What is Economics?

1. What is Economics?

2. What is Economics? The study of choice under the conditions of scarcity. • Microeconomics-study of the behavior and decision making by small units such as individuals and businesses. • Macroeconomics-study of the behavior and decision making of large units such as governments.

4. Scarcity~ The concept that there are limited resources for unlimited wants Scarcity and Shortage • Shortage~ A condition that occurs when producers will not or cannot offer goods and services at the current price. What is the difference between scarcity and shortage?

5. Trade-offs- All the alternatives that we give up whenever we choose one course of action over another. • Individuals • Businesses • Governments Opportunity Cost- The most desirable alternative given up as the result of a decision. The next best thing!! Thinking at the Margin- Deciding whether to do or use one additional unit of some resource. Chapter 1, Section 2:“Choosing is Refusing”

6. The Government Trade-Off: GUNS OR BUTTER?

7. We authorize the government, through the Constitution and elected officials, to raise money through taxes. • Must originate in the House (Ways and Means) • House-Senate-President • Taxation is the primary way that the government collects money. • Without revenue, or income from taxes, government would not be able to provide goods and services. Our Role in Funding the Government

8. The Power to Tax • Article 1, Section 8, Clause 1 of the Constitution grants Congress the power to tax. • The Sixteenth Amendment (introduced 1909, ratified 1913) gives Congress the power to levy an income tax. • Historical Context: Great Depression- Social Security Act (1935)- WWII – 80’s - Present Limits on Power to Tax • 1. The purpose of the tax must be for “the common defense and general welfare.” • 2. Federal taxes must be the same in every state. • 3. The government may not tax exports. Power and Limits of Taxation

9. Proportional Taxes A proportional tax is a tax for which the percentage of income paid in taxes remains the same for all income levels. • Progressive Taxes A progressive tax is a tax for which the percent of income paid in taxes increases as income increases. • Regressive Taxes A regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases. Tax Structures

10. Person A (Low-Income)- $15,000 Person B (Middle-Income)- $75,000 Person C (High-Income)- $225,000 Tax Activity

11. Simplicity • Tax laws should be simple and easily understood. • Economy • Government administrators should be able to collect taxes without spending too much time or money. • Certainty • It should be clear to the taxpayer when the tax is due, how much is due, and how it should be paid. • Equity • The tax system should be fair, so that no one bears too much or too little of the tax burden. What is a “good” tax?

12. Social Security Taxes This program is funded by the Federal Insurance Contributions Act (FICA). Most of the FICA taxes you pay go to Social Security, or Old-Age, Survivors, and Disability Insurance (OASDI) Medicare Taxes Medicare is a national health insurance program that helps pay for health care for people over 65 and for people with certain disabilities. Medicare is also funded by FICA taxes. Unemployment Taxes Unemployment taxes are collected by both federal and state governments. Workers can collect “unemployment compensation” if they are laid off through no fault of their own and if they are actively looking for work. Other Taxes Federal Income Taxes Excise Taxes Estate Taxes Gift Taxes Import Taxes Types of Taxes

13. Hannity on the Budget The Politics of Tax and Spend The Federal Budget: “Guns or Butter” Obama Defends Budget Ron Paul on Government Spending

14. Spending Categories • Discretionary Spending • Money that government • planners can choose how • to spend. • Defense • Education • Training • Environmental cleanup • National parks and monuments • Scientific research Mandatory Spending Money that lawmakers are required by law to spend • Interest payments on the national debt • “Entitlement” programs (Social Security, Medicare and Medicaid) • Makes up almost 2/3 of federal budget • Problem because Congress and the President cannot control much of spending.

15. How the Money Comes In: Revenue

16. Where the Money Goes: Spending

19. Appropriation Subcommittee Reports a Bill Appropriation Subcommittee Reports a Bill Sent to President Full Committee Approves Full Committee Approves Conference Committee Meets to Resolve Differences Sent to the Floor Sent to the Floor House Senate The Budget Process

20. Fall/Winter • Agencies send initial budget requests to the Office of Management and Budget (OMB) • February to August • President submits budget request to Congress • Congress debates budget request • September • House-Senate resolve differences and agree on spending bills • President signs or vetoes final bills • October 1st • Beginning of fiscal year What is the budget timeline?

21. Analyze the federal spending pie chart on page 371. Consider the difference between mandatory and discretionary spending as described on pages 371-374. 1. Create your own federal spending pie chart based on your priorities. You may not “leave it the same”…think critically about what you think is the best way to spend our tax dollars! You can add and delete items! 2. Explain the rationale for your spending choices. Also, identify “winners and losers” with your additions. 3. If you had to maintain all mandatory categories how would your decisions have been different? Discuss. Guns or Butter?

23. What can we learn from looking at a Production Possibilities Graph/Frontier? • Trade-Offs/Cost- Alternative given up as a result of a decision. Every point on the PPF indicates a cost in on item or another. • Efficiency- Making the best possible use of resources (any point on the PPF) • Underutilization/Inefficiency- Misuse or waste of resources (any point inside the PPF) • Growth- Expanding an economy’s ability to produce (shift of the entire curve to the right or any point to the right of the PPF) ~New Technology/Innovation ~Increase in Resources