Unit 1: Fundamentals of Economics

SSEF1, SSEF2, SSEF4, SSEF5, SSEF6, SSMI1

Unit 1 Standards:

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

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

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

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

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

Flash Presentation: Opportunity Cost

Land

Private propertyNatural resources

used in productioni.e. trees, coal, and

wheat

People who provide skills that assist in the production of a good or service

Labor

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

The risk-taking and managerial skills needed to start any business

Entrepreneurship

What Productive Resource do they represent??

What type of productive resource is pictured???

What Factor of Production is in this lady’s brain????

I started a business making computers and other electronic devices. I am an __________.

What Factor of Production do these represent?

Flash Presentation: Productive Resources

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

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……

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

LAND LABOR

CAPITAL ENTERPRENUERSHIP

Example

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

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

Format for a simple decision making grid.

Decision Making Grid

Alternatives

Choice 1 Choice 2

Benefits

Decision

Opportunity Cost

Benefits Forgone

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!

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”

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

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)

Production Possibilities Curve

The frontier on a P.P.C. represents the maximum combination of goods that can be produced with current resources

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

Production Possibilities Curve

Point X represents underutilizationThe economy is not

using its resources efficiently to produce the maximum amount of goods

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

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

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

Unit 1

Notes 3

3 Economic Systems

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

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

Different Economic Systems

Relies on habit/custom to answer economic questions

Usually small/close communitiesSlow to adapt to change

Traditional

Economic questions answered by individualsBuyers and sellers consider self-interest Competition regulates the market

Market

AdvantagesFreedomEfficiencyEncourages growthConsumers have a

great deal of control

Less stabilityInequality

Market

Disadvantages

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

AdvantagesGuarantee jobs and

incomeCan jumpstart

industry

Can not always meet consumer demands

No reward for innovation

Little individual freedom

Command

Disadvantages

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

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

Money in the Free MarketPlayers

HouseholdsOwn the factors of production and consume goods

+ servicesFirms

Uses factors of production to produce a product

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

Multiple ways of showing this:

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

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%

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

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

The Federal Government promotes technological innovation through federal agencies (like NASA) and by offering patents

Increasing Productivity

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

With any public good, people who would chose not to pay can still benefit

These individuals are called “free riders”

Free rider

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

ExamplesPositive

Public education improves communities and impacts all households

NegativeA new airport would

generate a great deal of noise, traffic, and pollution