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Unit 1: Fundamentals of Economics
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SSEF1, SSEF2, SSEF4, SSEF5, SSEF6, SSMI1
Unit 1 Standards:
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1. What is scarcity?2. What are the factors of production?3. How are limited resources allocated?4. What trade-offs appear on a production possibilities frontier?5. How are rational decisions made?6. What are the similarities and differences of a command,
market, and mixed economic system?7. How does each economic system answer the three basic
economic questions of what to produce, how to produce, and for whom to produce?
8. How does each economic system meet a society’s broad economic and social goals?
9. What is the role of government in a market economy?10. How do goods and services flow in a market economy?11. What is the role of money in a market economy?
Unit 1: EQs
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1. Scarcity 2. Choice3. Opportunity cost4. Trade-offs5. Factors of production6. Marginal thinking7. Production 8. Possibilities curve
(frontier)9. Economic systems10. 3 basic economic
questions
11. Market economy12. Public goods and
services13. Property rights14. Market failures15. Government regulations16. Deregulation17. Circular flow diagram18. Product market 19. Factor market20. Households21. Firms
Unit 1: Key Terms
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SSEF1 The student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments.a. Define scarcity as a basic condition that exists when
unlimited wants exceed limited productive resources.b. Define and give examples of productive resources
(factors of production) (e.g., land (natural), labor (human), capital (capital goods), entrepreneurship).
c. List a variety of strategies for allocating scarce resources.
d. Define opportunity cost as the next best alternative given up when individuals, businesses, and governments confront scarcity by making choices.
SSEF1
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Scarcity is the fundamental economic problem of having seemingly unlimited human needs and wants, in a world of limited resources.
not all of society's goals can be pursued at the same time
trade-offs are made of one good against others.
Scarcity
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A.K.A. productive resourcesAnything used in the production of a good
or serviceThey are classified into one of the
following areas:Land LaborCapital
Physical capitalHuman capital
Entrepreneurship
Factors of Production
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Flash Presentation: Opportunity Cost
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Land
Private propertyNatural resources
used in productioni.e. trees, coal, and
wheat
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People who provide skills that assist in the production of a good or service
Labor
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Physical – technology, equipment, buildings, and tools that assist in the production of a good or service
Human – the knowledge and skills that assist in the production of a good or serviceExample: taxi cab driver’s knowledge of city
streets
Capital
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The risk-taking and managerial skills needed to start any business
Entrepreneurship
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What Productive Resource do they represent??
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What type of productive resource is pictured???
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What Factor of Production is in this lady’s brain????
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I started a business making computers and other electronic devices. I am an __________.
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What Factor of Production do these represent?
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Flash Presentation: Productive Resources
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the benefit that is lost in making a choice between two competing uses of scarce resources.
It is always the next best alternative.
Opportunity Cost
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Opportunity Cost
EXAMPLE: an individual has $25 to either purchase groceries or new clothes. The individual weighs the choices against each other and decides that it’s more important to eat for the week and forgo the new pair of jeans. The opportunity cost of the groceries is……
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Choose a productDivide paper up into four sections + label
In each section, draw the factors of production involved in the production of that particular good/serviceInclude AT LEAST 8 things
Activity
Land Labor
Capital Entrepreneurship
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LAND LABOR
CAPITAL ENTERPRENUERSHIP
Example
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SSEF2 The student will give examples of how rational decision making entails comparing the marginal benefits and the marginal costs of an action.a. Illustrate by means of a production
possibilities curve the trade offs between two options.
b. Explain that rational decisions occur when the marginal benefits of an action equal or exceed the marginal costs.
GPS
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What is a decision making grid?Sometimes, making a decision can be
complex or unclearPutting this kind of information “on paper”
can make the opportunity cost clear, and make the decision easier
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Format for a simple decision making grid.
Decision Making Grid
Alternatives
Choice 1 Choice 2
Benefits
Decision
Opportunity Cost
Benefits Forgone
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Example
Decision Making Grid: Studying
Alternatives
Sleep Late Wake up early to study
Benefits -More sleep!-More energy during the day.
-Better grade-Teacher and parental approval-Personal satisfaction
Decision Sleep Late Wake up early to study
Opportunity Cost Extra study time! Extra sleep time!
Benefits Forgone -Better grade on the test-Teacher and parental approval-Personal Satisfaction
-More sleep-More energy during the day!
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Thinking at the marginNot all choices are all or nothingSometimes you can decide “how much” of
one choice you can do and “how much” of the other
This is called “Thinking at the Margin”
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Decision making at the Margin
Decision making at the Margin1
OPTIONS BENEFIT OPPROTUNITY COST
1 hour of extra studying
Grade of a C on test 1 hour of sleep
2 hours of extra studying
Grade of a B on test 2 hours of sleep
3 hours of extra studying
Grade of an A on test 3 hours of sleep
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Production Possibilities Curve
Graph used to various ways an economy can choose to utilize their resources
Two axes can show categories of goods (military vs consumer) or specific goods (guns v. butter)
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Production Possibilities Curve
The frontier on a P.P.C. represents the maximum combination of goods that can be produced with current resources
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Production Possibilities Curve
Point Y represents production beyond available resourcesCan reach point Y
with an increase in resources or better technology that allows more efficient production
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Production Possibilities Curve
Point X represents underutilizationThe economy is not
using its resources efficiently to produce the maximum amount of goods
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Opportunity Cost and PPC
In order to produce more of one good, you have to produce less of another
The amount of one item lost when increasing production of another is the opportunity cost
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A change in Factors of Production or technology will cause the PPC to “shift”Increase = Shift rightDecrease = Shift left
Example: More land on a farm would increase the production possibilities for wheat and corn (shift right)
Economic Growth and PPC
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Create a table showing the production possibilities between two alternatives
Graph the points & create a Production Possibilities curve
Include 2 things that could cause Production Possibilities to increase Sketch an additional curve showing growth
Include 2 things that could cause Production Possibilities to decrease Sketch an additional curve showing reduction
Activity
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Unit 1
Notes 3
3 Economic Systems
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SSEF4 The student will compare and contrast different economic systems and explain how they answer the three basic economic questions of what to produce, how to produce, and for whom to produce. a. Compare command, market, and mixed economic
systems with regard to private ownership, profit motive, consumer sovereignty, competition, and government regulation.
b. Evaluate how well each type of system answers the three economic questions and meets the broad social and economic goals of freedom, security, equity, growth, efficiency, and stability.
GPS
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Because resources are limited, all societies must answer the following:What goods and services to produce?How to produce?For whom to produce?
3 Key Economic Questions
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Different Economic Systems
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Relies on habit/custom to answer economic questions
Usually small/close communitiesSlow to adapt to change
Traditional
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Economic questions answered by individualsBuyers and sellers consider self-interest Competition regulates the market
Market
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AdvantagesFreedomEfficiencyEncourages growthConsumers have a
great deal of control
Less stabilityInequality
Market
Disadvantages
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Governments answer economic questionsTerms associated:
SocialismDemocratic means should be used to distribute
wealth evenly though societydemocracy
CommunismAll economic and political power lies with the
governmentauthoritarian
Command
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AdvantagesGuarantee jobs and
incomeCan jumpstart
industry
Can not always meet consumer demands
No reward for innovation
Little individual freedom
Command
Disadvantages
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In reality, no one economic system can answer all economic questions
Most economies use aspects of both free market and centrally planned economics to accomplish their goals
Mixed
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SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money.a. Illustrate by means of a circular flow
diagram, the Product market; the Resource (factor) market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.
b. Explain the role of money as a medium of exchange and how it facilitates exchange.
GPS
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Money in the Free MarketPlayers
HouseholdsOwn the factors of production and consume goods
+ servicesFirms
Uses factors of production to produce a product
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Money in the Free MarketFactors of production and products are
exchanged in 2 marketsFACTOR MARKET (A.k.a. Resource Market)
Households supply Factors of Production to firms in exchange for money
PRODUCT MARKETFirms supply households with goods and services
in exchange for money
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Multiple ways of showing this:
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Money in a Mixed Economy3rd player is added to market
GovernmentFactor market – purchases Factors of Production
from householdsProduct Market – buys goods and services from
firmsGovernment collects money from firms and
households through taxes + provides goods and services
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Activity:Create a MARKET ECONOMY circular flow model
using a specific businessDraw & label the firm and the household
20%Show which way money is moving around the economy
20%Show which way goods/resources are moving around
the economy20%
Explain what is happening in the factor market20%
Explain what is happening in the product market20%
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SSEF5 The student will describe the roles of government in a market economy.a. Explain why government provides public
goods and services, redistributes income, protects property rights, and resolves market failures.
b. Give examples of government regulation and deregulation and their effects on consumers and producers.
GPS
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Because of the business cycle, the American government aims to stabilize the economy byKeeping employment high
Unemployment between 3% and 6%Keeping growth steady
Economy must grow with population for there to be jobs and goods for everyone
Keeping prices stablePrevent inflation through regulating banks and
businesses
Promoting Strength
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The Federal Government promotes technological innovation through federal agencies (like NASA) and by offering patents
Increasing Productivity
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The government provides goods when it is inefficient or impractical toMake consumers pay individuallyExclude non-payers
Examples: parks, highways, police + fire service, and education
Public Goods
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With any public good, people who would chose not to pay can still benefit
These individuals are called “free riders”
Free rider
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An economic side effect of a good or service that generates benefits or costs to someone other then the person deciding how much to produce or consume
Two Types:Positive
Generates benefits for someone other then the individuals paying
NegativeGenerates costs for someone other then the person
paying for the good or service
Externalities
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ExamplesPositive
Public education improves communities and impacts all households
NegativeA new airport would
generate a great deal of noise, traffic, and pollution