UNIT 7 INTRODUCTION TO ECONOMICS

UNIT 7INTRODUCTION TO ECONOMICS

1Scarcity

2Warm-UpList all of the things this school would have it was perfect in your mind. Think in terms of facilities and resources:Why isnt our school like this?Resources are scarce meaning we dont have everything we want to have in our school3What 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?4What 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.Choose to Camp Outfor an XBox 360, orDo Something Else 5What is the Impact of Scarcity?Why are diamonds expensive and water so cheap?

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

6Producers and ConsumersProducers: make goods and services Motivated by profit ($$$)Consumers: purchase and use goods/services to satisfy their wants and needsMake decisions based on what needs and wants they want to satisfy with their limited scarce resources.7Goods & ServicesProducers make goods and services to be consumed by the publicGoods: tangible products such as cars, CDs and clothesServices: 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?8Needs vs. WantsNeeds 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?

vs.9Immediate vs. Delayed GratificationIf 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? 10Productivity and EfficiencyProducers 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?

114 FACTORS OF PRODUCTION (Resources)ALL FOUR FACTORS MUST BE PRESENT TO PRODUCE ANY GOOD/SERVICE!LandLaborCapitalEntrepreneurship12Land

Adds natural resources necessary for production these are renewable and nonrenewable resources Renewable Resources: trees, oxygen, waterNon-Renewable Resources: gold, oil, coal, gasANSWER: What is the difference between a renewable and nonrenewable resource?13Labor (workers)

Labor is the nations 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.14Capital

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 businessConsumer goods satisfy wants directly; capital goods do so indirectly by aiding production of consumer goods.15EntrepreneursEntrepreneurs 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.

16Opportunity Costthe 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 sleepWhy is opportunity cost opportunity lost?

IncentivesA reward offered to try and persuade people to take certain economic actionsEx. Buy one get one freeEx. The toy in a Happy Meal

Economics Day 2MARKET ECONOMYProduction and exchange is regulated by competition between individuals and businesses (firms).People have the right to own private propertyIndividuals and firms make decisions based on what is in their best interest.Businesses produce goods for profits = Profit MotiveEveryones needs will be met b/c producers will make the most profit by making what consumers want.-- Producers supply what is demanded by consumersNicknames: Laissez-Faire hands off, Capitalism, Free Enterprise System, Invisible HandExamples: England, Germany, JapanCompetition 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 EconomyAnswer 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)CompetitionWhat is the main coordinator in a market economy?PriceTradeMarket Economies based on TradeBenefits both parties Both parties trade excess material for a want or needEx. Buying a car: you trade your excess money for a carYou want a car The dealer wants moneyEveryone wins

OwnershipWithout ownership trade is impossibleWhy?Circular flow modelIt shows how our economy worksIt 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 businessFIRMHousehold26figThe circular flow of goods and incomes

27figGoods and servicesThe circular flow of goods and incomes

28figGoods and services$ConsumerexpenditureThe circular flow of goods and incomes

29figGoods and services$ConsumerexpenditureThe circular flow of goods and incomes

Households supply the factors of production (labor, etc)30figGoods and services$ConsumerexpenditureIncome: Wages, salary, rentdividends, etc.$Households supply the factors of production (labor, etc)The circular flow of goods and incomes

31figGoods and services$ConsumerexpenditureIncome: Wages, salary, rentdividends, etc.$Households supply the factors of production (labor, etc)The circular flow of goods and incomes

Whats the difference between wages and salary?32Business and Investment

33What 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 others 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 liabilityresponsible 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 partnersNo corporate income taxCONS: each partner has unlimited liability

Corporations A business formed by filing a charter with the govt. Stockholders who buy shares, or stocks, OWN the corporation.Board of Directors is hired to run the businessPROS: Raise money easily through selling stock to shareholdersLimited liability (only liable for your investment)Unlimited lifeCONS:Govt 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 companys 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 Capitalthe peoplethrough 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 CapitalMachinery, Technology, buildings, toolsHow 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 InvestmentNatural resourcesLand (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 InvestmentFinancial Capital- MAKE MY $$$ GROW!!!StockHow 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 InvestmentVenture CapitalInvestment in a NEW businessWhy is investing ina new businessRISKY?

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

Create a Business!Name BusinessState the major good or service you will be producing.State the TYPE of Business (corporation, sole proprietorship, partnership)?Identify your fixed costsWhat investments will you make to get started?Human Capital (how many workers, what types of jobs, skilled or unskilled workers?)Financial CapitalPhysical CapitalCreate Advertisement for product or business card on the back.I AM COLLECTING THIS FOR A GRADE.

Exit TicketDID 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 SupplyBusinesses 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 DemandConsumers 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 GraphWhere the 2 lines intersect is the price the good will be sold at.PriceQuantitySupplyDemand$45213At $45 a consumer is willing to buy (demands) 2 pairs, and the producer is willing to supply 2 pairs of sneakers.

Why wouldnt a producer sell the sneaker for $100?Why wouldnt a producer sell the sneaker for $10?

$100$10Equilibrium 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.

PriceQuantitySupplyDemand$45213$100$10Equilibrium Price = ????Shortage and SurplusWhat does it mean to have a shortage?What does it mean to have a surplus?Shortage vs. SurplusWhat happens to the price if we have too much supply and no demand for a good?SURPLUS: Supply is greater than demand = lower priceSALES at stores are usually the result of a surplus.

Shortage vs. SurplusWhat 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 priceGAS PRICES go up during gas shortages.

SUPPLY AND DEMAND PRACTICE1. Draw a Supply and Demand Graph. Label (supply S, demand D, equilibrium price E, Price axis, and Quantity axis.

PriceUnits DemandedUnits Supplied$51060$41851$32841$23829$15210Gum Supply and Demand Graph

2. What happens if demand is high and supply is low?When gum costs $1 what quantity is demanded?When gum cost $1 what quantity is supplied?What is the shortage of gum (demanded - supplied) ?3. What happens is demand is low but supply is high?Gum costs $3 what quantity is demanded?Gum costs $3 what quantity is supplied?What is the surplus of gum (supplied - demanded)?61Gum Supply and Demand Graph

4. 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?

62Illustration of Demand ShiftIncrease in Demand = curve shifts to the right

Decrease in Demand = curve shifts to the left. PriceQuantityD1D2QuantityPriceD1D2The less you buy the more you will move to the left!63Why 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

64Demand Factors1. Consumer Disposable income: income left over after necessities are purchased. More $$ to spend on luxuries increases demand for them.

Example: If US Govt gave citizens a tax credit ($$$) then people would have more money to spend (more disposable income). Would demand increase or decrease?

Demand Factors2. 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 Factors3. 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 Factors4. 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 Factors5. 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 ElasticityWhen 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 CurvePriceQuantityAs price increases, quantity supplied increases.

Because producers would rather sell goods at a higher priceS172Supply ScheduleSupply Schedule: table of how much people are willing to sell at various prices

Ex. Pizza Supply Schedule.How many pizzas are supplied at $1.00?As the price of pizza increased what happened to supply?PriceQuantity$.50$1.00$1.50$2.00$2.501527873Law of SupplyThe UP UP DOWN DOWNAs price goes up quantity goes upAs price goes down quantity goes down

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

74Illustration of Supply ShiftIncrease in Supply = curve shifts to the right

Decrease in Supply = curve shifts to the left. PriceQuantityS1S2QuantityPriceS2S175Why does supply shift?Supply can increase (move right) and Decrease (move left) depending on certain conditions in the market.STOP and Thinkif it reduces the cost of production (cheaper to produce) then supply of that good went ____.76Supply Factors1. 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 Factors2. 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 Factors3. 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 Factors4. Subsidies: govt 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 Factors5. 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 CompetitionExamples:Apple Farmers, Corn Farmers

Number:Many small firms

Amount of price control:HIGH CompetitionNO Price control, prices set by supply & demand

85Perfect 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

86Monopoly: One company provides the productExamples:Standard Oil of late 1800s

Number:1 Large Firm

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

87Monopoly

88OligopolyExamples: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.

89 Oligopoly (cont.)Barriers:Difficult Entry and Exit

Nature of Product:Differentiated (similar products but not exactly the same can be substituted)EX: Coke or PepsiWhopper or Big Mac

90MERGERSMerger: is when two firms join together.Horizontal Merger: 2 firms w/ similar product lines combineEX: Nike and Reebok combine.Vertical Merger: 2 firms working at different stages of production of a good combine.EX: Ford buys a tire company91Economic IndicatorsIndicators help us tell how well an economy is doing. They includeUnemployment: people who can work but are without employmentInflation (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 countryStock Market (bull vs bear market): where shares of corporations are bought and sold.

EmploymentUnemployment: measures the people who can work but do not have jobs.Full Employment: when all people who can work have jobsUnderemployment: having a job which you are overqualified and underpaid for.Ex: PhD. working at McDonaldsGDP: Gross Domestic ProductTotal 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 it95Per Capita GDPGDP divided by a countrys populationIn other words: The GDP per person

96Per Capita GDPGDP takes into account the Standard Of Living-measure of quality of life, higher GDP = higher standard of living.

97The darker the blue, the better Per Capita GDP. Hows the US doing?

CPI or the Consumer Price IndexMeasures inflation rates for the nations economyInflation: 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 drinksMedical careHousingtransportation99How much do these cost?In March Then againin May.Market Basket might include cost of.Food and drinksMedical careHousingtransportation

The Stock MarketWhere shares of corporations are bought and sold.Dividends: money earned by your share of a stockCapital Gains: money earned when you sell your stockBull Market: RisingBear Market: fallingBear vs. Bull MarketThe Chicago Bears just arent 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 CyclePeakContractionTroughExpansion103Contraction (a.k.a. Recession)Economy is DECLININGBear market GDP downUnemployment is RISING

104Trough (a.k.a. Depression)Economy is at its LOWESTGDP at LOWESTUnemployment is at its HIGHESTEX: the Great Depression 1929-1939

105Stock Market Crash1929, Black Tuesday

Run on the banks! NO FDICWall St.The Great Depression

The Great Depression

1933: unemployment=25%Today: unemployment = 8.6%

ExpansionEconomy is IMPROVINGBull marketInflation (CPI rises)GDP upUnemployment is FALLING

109Peak (a.k.a. Boom)Economy is at its HIGHESTGDP is at its HIGHESTUnemployment at its LOWESTEX: the dot com boom in the 1990s

110The Business Cycle____________________________________________111FEDFederal ReserveThe Federal Reserve (FED) is USAS Central BankIt Regulates Monetary PolicyVideoWrite down what a Central Bank is and its missionTools of regulating economyWrite down the 3 tools the FED usesTools of the Central BankInterest Rates/ Monetary Policy: how much you have to pay if you borrow moneyLow Interest Rates: Expand EconomyHigh Interest Rates: Slow Economy

Tools of the Central Bank2. Liquidity- providing loans to banks to help stabilize financial systemlender of last resortTools of the Central Bank3. Providing regulation and supervision: keeps financial system healthy by regulating banking systemGold StandardAll paper money is backed by goldUS off the gold standard in 1971

Why? Hint: inflationFiatMoney has value because of law not goldFiscal PolicyTools used by the elected government to stimulate the economyStimulus- money in the economy to help stimulate itSpend money to make moneyNC EconomicsTobacco FarmingTextilesResearch- Research TriangleFinance/Banking- Charlotte