* economics – the study of how individuals and societies make decisions about ways to use scarce...
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*Introduction to Economics
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*WHAT IS ECONOMICS?
*Economics – the study of how individuals and societies make decisions about ways to use scarce resources to fulfill wants and needs.
*What does THAT mean?!!??!!
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*The Study of Economics
*Microeconomics*How do individuals make economic decisions
“Microeconomists are wrong about specific things…”
*Macroeconomics*The big picture: growth, employment, etc.
*Choices made by large groups (like countries)
“Macroeconomists are wrong about things in general”
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*However, there is a Fundamental Problem
with economics:
SCARCITY: unlimited wants and needs but limited resources
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*What are resources?
*Definition: The things used to make other goods
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*4 Factors of Production*LAND – Natural Resources
*Water, natural gas, oil, trees (all the stuff we find on, in, and under the land)
*LABOR – Physical and Intellectual*Labor is manpower
*CAPITAL - Tools, Machinery, Factories*The things we use to make things
*Human capital is brainpower, ideas, innovation
*ENTREPRENEURSHIP – Investment $$$*Investing time, natural resources, labor and capital are all risks associated with production
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*Choices, Choices
*Because ALL resources, goods, and services are limited – WE MUST MAKE CHOICES!!!!
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*Why Choices?
We make choices about how we spend our money, time, and energy so we can fulfill our NEEDS and WANTS.
What are NEEDS and WANTS?
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*Wants and Needs, Needs and Wants*NEEDS – “stuff” we must have to survive, generally:
food, shelter, clothing
*WANTS – “stuff” we would really like to have (Fancy food, shelter, clothing, big screen TVs, jewelry, conveniences . . . Also known as LUXURIES
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VS.
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*TRADE-OFFS
You can’t have it all (SCARCITY – remember?) so you have to
choose how to spend your money, time, and energy. These decisions involve
picking one thing over all the other possibilities – a TRADE-
OFF!
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*Trade-Offs, cont.
*What COULD you have done instead of come to school today?
*These are all Trade-Offs!
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A special kind of Trade-Off is an
OPPORTUNITY COST =The Value of the Next Best
Choice
(Ex: Sleeping is the opportunity cost of studying for a test)
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*Opportunity Costs
*This is really IMPORTANT – when you choose to do ONE thing, its value (how much it is worth) is measured by the value of the NEXT BEST CHOICE.
*This can be in time, energy, or even MONEY
If I buy a pizza…
Then I can’t afford the movies…
What is the opportunity cost of buying pizza?
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*Production
*So how do we get all this “stuff” that we have to decide about?
Decisions, decisions …
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*PRODUCTION, cont.
*Production is how much stuff an individual, business, country, even the WORLD makes.
*But what is “STUFF”?
*STUFF – Goods and Services.
*Goods – tangible (you can touch it) products we can buy
*Services – work that is performed for others
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*Which Factor of Production?
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*Which Factor of Production?
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*Which Factor of production?
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*Which Factor of Production?
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*THREE parts to the Production Process
*Factors of Production – what we need to make goods and services
*Producer – company that makes goods and/or delivers services
*Consumer – people who buy goods and services (formerly known as “stuff”)
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*Production Possibilities
Frontier*A production possibilities curve can help
examine the opportunity cost of production and consumption decisions.
* A PPC shows the different combinations of goods and services that can be produced with a given amount of resources.
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*Production Possibility FrontiersCars
Bicycles
Y1
X1
A
B
Y2
X2
Assume a country can produce two types of goods with its resources – Cars and Bicyles
If it devotes all resources to cars it could produce a maximum of Ym.
If it devotes all its resources to bicycles it could produce a maximum of Xm
Ym
Xm
If the Nation is at point A on the PPC It can produce the combination of Y1 cars and X1 bicycles
If it reallocates its resources (moving round the PPC from A to B) it can produce more bicycles but only at the expense of fewer cars. The opportunity cost of producing an extra X1 – X2 bicycles is Y1 – Y2 cars.C
Any point inside the curve (C) – resources are not being utilized efficiently
D
Any point outside the curve (D) – not attainable with the current level of resources