unit 7 introduction to economics

UNIT 7INTRODUCTION TO ECONOMICS

SCARCITY

Warm-Up List all of the things this school would

have it was perfect in your mind. Think in terms of facilities and resources:

Why isn’t our school like this?

Resources are scarce meaning we don’t have everything we want to have in our school

What is Economics? Economics is the study of

how we make decisions in a world where resources are limited.

It is sometimes called the science of decision making.

How do you choose what to buy when you only have a limited amount of money?

What is the Fundamental Economic Problem?

The fundamental economic problem is SCARCITY— we have unlimited wants and limited resources!

Because of scarcity, we must make choices among alternatives.

What is the Impact of Scarcity? Why are diamonds expensive and water so cheap?

Scarce resource=high price Abundant (not scarce) resource=low

price

Producers and Consumers Producers: make goods and services

Motivated by profit ($$$) Consumers: purchase and use

goods/services to satisfy their wants and needs Make decisions based on what needs and

wants they want to satisfy with their limited “scarce” resources.

Goods & ServicesProducers make goods and services to be

consumed by the public Goods: tangible products such as cars, CDs

and clothes Services: intangible things like telephone

service, Internet or medical/legal services.

Answer: When you watch TV there is a good and a service involved, what are they?

Needs vs. Wants Needs are things we

need for survival, such as food, clothing, and shelter.

Wants are things we would like to have.

Both needs and wants must be prioritized. What do you need the most? what do you want the most?

Immediate vs. Delayed Gratification

If you choose to only consider the short term benefit of your purchase you are making a choice based on immediate gratification.

If you consider a longer term benefit of a purchase you are making a choice based on delayed gratification.

QUESTION: If you buy a Hummer because you like it the most right now is this immediate or delayed gratification?

If you buy a Honda accord because you know it will save you money on gas in the long run it is immediate or delayed gratification?

Productivity and Efficiency Producers want to maximize their

productivity and efficiency in order to make a larger profit! So, you want to get the MOST out of every

worker and resource you can. We know a business is efficient when the cost

of producing a resource is not more than the price. Example: It cost me $1 to make each burger

and I can sell it for $2! What is my profit on each burger?

4 FACTORS OF PRODUCTION (Resources)

ALL FOUR FACTORS MUST BE PRESENT TO PRODUCE ANY GOOD/SERVICE!

1. Land2. Labor3. Capital4. Entrepreneurship

Land Adds natural resources necessary for

production these are renewable and nonrenewable resources Renewable Resources: trees, oxygen, water Non-Renewable Resources: gold, oil, coal,

gas

ANSWER: What is the difference between a renewable and nonrenewable resource?

Labor (workers) Labor is the nation’s workforce or human

resources. Sometimes it is called human capital.

It includes the physical and mental talents of the people who help produce goods and services.

Factors such as population growth, education, training and war affect the quantity and quality of labor.

Capital Capital, or capital goods, includes the

tools, machinery, and buildings used to make other products.

Financial Capital is the money that goes into a new business

Consumer goods satisfy wants directly; capital goods do so indirectly by aiding production of consumer goods.

Entrepreneurs Entrepreneurs are individuals who start new businesses, introduce new products, create jobs and improve management techniques.

They are innovative and willing to take risks.

Brains of the economy: Entrepreneurs drive the economy because they use factors of production to produce new products & create jobs.

Opportunity Cost the cost of any

activity measured in terms of the value of the next best alternative forgone (that is not chosen)

Ex. By going to school your opportunity cost is giving up sleep

Why is opportunity cost “opportunity lost”?

Incentives A reward offered

to try and persuade people to take certain economic actions

Ex. Buy one get one free

Ex. The toy in a Happy Meal

Economics Day 2

MARKET ECONOMYProduction and exchange is regulated by competition between individuals and businesses (firms).

1. People have the right to own private property2. Individuals and firms make decisions based on what is in their best

interest.– Businesses produce goods for profits = Profit Motive

3. Everyone’s needs will be met b/c producers will make the most profit by making what consumers want.-- Producers supply what is demanded by consumers

Nicknames: Laissez-Faire “hands off,” Capitalism, Free Enterprise System, Invisible Hand

Examples: England, Germany, Japan Competition answers the 3 economic questions (what, how, whom)

The government DOES NOT tell people what to produce or buy.

HOW IS AMERICA LIKE A MARKET ECONOMY?

HOW IS AMERICA NOT LIKE A MARKET ECONOMY?

Parts of a Market Economy Answer the following questions in your notes: What is the motivator to work in a market

economy? Profit-Without profit there is no point of

participation What regulates a market economy? (not the

government) Competition

What is the main coordinator in a market economy? Price

Trade Market Economies

based on Trade Benefits both parties

Both parties trade excess material for a want or need

Ex. Buying a car: you trade your excess money for a car You want a car The dealer wants money Everyone wins

Ownership Without ownership trade is impossible

Why?

Circular flow model It shows how our economy works It shows how goods and services, money,

and the factors of production are exchanged between households and firms in the economy.

fig

The two main parts of the Circular Flow model are firms and

households.FYI: Firm is another word for

“business”

FIRM Household

fig

The circular flow of goods and incomes

fig

Goods and servicesThe circular flow of goods and incomes

fig

Goods and services

$Consumer

expenditure

The circular flow of goods and incomes

fig

Goods and services

$Consumer

expenditure

The circular flow of goods and incomes

Households supply the factors of production (labor, etc)

fig

Goods and services

$Consumer

expenditure

Income: Wages, salary, rentdividends, etc.

$Households supply the factors of production

(labor, etc)

The circular flow of goods and incomes

fig

Goods and services

$Consumer

expenditure

Income: Wages, salary, rentdividends, etc.

$Households supply the factors of production

(labor, etc)

The circular flow of goods and incomes

What’s the difference between wages and salary?

BUSINESS AND

INVESTMENT

What will happen to a company if they add too many factors of production (land, labor, capital, entrepreneurs)? What is this known as?

EX: Subway, if subway had too many workers they would get in each other’s way and would not be able to produce as many sandwiches as they could if they had fewer workers

WARM-UP:

If you could start a business would you work on your own or with a partner? Why?

Sole Proprietorships Business owned and operated by ONE person.

Anyone can start one. PROS: make all the profit & helped out by the

government (Small Business Administration)

CONS: unlimited liability—responsible for all debts. Must raise all initial capital (human, physical and

financial) Limited Life: Business dies when owner does

Partnerships

A partnership is a business owned by 2 or more people.

PROS: Share the burden of debt and capital. Raise $$ by adding partners No corporate income tax

CONS: each partner has unlimited liability

Corporations A business formed by filing a charter with the gov’t. Stockholders who buy shares, or stocks, OWN the corporation.

Board of Directors is hired to run the business

PROS: Raise money easily through selling stock to shareholdersLimited liability (only liable for your investment)Unlimited life

CONS:Gov’t regulation and might have to pay corporate taxOwners have little say in management of corporation

Franchises Businesses when individual people buy the rights to manage or run a large company’s store.

Example: McDonalds is a massive, multi-national company. But the local McDonalds in Scotland Neck is franchised to an individual owner.

PROS: ??

CONS: ??

Words to Know for BusinessesLIABILITY: What is risked if something

goes wrong in a business.

Words to Know for BusinessesSTOCK: A partial ownership in a

company.

Words to Know for BusinessesDIVIDENDS: The money shareholders

get when a company makes a profit.

Investment-Spend $$ to make More $$

What you can invest in and how you can invest your money

INVESTMENT IS A WAY TO USE RESOURCES THAT COULD BE USED FOR IMMEDIATE BENEFIT FOR A GREATER BENEFIT AT A LATER TIME.

Types of InvestmentHuman Capital

the people—through pay, benefits, education and training to increase productivity!

How would investingin human capital

improve business?

Investment-Spend $$ to make More $$

What you can invest in and how you can invest your money

Types of Investment Physical Capital

Machinery, Technology, buildings, tools

How would investingin physical capital improve business?

Investment-Spend $$ to make More $$

What you can invest in and how you can invest your money

Types of Investment Natural resources

Land (renewable & nonrenewable resources)

How would investingin natural resourcesimprove business?

Investment-Spend $$ to make More $$

What you can invest in and how you can invest your money

Types of Investment Financial Capital- MAKE MY $$$ GROW!!!

Stock

How would investingin financial capital

make someonemore money?

Investment-Spend $$ to make More $$

What you can invest in and how you can invest your money

Types of Investment Venture Capital

Investment in a NEW business

Why is investing ina new business

RISKY?

OVERALL:Investment seeks to increase productivity by increasing inputs. EX: I invest in machinery (input) and I get more

cars (output)

Create a Business!1. Name Business2. State the major good or service you will be producing.3. State the TYPE of Business (corporation, sole

proprietorship, partnership)?4. Identify your fixed costs5. What investments will you make to get started?

• Human Capital (how many workers, what types of jobs, skilled or unskilled workers?)

• Financial Capital• Physical Capital

6. Create Advertisement for product or business card on the back.

I AM COLLECTING THIS FOR A GRADE.

Exit Ticket DID YOU GET IT??? Use the circular

flow model to answer 1-51. Who provides firms with the factors

of production?2. Who purchases good & services?3. Who creates goods & services?4. What do households get in return

for providing labor to firms?5.What must a firm have in order to

produce any good or service?

Economics Day 3

Law of Supply Businesses will produce more products

when they know they can sell them at a higher price. Ex: If you know you can sell your sneakers for

$100 a pair you will want to make more sneakers than if you could only sell them for $10.

Law of Demand Consumers will demand (want) more of a

good when the price for the good is low. Ex: As a consumer you will want to buy more

sneakers if they cost $10 rather than if they cost $100.

So what will be the price of the sneakers? $100, $10 or somewhere in between?

The Supply and Demand Graph Where the 2 lines intersect is the price

the good will be sold at.

Price

Quantity

Supply

Demand

$45

21 3

At $45 a consumer is willing to buy (demands) 2 pairs, and the producer is willing to supply 2 pairs of sneakers.

1. Why wouldn’t a producer sell the sneaker for $100?

2. Why wouldn’t a producer sell the sneaker for $10?

$100

$10

Equilibrium price: the price where supply and demand are equalthe highest price a good can be sold at and not have a shortage (not enough) or surplus (too much). The Equilibrium Price prevents producers from

charging too much for a good, because they will never sell it at a high price if there is no demand.Price

Quantity

Supply

Demand

$45

21 3

$100

$10

Equilibrium Price = ????

Shortage and Surplus What does it mean to have a shortage? What does it mean to have a surplus?

Shortage vs. Surplus

What happens to the price if we have too much supply and no demand for a good? SURPLUS: Supply is greater than demand =

lower price SALES at stores are usually the result of a surplus.

Shortage vs. Surplus What happens to the price if we have a lot

of demand but not enough supply of a good? SHORTAGE: Demand is greater than supply =

higher price GAS PRICES go up during gas shortages.

SUPPLY AND DEMAND PRACTICE

1. Draw a Supply and Demand Graph. Label (supply “S”, demand “D”, equilibrium price “E,” Price axis, and Quantity axis.

Price Units Demanded

Units Supplied

$5 10 60

$4 18 51

$3 28 41

$2 38 29

$1 52 10

Gum Supply and Demand Graph2. What happens if demand is high and supply is low?

a) When gum costs $1 what quantity is demanded?

b) When gum cost $1 what quantity is supplied?

c) What is the shortage of gum (demanded - supplied) ?

3. What happens is demand is low but supply is high?

d) Gum costs $3 what quantity is demanded?

e) Gum costs $3 what quantity is supplied?

f) What is the surplus of gum (supplied - demanded)?

Gum Supply and Demand Graph4. Circle on the graph at what price the quantity supplied and demanded are the same (equal)?_____________

What is this point called? _________________________

5. What would happen if the government set the price of gum at $4? 6. What would happen if the government set the price of gum at $2?

7. How does having price set by supply and demand benefit consumers?

Illustration of Demand Shift

Increase in Demand = curve shifts to the right

Decrease in Demand = curve shifts to the left. Price

QuantityD1 D2

Quantity

Price

D1D2

The less you buy the more you will move to the left!

Why does demand shift? Demand can increase (move right) and

Decrease (move left) depending on certain conditions in the market.

There are 6 factors affecting demand

Demand Factors

1. Consumer Disposable income: income left over after necessities are purchased. More $$ to spend on luxuries increases demand for them.

Example: If US Gov’t gave citizens a tax credit ($$$) then people would have more money to spend (more disposable income). Would demand increase or decrease?

Demand Factors

2. Consumer tastes: popularity of a product

Example: Consumers who used to prefer board games now prefer video games. What happened to demand for board games?__________

Demand Factors

3. Consumer expectations: what consumers expect to happen in the future

Example: Consumers expect that a new version of the iPod will come out around Christmas. What happened to demand for the OLD iPod?

Demand Factors 4. Number of consumers: how many

people live in a certain area

Example: A new housing development was built in Enfield. Did the number of consumers in Enfield increase or decrease? So what happened to demand?

Demand Factors

5. Substitutes: competing products that can be exchanged when the price of one becomes too high. Honda & Toyota

Example: Dell raised the price of its laptops, so consumers started to buy the lower priced Sony laptop. What happened to demand for Dell laptops?

WHAT IS ANOTHER SUBSTITUE GOOD YOU CAN THINK OF?

6. Complementary goods: Products that are used together.

Example: DVD players have become popular among consumers. What happened to demand for DVDs?

WHAT IS ANOTHER SET OF COMPLEMENTARY GOODS YOU CAN THINK OF?

Price Elasticity When the price of a good is elastic that

means it can change a lot and easily. If there are no substitutes for a good the price

is not elastic (inelastic).Ex: water, eggs, milk = inelastic BUT sugar = elastic, b/c you could use splenda or

sweet and low.

Supply Curve

Price

Quantity

As price increases, quantity supplied increases.

Because producers would rather sell goods at a higher price

S1

Supply Schedule Supply Schedule:

table of how much people are willing to sell at various prices

Ex. Pizza Supply Schedule. How many pizzas are

supplied at $1.00? As the price of pizza

increased what happened to supply?

Price Quantity

$.50

$1.00

$1.50

$2.00

$2.50

1

5

2

7

8

Law of Supply“The UP UP DOWN DOWN”

As price goes up quantity goes up As price goes down quantity goes down

Producers make more goods/services at higher prices then they do at lower prices.

Illustration of Supply Shift Increase in Supply

= curve shifts to the right

Decrease in Supply = curve shifts to the left.

Price

Quantity

S1

S2

Quantity

PriceS2

S1

Why does supply shift?

Supply can increase (move right) and Decrease (move left) depending on certain conditions in the market.

STOP and Think…if it reduces the cost of production (cheaper to produce) then supply of that good went ____.

Supply Factors 1. Number of suppliers: more suppliers =

more supply

Example: A new shopping plaza opened on 301 in Enfield. Did the # of suppliers increase or decrease? Did supply increase or decrease?

Supply Factors

2. Government Regulations: tighter government regulation of production makes it more expensive to supply goods decrease in supply

Example: Congress raised the minimum wage to $6.55 an hour from $7.25. What is the impact for fast food restaurants? Did the supply of fast food increase or decrease?

Supply Factors

3. Taxes: Higher taxes raises business costs (supply decrease), lower taxes reduces them (supply increase)

Example: Congress cut the tax on American corporations to try and boost production in the United States. Did costs for corporations go up or down? Did supply increase or decrease?

Supply Factors

4. Subsidies: gov’t payment to an individual, business, or group to reduce the cost of production.

Example: Congress gave all corn producers a subsidy for each bushel of corn they produce. Did the cost of corn production go up or down? Did the supply of corn increase or decrease?

Supply Factors

5. Producer Expectations: If producers think that consumer demand will drop, then they reduce supply. If they think demand will increase then they increase supply.

Example: As the weather gets warmer near the end of the school year clothing stores expect consumers will want to buy summer clothes. Did the supply of winter clothes increase or decrease? Did the supply of SUMMER clothes increase or decrease?

Exit Ticket:1. Draw the supply and demand graph, with

these parts labeled:supply line, price, quantity, demand line, equilibrium price

2. When does a surplus occur?

3. When does a shortage occur?

Day 4 Economics

Competition

Perfect Competition Examples:

Apple Farmers, Corn Farmers

Number: Many small firms

Amount of price control: HIGH Competition NO Price control, prices set by supply &

demand

Perfect Competition (cont.) Barriers (how easy is it to get in the

market?): Easy Entry, Easy Exit

Nature of Product (How alike or different the available products are) : Homogenous (goods are the same,

all can be substituted for one another) EX: Red Delicious Apple

Monopoly: One company provides the product

Examples: Standard Oil of late 1800s

Number: 1 Large Firm

Amount of price control: NO Competition / The monopoly sets the price

Monopoly

Oligopoly Examples:

Cell phones, airlines, cereals, soft drinks Number:

A FEW large firms Amount of price control:

SOME Competition / SOME price control b/c the few large firms keep

prices pretty close.

Oligopoly (cont.)

Barriers: Difficult Entry and Exit

Nature of Product: Differentiated (similar products but

not exactly the same can be substituted) EX: Coke or Pepsi Whopper or Big Mac

MERGERS Merger: is when two firms join together. Horizontal Merger: 2 firms w/ similar

product lines combine EX: Nike and Reebok combine.

Vertical Merger: 2 firms working at different stages of production of a good combine. EX: Ford buys a tire company

Economic Indicators Indicators help us tell how well an economy is

doing. They include… Unemployment: people who can work but are

without employment Inflation (CPI): the general increase in prices over

time. Inflation often occurs during expansion because consumers have more $ to spend causing demand to increase.

PPI (producer price index): Used by producers to see how much the goods/services they need for their businesses will cost.

Productivity/GDP: total of all the final products produced in a country

Stock Market (bull vs bear market): where shares of corporations are bought and sold.

Employment Unemployment: measures the people

who can work but do not have jobs. Full Employment: when all people who

can work have jobs Underemployment: having a job which

you are overqualified and underpaid for. Ex: PhD. working at McDonalds

GDP: Gross Domestic Product

Total value of all the final products that are produced within a country in one year.

Final products: a good sold to a user (as opposed to all the ingredients of that product). The car, but not the steel or the rubber that went into making it

Per Capita GDP GDP divided by a country’s population

In other words: The GDP per person

Per Capita GDP GDP takes into account the Standard Of Living-measure

of quality of life, higher GDP = higher standard of living.

The darker the blue, the better Per Capita GDP. How’s the US doing?

CPI or the Consumer Price Index Measures inflation rates

for the nation’s economy Inflation: the general

rise in price of an item over time.

Is determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical consumer.

Market Basket might include cost of….•Food and drinks

• Medical care• Housing• transportation

How much do these cost?In March

Then again

in May.Market Basket might include cost of….•Food and drinks

• Medical care• Housing• transportation

The Stock Market Where shares of corporations are bought

and sold. Dividends: money earned by your share of a

stock Capital Gains: money earned when you sell

your stock Bull Market: Rising Bear Market: falling

Bear vs. Bull Market The Chicago Bears just

aren’t that good and often FALL, just like a bear market.

When Michael Jordan was on the Chicago Bulls, he would always rise up to dunk just like the rising market.

The Business Cycle

Peak

Contraction Trough

Expansion

Contraction (a.k.a. “Recession”) Economy is DECLINING

Bear market GDP down

Unemployment is RISING

Trough (a.k.a. “Depression”)

Economy is at its LOWEST GDP at LOWEST

Unemployment is at its HIGHEST EX: the Great Depression 1929-1939

Stock Market Crash1929, “Black Tuesday”

Run on the banks! NO FDIC

Wall St.

The Great Depression

The Great Depression1933: unemployment=25%Today: unemployment = 8.6%

Expansion Economy is IMPROVING

Bull market Inflation (CPI rises) GDP up

Unemployment is FALLING

Peak (a.k.a. “Boom”) Economy is at its HIGHEST

GDP is at its HIGHEST Unemployment at its LOWESTEX: the dot com boom in the 1990s

The Business Cycle

___________

___________

___________ ___________