Economics Chapter 1: What is Economics?

Economics

Chapter 1: What is Economics?

http://www.investopedia.com/university/economics/




Table of Contents Economics? Factors of Production Outputs Scarcity Production Possibilities Graph Trade-offs Other Vocabulary

1. Define Economics and explain the difference between Macroeconomics and Microeconomics.

Economics:

The study of how people seek to satisfy their needs and wants by making choices

The study of scarcity

Economics“’[E]conomy is the art of making the most of

life.’ Economics is the study of how we do that. There is finite supply of everything worth having: oil, coconut milk, perfect bodies, clean water, people who can fix jammed photocopy machines, etc. How do we allocated these things?”

--Naked Economics, page 5

What are the 2 different types of Economics?

MacroeconomicsMacroeconomics Entire economics A “Bird’s eye-view” Examples: overall

prices, national income

THINK BIG!!!

MicroeconomicsMicroeconomics Small units A “Worm’s eye-view” Examples:

individuals, families, businesses

Think small.

2. List the five Factors of Production (inputs)

What are the Factors of Production?

Resources that are used in the production of ALL goods and services.

AKA: INPUTS Land Labor Capital Entrepreneurs Technology

Land

Natural Resources

Examples: fertile agricultural land, ore deposits,

tuna fish, corn seeds

LaborEffort that people

devote to a task

Capital

Physical CapitalPhysical Capital Tangible

(can be touched) Examples: tools,

Factories

Human CapitalHuman Capital Skills & knowledge

gained by education & experience

Human-made goods used in the production of other goods and services

EntrepreneursLeaders who combine

the Land, Labor, and Capital to make new goods and services

Example: Running a service that hires people to install a sprinkler system in lawns

Entrepreneur Joke

“Why did the entrepreneur cross the road?

Because he could make more money on the other side.


TechnologyMakes Factors of

Production more productive

What happens when you have all of your Factors

of Production?

You can make new products…

IINNPPUUTTSS

OOUUTTPPUUTTSS

What are some examples of Outputs?

Needs and Wants

Goods and Services

3. What is the difference between…

NeedNeed Necessary for

survival

Examples: Air, water, food, shelter

WantWant We desire, NOT

really essential to survive

Examples: specific type of food

4. What is the difference between…

GoodsGoods Physical objects

Tangible (can be touched)

Examples: shoes, clothing

ServicesServices Actions / Activities

that one person performs for another

Intangible

Examples: Education, healthcare, leisure

5. What is scarcity and why is it so important in society?

Scarcity Limited quantities to

meet unlimited wants

ALL RESOURCES ARE SCARCE!!!

Examples: Lack of workers, water, time

6. What is the difference between scarcity and a shortage:

ShortagesA good or service is

unavailable

A) Temporary – example: holiday season

B) Long-term –example: wars & droughts

10. What is a trade-off and what is meant by the phrase Guns or Butter?

Trade-off An alternative we sacrifice when we

make a decision

Trade-offs“ We may pay a few cents extra for dolphin-safe tuna or send money to a favorite charity. Both of these things can give us utility; neither could be selfish. Americans give over $200 billion to assorted charities every year. We hold doors open for strangers. We practice remarkable acts of altruism.”

-- Naked Economics, page 8

Trade-offs

“None of this is incompatible with the basic assumption that individuals seek to make themselves as well off as possible, however they happen to define that. Nor does this assumption imply that we always make perfect—or even good—decisions. We don’t.”


Trade-offs

“But each of us does try to make the best possible decision whenever information is available at the time.”


Trade-offs

“[W]e may use a credit card to purchase a big-screen television today even though the interest on the credit card debt will lessen the amount we can consume in the future.”


Example: Credit CardsExample: Credit Cards

12. What is meant by the term, Thinking at the Margin. Provide an example.

Thinking at the Margin

Deciding whether to do or use ONE ADDITIONAL UNIT of some resource

Uses the Factors of Production

Examples: Hire another worker

Grow beans or corn on a large farm?


You should ONLY go to another year of college if the benefits from the additional year of schooling exceeds the cost of attending that year

Weigh: does marginal benefit exceed marginal cost? If so, its worth it!!!

Example: Going to CollegeExample: Going to College


In 1998, President Clinton vowed to end “drive-by deliveries”—he wanted Congress to consider a mandate that “insurance companies cover the cost of two nights in the hospital for women who have delivered babies, rather than just one.”

--Naked Economics, page xvii

Example: An end to “drive-by deliveries”Example: An end to “drive-by deliveries”


“An extra night in the hospital is not medically necessary in most cases, but it is expensive, which is why new parents don’t pay for it themselves and insurance companies don’t want to pay for it either.”




“If insurance companies are forced to offer this benefit (or any other new benefit mandated by law), then they will recover their extra costs by raising premiums. And when premiums go up, some people on the margin will no longer be able to afford any health insurance at all.”




“So the real policy question is: Are we willing to pass a law that will make many women more comfortable if it means that a smaller number of men and women will lose coverage for basic care?”



7. What does the Production Possibilities Graph show?

Production Possibilities Graph

A graph that shows the alternative / possible ways to use an economy’s resources

8. What is the significance of the Production Possibilities Frontier?

Production Possibilities Frontier

A line that usually curves on a Production Possibilities Graph

Shows the Maximum possible output amount that an economy can produce

Represented by Line B

9. What is the difference between efficiency, growth, and underutilization on a Production Possibilities graph and how is shown on the graph?

Efficiency Using all resources

to Maximize the production of goods and services

Normally, is located on the PPF

Represented by “Z”

Underutilization Using FEWER

resources than an economy is capable of using

Represented by “X” and “Y”

Growth Entire PPF “shifts to

the RIGHT”

Caused by a change in quantity or quality of Factors of Production available

Represented by “C”

What happens when an economy grows?

It gains more of the Factors of Production, such as more workers, factories, technology.

Result: Efficiency also changes

Efficiency now indicated by “W”

Underutilization now indicated by X, Y, & Z.

Side note: If an economy loses

Factors of Production, this is called Shrinkage.

If PPF was originally Line B, and shrinkage occurs, the new PPF becomes Line A

Guns or Butter A country must

decide how much MILITARY (guns) or CONSUMER (butter) to produce

Shown on a PPF

Guns or Butter If EFFICIENCY is

closer to Guns, it means the economy is able to produce more MILITARY

Represented by “G”

Guns or Butter If EFFICIENCY is

closer to BUTTER, it means the economy is able to produce more CONSUMER

Represented by “B”

11. Explain Opportunity cost (cost), including a good example.

If you were NOT at school, what would you

rather be doing?

Sleeping

Playing video games

Swimming

Playing a sport

“Chasing boys” or “Chasing girls”

Hanging out with friends

Eating

Opportunity Cost

AKA: Cost

The most desirabledesirable (attractive) alternative GIVEN UPGIVEN UP as a result of a decision

Examine by looking at a PPG

Opportunity Cost

Includes: Tuition payments, Time you could have spent working, potential wages

Excludes: Room and board payment (would have had to pay even if were not in college)

Example: Going to CollegeExample: Going to College

Opportunity Cost

“[Y]ou make derive some satisfaction from whacking your boss on the head with a canoe paddle at the annual company picnic. But the momentary burst of utility would presumably be more than offset by the disutility of spending many years in federal prison.”


Example: Your Boss Example: Your Boss

Opportunity Costs

“We may spend years in [college] eating ramen noodles because it dramatically boosts our standard of living later in life.”


Example: College Example: College

Production Possibilities Graph

A graph that shows the alternative / possible ways to use an economy’s resources

13. Explain the Law of Increasing Costs. Provide an example.

Law of Increasing CostsAs we shift the

Factors of Production from making 1 good or service to another, the cost of producing the second item increases

Law of Increasing Costs

For example, if we move from point O to point C, we are not able to produce as many Peas because we can now produce more Corn

Law of Increasing Costs

Therefore, when we produce more Corn, our COSTCOST is not producing as many Peas

Cost-Benefit Analysis“Consider a well-intentioned proposal to

require that all infants and small children be restrained in car seats while flying on commercial airlines. During the Clinton administration, FAA administrator Jane Garvey told a safety conference that her agency was committed to ensuring that children are accorded the the same level of safety in aircrafts as are adults.”

Cost-Benefit Analysis

“Using a car seat requires that a family buy an extra seat on the plane, which dramatically increases the cost of flying. Airlines no longer offer significant children’s discounts; a seat is a seat, and it is likely to cost at least several hundred dollars. As a result, some families will choose to drive rather than fly.”

Cost-Benefit Analysis

“Yet driving—even with a car seat—is dramatically more dangerous than flying. As a result, requiring car seats on planes might result in more injuries and deaths to children (and adults), not fewer

--Naked Economics, p. 29

Other Vocabulary…

14. What is the difference between

Demand and Supply?

DemandDemand

Consumers are willing and able to purchase

SupplySupply

Businesses are willing and able to sell

Demand is defined as the amount of goods or services a person is willing and able to purchase at a given price. For example, Jane really wants a car. In order to create demand, Jane needs to be able to purchase the car. The amount of cars Jane demands depends on the price the cars are being sold at.

For example, if the car that Jane wants is really cheap ($10,000), Jane could possibly demand three cars (perhaps she wants one for the weekend, one for the weekday, and one to show off to her friends). If, on the other hand, the price of the car is really expensive ($50,000), Jane only demands one car because that is all she can afford (hence the willing and able part). Usually with demand, price and quantity demanded are inversely related—meaning price and quantity are moving in opposite directions. This means that when price increases, people demand less of a product; when price decreases, people demand more of a product.

Supply is defined as the amount of goods or services a business is willing and able to sell at a given price. Price is what the business sells a product to consumers for. When prices are lower, suppliers are less willing (and able) to sell a product for; when prices are higher, suppliers are more willing (and able) to supply a product. The relationship between price and quantity supplied are directly related—meaning they move in the same directions.

Demand and Supply

The interaction of demand and supply result in the prices of products.

15. What is the business cycle? Fill in below and describe the four parts of the business cycle, including the two extremes.

Business Cycle

A period of macroeconomic expansion followed by a period of contraction

An “economic roller-coaster” showing the ups and downs of an economy

Business Cycle

Expansiongrowth, recovery

Trough

Peak

Contraction

Business Cycle + 2 Extremes

Peak

Expansiongrowth, recovery

Trough

Contraction

Recession***

Depression***

. The business cycle represents the economy’s “roller coaster.” There are only four parts to the business cycle: expansion, peak, contraction, and trough. There are “ups”—called recovery, expansion, or growth; there are “downs”—called contractions. When an economy stops rising, this is called a peak (like the top of a mountain). When an economy stops falling, this is called a trough (pronounced, “trof”). When the economy is really not doing well, the economy can experience some extremes—which are NOT part of the business cycle. A prolonged economic contraction is called a recession; a very severe contraction is called a depression.

16. Who is Ben Bernanke?

Who is Ben Bernanke? Replaced Alan Greenspan on

February 1st, 2006 as the new Chairman of the Federal Reserve (FED)

Who is Alan Greenspan?

Former Chairman of the Board of Governors of the Federal Reserve (FED)

www.federalreserve.govhttp://www.federalreserve.gov/bios/greenspan.htm

http://www.federalreserve.gov/

http://www.federalreserve.gov/bios/greenspan.htm

Federal Reserve (Fed) In charge of monetary policy

17. Explain the factors that influence the health of an economy including Gross Domestic Product (GDP), interest, inflation, monetary policy, and fiscal policy.

Gross Domestic Product (GDP)

The dollar value of all final goods and services produced within a country’s borders within a given year

Measures the health of an economy

Want to increase

FYI: Gross Domestic Product (GDP)

is different fromGross National Product (GNP)

Both measure the health of a society. Like GDP, normally the greater the

amount of GNP indicates that an economy is doing well

Interest

The price paid for the use of borrowed money, or, money earned by deposited funds.

InterestExample: You want to buy a new car for $5000 Problem: you don’t have enough money

to buy the entire car. You go to the bank and ask to borrow

$5000 If you are approved (you may need a

parent’s signature), you get the money…

Interest However, not only do you have to pay

back the $5000, you have to pay back INTEREST

When you include interest into the calculation, you will pay more money every month and during the course of the loan

Inflation A general increase in prices

Example:

When your parents were younger, they paid less for the same product

Inflation Once upon a time, Miss Kroope turned

16 years old (in 1996) and got her driver’s license.

How much do you think gas per gallon was for her 1984 Chrysler Laser?

$.89 for a gallon of gasoline

How much is a gallon of gasoline today?

Approximately

$2.55$2.55 per gallon of gasoline

Why has the price of Gasoline increased?

Inflation.

www.bls.gov

http://www.bls.gov/

http://www.bls.gov/

http://www.bls.gov/

http://www.bls.gov/

What is Monetary Policy?a) Amount of money is in circulation

b) Controlling inflation

c) Adjusting interest rates

What is Fiscal Policy?

Government’s spending

Taxes

Standards 6.2.12K 6.3.12A – F 6.5.12F

Economics Chapter 1: What is Economics?

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