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  1. It is Fun to Learn Economics http://www.youtube.com/results?search=ben&sort=video_view_count Or http://www0.gsb.columbia.edu/students/organizations/follies/media/EveryBreath.wmv

  2. Economics: The Core Issues Chapter 1

  3. In This Chapter… • What is Economics about? • The Core Issues in Economics • Key (Basic) Concepts in Economics • Why Study Economics?

  4. 1. What is Economics?

  5. 1. What is Economics? Definition: • Why are you here? • Why am I here? • Why should I teach you? Why should you have to register for my class?

  6. 1. What is Economics? Definition: • Economicsis the study of how best to allocate scarce resources among competing uses.

  7. 1. What is Economics? • In general we have relentless quest for more and better • This relentless quest for more arises from • Necessity • Increased income • Development and growth

  8. 1. What is Economics? • We have unlimited wants (desire)—It either grows or changes, but…. • But the RESOURCES from which we produce goods and services that satisfy our needs (wants) are limited. • Resources are Limited in Supply. That is, Resources are Scarce!!!

  9. 1. What is Economics? • Although resources are scarce, they have alternative (multiple) uses • To get the best out of the scarce resources we have, we choose between the alternative uses • Scarcity entails Choice, and choice involves Making Decisions

  10. 1. What is Economics? Summary • Economicsis the study of how best to allocate scarce resources among competing uses….. • Economics is the study of how the society chooses to allocate its scarce resources among alternative uses • The study of resource allocation • The science of choice

  11. 2. The Core Issues in Economics

  12. 2. Three Core Issues of Economics • WHAT to produce with our limited resources. • HOW to produce the goods and services we select. • FOR WHOM goods and services are produced; that is, who should get them.

  13. 2. Three Core Issues of Economics Fact! • All societies, Individuals, Economies face these Core Economic problems (Decisions) • Why?

  14. 3. Key (Basic) Concepts in Economics

  15. 3. Basic Concepts 3.1. Scarcity (What is scarcity)? • Scarcity is the lack of enough resources to satisfy all desired uses of those resources. • That is, we can’t have everything we want because relative to our wants, Economic Resources are limited in supply (availability). • Thus it is the foundation of economics

  16. 3. Basic Concepts 3.2. What are Resources? Are factors of production that are used to produce goods and services with which we satisfy our needs. Inputs that are needed to produce outputs

  17. 3. Basic Concepts • Four Basic Factors of Production

  18. 3. Basic Concepts • Land • refers to all natural resources such as crude oil, water, air, and minerals. • Labor • refers to the skills and abilities to produce goods and services.

  19. Factors of Production • Capital • Goods produced for use in the production of other goods, e.g., equipment, structures. • Entrepreneurship: • is the assembling of resources to produce new or improved products and technologies. (know how, managerial capacity)

  20. 3. Basic Concepts • 3.3. What is the economy? • The economy is an abstraction that refers to the sum of all our individual production and consumption activities. • The economy is us — the aggregation of all of our supply and demand decisions.

  21. 3. Basic Concepts • So far…. • What Resources are (Factors of Production) • What the Economy is ( an abstraction of us and our actions) • Scarcity of Resources (Limitation) and Insatiable Wants (desires) • Implication-1? • There is a limit to the output we produce!

  22. 3. Basic Concepts • Example: • Colonization of the Moon and Exploration of Mars • http://msnbc.msn.com/id/%204008805/ • or • http://cndyorks.gn.apc.org/yspace/articles/spaced_out_invaders.htm

  23. 3. Basic Concepts • No matter how an economy is organized there is a limit to how fast it can grow. • Recall: • We can’t have everything we want because relative to our wants, Economic Resources are limited in supply (availability)…. • The most evident limit is the amount of resources available for producing goods and services.

  24. 3. Basic Concepts • Scarcity — thus is the result of the imbalance between our desires and available resources • Implication-2? • —forces us to make economic choices. • What, how and how much to produce? • Choice between alternative uses • ….Definition of economics?

  25. 3. Basic Concepts • Studying how the society allocates its scarce resources Requires… • The knowledge of alternative combination of outputs that could be produced from the mix of the available resource(s) and • The Production Possibilities • The Costs of Making Choices… …. • Opportunity Cost

  26. Basic Concepts 3.4. Opportunity Costs • It is what is given up in order to get something else. (The best alternative forgone) • Opportunity cost is the most desired goods or services that are forgone in order to obtain something else. • The cost of allocating scarce resources for one use rather than the other use

  27. 3. Basic Concepts 3.5. Production Possibilities Curve (Frontier)—PPC (PPF) • A graphic representation of production possibilities • Production possibilitiesare the maximum alternative combination of goods and services that could be produced in a given period of time with all the available resources and technology.

  28. The Production Possibilities Curve (PPC)

  29. The Production Possibilities Curve (PPC)

  30. A 5 B 4 C 3 OUTPUT OF TRUCKS D 2 E 1 F 0 1 2 3 4 5 OUTPUT OF TANKS The Production Possibilities Curve

  31. The Production Possibilities Curve • Each point on the production possibilities curve depicts an alternative mix of output. • A(5 trucks, 0 Tanks) • B(4 trucks, 2 Tanks) • . • . • F(0 trucks, 5 Tanks)

  32. Production Possibilities Curve (PPC) also Illustrates Several Essential Principles and Core Issues • Scarce resources – there’s a limit to the amount we can produce in a given time period with available resources and technology.

  33. Currently not attainable A X 5 B 4 C 3 OUTPUT OF TRUCKS 2 1 1 2 3 4 5 0 OUTPUT OF TANKS

  34. 2. Opportunity Costs – we can obtain additional quantities of any desired good only by reducing the potential production of another good. Thus movement along the PPC represent opportunity cost How much we give up in the production of one output to get more of the other output)--tradeoffs

  35. Opportunity Costs A Step 1: give up one truck 5 B 4 Step 3: give up another truck Step 2: get twotanks C 3 OUTPUT OF TRUCKS Step 4: get one more tank D 2 E 1 F 0 1 2 3 4 5 OUTPUT OF TANKS

  36. It shows the Law of Increasing Opportunity Costs • Increasing quantities of any good can be obtained only by sacrificing ever-increasing quantities of other goods…? • Resources do not transfer perfectly from the production of one good to another.

  37. Increasing Opportunity Costs A Step 1: give up one truck 5 B 4 Step 3: give up another truck Step 2: get twotanks C 3 OUTPUT OF TRUCKS Step 4: get one more tank D 2 E 1 F 0 1 2 3 4 5 OUTPUT OF TANKS

  38. Some Real Life Examples • The Cost of North Korea’s Military • North Korea’s inability to feed itself is due in part to its large army. • Resources used for the military aren’t available for producing food.

  39. The Cost of North Korea’s Military A P G Reduced food output N C FOOD OUTPUT Military buildup O H D B MILITARY OUTPUT

  40. 16.3 12.0 4.1 3.8 3.4 2.8 2.7 1.5 1.2 1.0 0.9 0.5 India USA Japan China Bosnia Jamaica Mexico N. Korea Canada Germany S. Korea Saudi Arabia The Military Share of Output Percent of Output Allocated to Military

  41. 3.6. Efficiency and Inefficiency PPC also shows whether outcomes (of allocation decision) are Efficient or Inefficient. • Efficiency means getting the maximum output of a good from the resources used in production. • Every point on a production possibilities curves is efficient.

  42. Inefficiency • Recall that a production possibilities curves shows potential output, not necessarily actual output. • Thus if we are inefficient, actual output will be less than the potential output. • Any point inside the PPC represent inefficient outcomes • ?????

  43. Countries may end up inside their production possibilities curve if all available resources are not used. • ……Unemployment

  44. Unemployment A 5 B 4 C Y 3 OUTPUT OF TRUCKS 2 1 1 2 3 4 5 0 OUTPUT OF TANKS

  45. 3. Basic Concepts 3.7. Economic Growth Economic growth is an increase in output (real GDP) — an expansion of production possibilities. • PPC also shows Economic Growth or Decline • A point outside the production possibilities curve suggests that we could get more goods than we are capable of producing!

  46. Currently not attainable Recall- Currently Unattainable Levels A X 5 B 4 C 3 OUTPUT OF TRUCKS 2 1 1 2 3 4 5 0 OUTPUT OF TANKS

  47. with more resources or better technology, production possibilities curve may shift outward. • Such a shift represents Economic Growth

  48. PP2 PP1 Economic Growth OUTPUT OF TRUCKS 0 OUTPUT OF TANKS

  49. Back to the Core Issues in Economics

  50. Basic Decisions • Production possibilities define the output choices confronting a nation (the three core issues in economics): • WHAT to produce • HOW to produce • FOR WHOM to produce