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Basic Economic Concepts. Scarcity, Opportunity Cost & PPC Capitalism Characteristics Supply and Demand. SCARCITY. Economics is the study of limited resources and unlimited needs and wants Scarcity leads to making choices

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basic economic concepts

Basic Economic Concepts

Scarcity, Opportunity Cost & PPC

Capitalism Characteristics

Supply and Demand

  • Economics is the study of limited resources and unlimited needs and wants
  • Scarcity leads to making choices
  • Opportunity Cost is what is sacrificed when one choice is made over the “next best alternative”
  • Every decision has an opportunity cost
  • Marginal decision making = the result of an additional change
  • Marginal benefits vs. marginal costs is the basis for making the decision
  • Examples:

1 more hour of sleep vs. eating breakfast

Part time job vs. goofing off

College vs. full time job

production possibilities curve
Production Possibilities Curve
  • Illustrates scarcity, choices & opportunities costs
  • Points on the curve show production amounts possible for 2 goods

Capital goods

Point A

Consumer Goods


Capital Goods

Y = Point Not Possible

Point A

X = Point possible,

but inefficient

Consumer Goods

capitalism market economy
  • Ownership of all resources is in the hands of individuals
  • Decision making is by individuals in the market
  • Voluntary exchange of goods and services
  • Self interest influences all decisions – to the benefit of society
  • Competition is the regulating mechanism
capitalism market economy1
  • Markets and Prices coordinate the millions of decisions
  • System is facilitated by:
    • Specialization
    • Use of money
    • Technology
    • Active, but limited government involvement
capitalism market economy2
  • Basic Questions every society must ask:
    • What goods & services to produce?
    • How to produce?
    • How much to produce?
    • For whom to produce?
    • How will changes be implemented?
capitalism market economy3
  • Lesson on property rights – Power point
supply and demand
Supply and Demand
  • Go to Power Point on S & D
problem areas in ap economics
Problem Areas in AP Economics
  • Investment – term defined as business spending for capital equipment, machinery, factories, inventories, etc.
  • Personal investment is NOT used in Macro
  • Investment decisions are MB vs MC
  • MB = rate of return business will receive (profit motive = revenue – cost = profit)
  • MC = interest rate that must be paid to borrow funds for Ig (gross private investment)
problem areas in ap economics1
Problem Areas in AP Economics
  • Real Interest rate – cost of borrowing the money to buy the capital goods (machinery)
  • If rate of return is greater than the cost of the interest, the investment will be profitable
  • Ex: 10% rate of return is greater than 7% interest = profitable decision
  • Even if capital is financed by savings, it gives up interest earned on $$$savings
  • REAL interest is used – inflation adjusted $$ (nominal rate – inflation rate = real interest rate)
problem areas in ap economics2
Problem Areas in AP Economics
  • Investment Demand Curve shows amount of Ig at each real interest rate amount
  • Ig Demand Curve shifts (left or right) when other factors change:
    • Costs of production
    • Business taxes
    • Technology changes
    • Excessive inventories (no need for new production)
    • Expectations for future business conditions
problem areas in ap economics3
Problem Areas in AP Economics
  • Key Graphs to know and teach:
    • Circular Flow
    • PPC
    • Supply and Demand
    • Foreign Exchange Rates (S & D)
    • Investment Demand
    • Business Cycles
    • AD/AS (Short Run and Long Run)
problem areas in ap economics4
Problem Areas in AP Economics
  • Key Graphs to know and teach:
    • Loanable Funds (S & D) + AD/AS (Fiscal Policy)
    • Money Market + Ig Demand + AD/AS (Monetary Policy)
    • Phillips Curve (Long Run and Short Run)
    • Laffer Curve
    • Cost Curves (Micro)