible hand guides the marketplace • buyers and sellers benefit from each transition • becomes foundation of modern economics