Basic Economic Concepts

Basic Economic Concepts

1Basic Economic VocabularyNeeds are Necessities for survivalWants are Ways of expressing needs and/or goods and services consumed beyond what is necessary for survival.Goods are physical objects that can be purchasedServices are actions or activities performed for a feeEconomics is the study of scarcity and choice. We have limited resources and unlimited needs and wants. Every economics issue involves personal choice. Scarcity: there is not enough of it available to satisfy the way a society wants to use it. This leads us to making choices. Opportunity Cost is what is sacrificed when one choice is made over the next best alternativeEvery decision has an opportunity cost3Opportunity Cost to every decision!

4The Six Core Principlesof EconomicsPeople choosePeoples choices involve costs.People respond to incentives in predictable ways.People create systems that influence individual choices and incentives.People gain when there is voluntary exchange.Peoples choices have consequences that lie in the future.

1. People Choose We always WANT more than we can get and PRODUCTIVE RESOURCES (HUMAN, NATURAL, CAPITAL) are always limited. Therefore, because of this major economic problem of SCARCITY, we usually choose the alternative that provides the most BENEFITS with the least COST.2. Peoples choices involve costs.

All Choices Involve Costs The OPPORTUNITY COST is the next best alternative you give up when you make a CHOICE. When we choose one thing, we refuse something else at the same time.3. People respond to incentives in predictable ways.

INCENTIVES are actions, awards, or rewards that determine the CHOICES people make. Incentives can be positive or negative. When incentives change, people change their behaviors in predictable ways.4. People create systems that influence individual choices and incentives.

People cooperate and govern their actions through both written and un written RULES that determine methods of ALLOCATING scarce resources. These RULES determine what is produced, how it is produced, and for whom it is produced. As the rules change, so do individual CHOICES, INCENTIVES, and behavior.5. People gain when there is voluntary exchange.

People SPECIALIZE in the PRODUCTION of certain GOODS and SERVICES because they expect to gain from it. People TRADE what they produce with other people when they think they can gain something from the EXCHANGE. Some BENEFITS of voluntary TRADE include higher STANDARDS OF LIVING and broader choices of GOODS and SERVICES.6. Peoples choices have consequences that lie in the future.

Economists believe that the COSTS and BENEFITS of DECISION MAKING appear in the future, since it is only the future that we can influence. Sometimes our choices can lead to UNINTENDED CONSEQUENCES.Key Assumptions in EconomicsPeople are rationally self-interested__They seek to maximize their utility (happy points)People generally make decisions at the margin__They weigh the marginal benefit against the marginal cost of a decisionCeteris Paribus_ Economists hold factors constant, except for whats being considered.

Beautiful, beautiful forest!.

Beautiful leaf!MACROECONOMICS...

MICROECONOMICS...

Microeconomics vs. MacroeconomicsMICROeconomics (think of small picture)Individual marketsThe behavior of firms (companies) and consumersSupply and demandCompetitionResource marketsMarket failures

MacroeconomicsExamines: (Think of the Big Picture)National MarketsTotal output and income of nationsTotal supply and demand of the nationTaxes and government spendingInterest rates and central banksUnemployment and inflationIncome distributionEconomic growth and developmentInternational Trade

Eight Economic Goals1. Economic Growth [Increase in Real GDP or per capita GDP] 3% annual growth will increase our standard of living.1929-Per capita=$792; 1933-Per capita=$430; 2007-per capita= $44,0002. Full Employment about 95-96% employment is full employment. In 1982, unemployment was 10.8% [12 M unempl.]

Doing the best with what we have.3. Economic Efficiency obtaining the maximum outputfrom available resources or maximum benefits at minimum cost from our limited resources.

Eight Economic GoalsIn 1945, $1.50 bought what $1.00 did in 1860.Today, it takes $11 to buy what $1 bought in 1945.

4. Price Level Stability sizable inflation or deflation should be avoided. We had over 10% in 73, 79, & 80. Inflationwas 2% in the 1950s, 2.3% in 1960s and 7.4% in 80s.A person making $25,000 a year at age 30 would need (withaverage inflation of 5%) $125,000 a year at age 65 to have the same standard of living. 1972 82, $2.14=$1.00In 1982, it took $2 to buy what $1 bought in 1972. 2008 1982

Eight Economic Goals

5. An Equitable Distribution of Income. One group shouldnt have extreme luxury while another is in stark poverty. The richest 1%(3 mil.) have as much total income after taxes [average $400,000 a year as the bottom 40% [100 million people]. The richest 1% have greater wealth than the bottom 90% of the population.

. 7. Economic Security provision should be made for those not able to take care of themselves handicapped, disabled, old age, chronically ill, orphans. Protection from lay-offs [unemployment insurance]. Also no discrimination. 43 million Americans have some type of disability.A. Hearing impaired: 22 million (including 2 million deaf)B. Totally blind: 120,000 (Legally blind: 60,000)C. Epileptic: 2 million D. Paralyzed: 1.2 millionE. Developmentally disabled; 9.2 millionF. Speech impaired: 2.1 millionG. Mentally retarded: up to 2.5 millionH. HIV infected: 900,000 6. Economic Freedom guarantee that businesses , workers, and consumers have a high degree of economic freedom. 8. Balance of Trade. Over $400 billion a year the last few years.Some of these goals are complementary [economic growth & F.E.] and some conflict [F.E. and price level stability].

ECONOMICS - science of scarcity-the study of the choices people make in an effort to satisfy their unlimited needs and wants from limited resources.

The science of scarcityIndividual Choice:Decisions by individuals about what to do, which necessarily involve decisions about what not to do. Think Target and the size of your house.SCARCITYMarginal decision making = the result of an additional changeMarginal benefits vs. marginal costs is the basis for making the decisionExamples: 1 more hour of sleep vs. eating breakfastPart time job vs. goofing off College vs. full time job21WHAT IS AND WHAT SHOULD BE:Positive vs. Normative Economics:Positive economics deals with facts and therefore addresses what is.

Normative economics attempts to determine what should be based on value judgment. Normative statements express an individual or collective opinion on a subject.

"with other things the same," or "all other things being equal or held constant."INCOME(per week)$ 0100200300400$ 50100150200250CONSUMPTION(per week)Table of ValuesConstruction of Econ GraphsINCOME(per week)$ 0100200300400$ 50100150200250CONSUMPTION(per week)Table of ValuesConstruction of Econ GraphsCONSUMPTION (C)$400

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100Vertical AxisINCOME(per week)$ 0100200300400$ 50100150200250CONSUMPTION(per week)Table of ValuesConstruction of Econ GraphsCONSUMPTION (C) 0 100 200 300 400INCOME (Y)$400

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100Vertical AxisHorizontal AxisINCOME(per week)$ 0100200300400$ 50100150200250CONSUMPTION(per week)Exists Between Consumption & Income CONSUMPTION (C) 0 100 200 300 400INCOME (Y)$400

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100abcdeabcdeA Direct Relationship...C150250

Direct(positive) RelationshipIndependent variableinduces(cause); Dependent variable responds(effect)

Direct 2 variables move in same direction.Econ, Econ

Econ

TICKETPRICE$50 403020100048121620ATTENDANCE(thousands)Inverse (Negative) RelationshipInverse - 2 variables move in opposite directionsTICKET PRICE (P) 0 4 8 12 16 20ATTENDANCE IN THOUSANDS (Q)$50

40

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In Economics the independent variablecan be on either axis.

INFINITE & ZERO SLOPESPrice of BananasPurchases of WatchesConsumptionDivorce RateSlope =InfiniteSlope = ZeroConstruction of Econ GraphsIncreasing X has no effect on Y.YXXYIncreasing Y has no effect on X.

What you should know from Chapter One

Define economicsDescribe the economic way of thinkingState some important reason for studying economicsExplain the importance of ceteris paribusList eight economic goals and give examples Differentiate between micro and macroeconomicsDifferentiate between positive and normative economicsExplain and illustrate a direct relationship between variables, and define and identify a positive sloping curveExplain and illustrate an inverse relationship between two variables and a negative slope