UNIT 1 - Fundamental Concepts n Economics is the study of how we can best increase a country’s...

UNIT 1 - Fundamental ConceptsUNIT 1 - Fundamental Concepts

Economics isthe study of how we can best increase a country’s wealth with the resources that we have available to us.


Marginal Benefitis the additional satisfaction or value one obtains from an activity or product.

Marginal Cost is the additional cost or sacrifice one makes of participating in an activity or purchasing a product.


Economic Decision-MakingYou decide to participate in an activity (going to college, buying something, etc.) as long as your marginal benefit exceeds your marginal cost.


Macroeconomics and MicroeconomicsThe nation's unemployment rate, inflation, interest rate trends, government budgets, government fiscal policies, economic growth, and monetary policy, are topics discussed in _____ (fill in the blank).

For inflation and unemployment rates, visit http://www.bls.gov/


Macroeconomics and MicroeconomicsPrice elasticity (sensitivity) of demand for goods and services, firms’ production behavior, cost functions, income inequality, and protectionism, are topics discussed in _____ (fill in the blank).

For college tuition changes, visit www.bloomberg.com and search for “tuition”.


The Production Possibilities CurveA production possibilities curve represents outcome or production combinations that can be produced with a given amount of resources.


The Production Possibilities Curve

E

A

B

C F

G

D

GUNS

ROSES

600

500

400

300

580500350 700


Economic GrowthIf an economy is operating at a point on the a point on the production possibilities curveproduction possibilities curve, all resources are used, and they are utilized as efficiently as possible.

E

A

B

C F

G

D

GUNS

ROSES

600

500

400

300

580500350 700


Economic Growth Is Caused by:

Increases in Resources

Advances in Technology


Your Own Personal PPCIf two possible outcomes in your own personal life are job earnings and educational credits, then your PPC looks as follows:

E

A

B

C F

G

D

Job earnings

College credits

30000

23000

16000

12000

1810 3023

UNIT 1 - Fundamental ConceptsThree Economic Systems are:

UNIT 1 - Fundamental ConceptsThree Economic Systems are:

1. Capitalism

2. Communism

3. Socialism


Capitalism Characteristics

The role of the government is limited to the most essential functions.

All prices are determined in the free market (supply and demand).


Communism Characteristics

Government makes all decisions regarding production, prices, wages, interest rates, and income distribution.


Socialism (Mixed Economy) Characteristics

Most economic decisions are made by the private sector, but the role of the government is significant. Government spending and taxes are relatively high.

Survey question. On a scale of 1through 5 (1 = most Survey question. On a scale of 1through 5 (1 = most capitalist, and 5 = most communist), which capitalist, and 5 = most communist), which economic system do you prefer?economic system do you prefer?

Survey question. On a scale of 1through 5 (1 = most Survey question. On a scale of 1through 5 (1 = most capitalist, and 5 = most communist), which capitalist, and 5 = most communist), which economic system do you prefer?economic system do you prefer?

1. 1

2. 2

3. 3

4. 4

5. 5

0 of 30


Grading Systems Capitalist: every student gets the grade (s)he

works for. Communist: all scores are added up, then

divided by the number of students in the class. Everyone receives the same grade.

Socialist: some points are taken from the higher scoring students and given to the lower scoring students.

For the grading system in our course, which do you prefer (1 = pure capitalist; 5 = pure communist)?

For the grading system in our course, which do you prefer (1 = pure capitalist; 5 = pure communist)?

0 of 5

1. The current system (no redistribution)

2. A small amount of grade redistribution (i.e. 6%)

3. A fair amount of grade redistribution (i.e. 12%)

4. A considerable amount of grade redistribution (20%)

5. Pure equality


Economic Growth and Economic Systems

Countries with the highest overall economic standard of living have the freest markets (more elements of capitalism).

Examples: Hong Kong, the United States, Japan, Taiwan, Great Britain, Canada, Sweden, South Korea, and Singapore.


2010 Purchasing Power Parity (unless otherwise noted) Gross Domestic Product estimated in billions of dollars, and Per Capita (person) GDP

Country/Area GDP Per Cap. GDP

World $ 74,540 $ 11,200 United States $ 14,660 $ 47,200China $ 10,090 $ 7,600Hong Kong $ 326 $ 45,900Korea - North $ 40 $1,800Korea - South $ 1,459 $ 30,000 Luxembourg $ 41 $ 82,600Qatar $ 151 $ 179,000

For GDP information of other countries around the world, see our CD, Unit 3, Section 2


Economies around the World

Most industrialized countries are mixed economies, but they also have many capitalist elements. Characteristics include

Substantial activity in the private sector (businesses and households). Prices are determined by demand and supply.

A significant role by federal and local governments.


The Role of GovernmentThe role of most governments around the world includes:Spending on defense, roads, legal system, public

services and educationRedistributing incomes

through taxes and subsidiesPassing laws and imposing

regulations Implementing price controlsConducting monetary policy

to affect inflation,interest rates, and employment


Important Concepts and DefinitionsWe will discuss the following concepts:

The simple circular flow The circular flow with government and foreign

markets Nominal and real prices and incomes Positive and normative economic statement The fallacy of composition The fallacy of cause and effect

Households Businesses

Supply of Products

Purchases of (Demand for) Products

Purchases of (Demand for) Labor and Resources

Supply of Labor and ResourcesResource(Inputs) Market

ProductsMarket

The Simple Circular Flow


The circular flow with government and foreign markets (see next slide). This is a more complex (more realistic) model.

Households Businesses

Supply of Products

Purchases of Products

Purchases of (Demand for) Labor and Resources

Supply of Labor and Resources

Resource(Inputs) Market

ProductsMarket

GovernmentTaxes Taxes

Services Services

Products

Foreign Markets


Nominal and Real Prices Nominal prices are expressed in current

dollars. Real prices are adjusted for inflation.

Enough money to purchase3 gallons of gasoline afew years ago. Not enough to purchase 2 gallonstoday.


Positive and Normative Economic Statements

A positive statement can be proven or dis-proven.

A normative statement is an opinion or value judgment.


Which is the Normative and Which is the Positive Economic Statement?

Statement I: The minimum wage should increase to $8.50.

Statement II: If the minimum wage increases, then firms’ cost of production rises.


The Fallacy of CompositionFallacy: what is good for one person (or one

group) is good for all persons (or all groups).


The Fallacy of Cause and EffectBecause A happens before B, A must be

automatically the cause of B.


Cause and Effect Fallacy Example

A: The car industry in country X has not done well.

B: The economy of country X has not done well.

Did A cause B?


Critical Thinking Guidelines

Question the source. Question the assumptions. Question how the

variables are defined. Question the validity of

the statement. Question the statistics. Think like an economist.

UNIT 1 - Fundamental Concepts n Economics is the study of how we can best increase a country’s...

Documents

Transcript of UNIT 1 - Fundamental Concepts n Economics is the study of how we can best increase a country’s...