Unit 1

1. Unit 1 Economic Fundamentals

2. Essential Question Summarize three points from the Economics syllabus.

3. Economics The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human material wants.

4. The economic perspective • Scarcity: human and property resources are limited, thus goods and services we produce are also limited. Question: How do we decided what everyone will have? Who gets what resources? • This is the fundamental problem of economics. Limited resources, unlimited wants.

5. Scarcity = unlimited wants, limited resources True or false… • Sunshine is scarce. • Because it is limited, smallpox is scarce. • Because water covers three-fourths of the earth’s surface and is renewable, it cannot be considered scarce. • Because it is not tangible, time is not scarce.

6. Scarcity To be scarce, something must be limited and desirable. Scarcity can be shown on a Production Possibility Curve.

7. The economic perspective Two assumptions: • Rational self-interest: we make rational decisions to achieve the greatest satisfaction. Question: Is rational self-interest the same as selfishness? 2. Marginal analysis: when we make choices, we base our decisions on marginal benefits and marginal costs.

8. The economic perspective Question: What should you do on Saturday? Should you study economics or practice football? What is the benefit of studying? What is the cost? What is the benefit of practicing? What is the cost?

9. The economic perspective • Opportunity cost (Marginal analysis): The amount of one thing you must give up to get another… • Give 5 examples of opportunity costs that you incurred in the past 24 hours.

10. Opportunity Cost ABSOLUTE ADVANTAGE: The ability to produce a product more efficiently (greater output per unit of input) COMPARATIVE ADVANTAGE: The ability to produce a product at a lower opportunity cost. Example: Lawyer and secretary, total self-sufficiency

11. Absolute Advantage • Which nation has an absolute advantage in producing Olives? • Which nation has an absolute advantage in producing grapes?

12. Comparative Advantage • Which nation has a comparative advantage in producing olives? • Which nation has a comparative advantage in producing grapes?

13. Comparative Advantage • Greece: • Opportunity cost of one pound of olives (ratio 8:40) 8/40 = 1/5 = .2 lbs of grapes • Opportunity cost of one pound of grapes (ratio 40:8) 40/8 = 5 lbs of olives • Italy: • Opportunity cost of one pound of olives (ratio 6:6) 6/6 = 1 lb. of grapes • Opportunity cost of one pound of grapes (ratio 6:6) 6/6 = 1 lb. of olives

14. Why study economics? • Well-informed citizens • Voting • Social issues • Professional Applications • Analytical skills • Skills in the business world (although economics is mainly an academic, not a vocational, subject.)

15. Essential Question Explain scarcity and opportunity cost. How are they connected?

16. Economic Goals • Economic growth • Full employment • Economic efficiency • Price-level stability • Economic freedom • Equitable distribution of income • Economic security • Balance of trade Question: Which of the above are goals of the United States?

17. Essential Question • List four economic goals of the United States.

18. Definitions • Macroeconomics: Economy as a whole. • Examines the forest, not the trees • Microeconomics: The focus is specific units. • Examines the trees, not the forest.

19. Economic Resources(Factors of Production)A.K.A. Inputs • Land: gifts of nature • Capital: all manufactured aids to production (not money) • Labor: workers (does not include entrepreneurial ability) • Entrepreneurship (enterprise): Initiative, innovation, risk bearer • Provide 3 examples of each economic resource.

20. Economizing problem • Do the best with what you have • Use scarce resources in the best way possible (efficient allocation) • To be efficient you must achieve full employment and full production 1. Full employment (use of all available resources) • Social customs determine what resources are available. Example: child labor

21. Economizing Problem 2. Full production (resources used so they provide maximum possible satisfaction of our material wants) • Productive efficiency: producing in the least costly way • Allocative efficiency: producing what society wants • Do we produce PCs or typewritters?

22. Production Possibilities Curve Production Possibilities Curve (PPC): A 2 dimensional representation of the different combinations of two products that can be produced with limited resources.

23. PPC • Any point on the curve shows that society is achieving full employment and productive efficiency. • Points inside the curve are attainable but not desirable because we do not achieve full employment and productive efficiency. An example is The Great Depression. • Points outside of the curve are not attainable with current resources and technology.

24. PPC • Read pages 25 – 28 • Opportunity cost: the amount of one product that must be given up to obtain another product. • Law of increasing opportunity costs: The more of a product that is produced, the greater its opportunity cost.

25. PPC • The law of increasing opportunity costs gives the curve its bowed out (concave) shape.

26. Essential Question • What does a point lying outside of the Production Possibilities curve signify?

27. Economic Systems • Pure capitalism Laissez-faire No government interference • Command Communism Public ownership of all resources Ex. Stalin’s Soviet Union

28. Economic Systems • Mixed Mixture of capitalist and command economies Ex. America, China • Traditional Economy is based on custom Heredity and caste dictate economic roles

29. Economic Systems • Economics systems are created to answer the following three basic questions of economics: • What to produce? • How to produce? • For whom to produce?