ECONOMICS

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ECONOMICS

• What is it??
• Hmmmmm ??

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ECONOMICS

• Book Definition
• How people choose to use limited resources in an
  effort to satisfy unlimited wants

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Economics

• Choices. . . What to buy, what not to buy. .
• Should I spend time reading this, or go on
  Youtube and watch a funny video.. .
• Should I get a job this semester or concentrate
  on my classes. . .
• This is an everyday definition of Economics.

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SCARCITY

• The problem of limited resources and unlimited
  wants.
• This is the essential economic problem everyone
  has, even Bill Gates.

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A resource or goodis scarce if

• people want it
• there is not enough of it to fulfill everyones
  wants
• it has alternative uses
• using it one way means giving up using it
• another way

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Two Basic Questions Everyone has. . .

• What do I need and What do I want?
• You need to know. . . What is the difference
  between a need and a want?

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A Need

• Textbook Definition a basic requirement for
  survival- food, clothing, shelter.

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A Want

• Textbook Definition- A way you express your needs
• Huh? What does that mean?

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Need vs. Want

• You need to eat
• You want a Doughnut
• You dont need a Doughnut. . Some broccoli would
  work just as well. . But you WANT a doughnut
• The doughnut is how youve expressed your need to
  eat.

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In Economics some words have very specific
meanings outside of how we normally use them.

• For example- the word Cost
• In the regular world- the word cost means, the
  price of something you buy.
• In Economics- the word Cost means Consequence.
• You need to know the meaning of the word Cost

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TINSTAAFL

• There is no Such thing as a free lunch.
• When you make a choice, you usually give
  something up.
• For example, lets say you have a dollar

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With your dollar you have two options

• A Candy Bar or A Soda
• You can only buy one of the two options with your
  dollar

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If you chose the Candy bar

• A Candy Bar No Soda for you

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If you choose the soda
No Candy for you
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You cant have both

• By choosing one, you give up the other.
• Whatever you did not choose, that was the cost
  (consequence) of your choice.

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3 BASIC ECONOMIC QUESTIONS

• WHAT GOODS SERVICES SHALL BE PRODUCED?
• HOW SHALL THEY BE PRODUCED?
• FOR WHOM SHALL THEY BE PRODUCED?
• Everyone has to answer these three questions for
  everything that they do.

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Three Question Example

• You want to make a peanut butter sandwich for a
  snack
• Youve just answered the first basic Economic
  question- WHAT GOODS SERVICES SHALL BE
  PRODUCED?- Answer- A peanut butter sandwich

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So what do you do. .

• Get out the bread, spread peanut butter on one
  piece, jelly on the other and put them together.
• Youve just answered the second basic economic
  question- HOW SHALL THEY BE PRODUCED?

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Then you eat it. . .

• Youve just answered the third basic economic
  question- FOR WHOM SHALL THEY BE PRODUCED? For
  yourself !

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• WHAT GOODS SERVICES SHALL BE PRODUCED?
• HOW SHALL THEY BE PRODUCED?
• FOR WHOM SHALL THEY BE PRODUCED?
• Every person
• Every business
• Every country
• All must be able to answer these questions, if
  they cant -people die, businesses go broke,
  countries collapse.

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LIMITED RESOURCES(We cant always get what we
want)

• Think of three things that you want but cannot
  afford.
• Think of three things you wish were in Woodland
• Think of three things that America needs but must
  obtain from another country

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Possible Answers

• For yourself- A car, clothes, more food, I-pod,
  computer
• For Woodland- A better Mall, a Zoo, a theme park,
  cheaper housing
• For America- Oil, Electronics, Cars,
• We cant have everything due to scarcity, we must
  specialize based on what we have to work with.

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There are four basic elements that go into any
type decision making, business or country.

• FACTORS OF PRODUCTION
• NATURAL RESOURCES
• CAPITAL GOODS
• LABOR
• ENTREPRENEURSHIP

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NATURAL RESOURCES

• THINGS PROVIDED BY NATURE
• For example- the peanut butter for your sandwich.
  
• LAND, AIR, WATER, FORESTS, COAL, IRON ORE, OIL,
  ETC.
• AN ECONOMY CANNOT CREATE GOODS IF IT LACKS
  NATURAL RESOURCES.

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CAPITAL GOODS

• HUMAN MADE RESOURCES THAT ARE USED FOR
  PRODUCTION.
• For example- the knife used to spread the peanut
  butter, you cant eat it, but you need it for the
  sandwich process to work.
• FACTORIES, MACHINES, TRUCKS, BUSINESS BUILDINGS.
• THINGS THAT A BUSINESS USES TO MAKE ITEMS THAT
  WILL BE SOLD TO A CONSUMER.

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LABOR

• HUMAN RESOURCES
• THE HUMAN EFFORT USED IN PRODUCTION.
• For example- you making the sandwich

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ENTREPRENEURSHIP

• INDIVIDUALS WHO USE CREATIVITY AND KNOW HOW TO
  CREATE A BUSINESS.
• THEY ASSUME THE RISK OF FAILURE.
• For example- you deciding to make a sandwich. If
  you decide to sell your sandwich, you might make
  money, you might not. Thats the risk.

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Some MisconceptionsCorrected

• Not resources
• Time
• Money
• Economics and Finance are not the same
• Economics is about resources
• Finance is about money
• Finance is an application of economic
• reasoning

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More Terms to know

• A Good - an item that is economically useful or
  that satisfies an economic want.
• An example- A car, I-pod, soda, pants
• Note- A Capital good is an item used to produce
  another good- knife for peanut butter.

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• A Service work performed for someone
• Example- haircut, oil change, teeth cleaning,
  brain surgery.
• You cant hold a haircut, but you can get one.

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• Consumer- Me, you, everyone.
• People who use goods and services to satisfy
  wants and needs.

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Question Time. . .

• What makes something valuable?
• Value means- Worth that can be expressed in
  dollars and cents.

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• Are you valuable to your parents??
• How much are you worth to them?
• Can they express what you are worth in money ??
• Odd questions. . .

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• Value in Economics doesnt have anything to do
  with emotions, strictly dollars.
• Currently you cost your parents just over an
  estimated 7500 dollars a year in food, housing,
  and medical expenses.
• Next year, the number goes up when you include
  college tuition.

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Paradox of Value

• Which is more valuable-
• A Diamond Ring or a Flat Screen TV

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Paradox of Value

• Lets be honest- Many guys would say the TV, and
  many girls would choose the ring.
• Who is right?

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Another Term

• Utility the capacity to be useful.
• For example in a utlity closet you find all sorts
  of useful things- brooms, mops, sponges etc. .

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Paradox of Value

• Now. . Which one has more utility ?
• How is a Diamond Ring useful?
• How is a TV useful?

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Paradox of Value

• TVs do have more utlity than a Diamond ring,
  unless youre trapped in a glass box and have to
  cut your way out.
• Generally, we assign more value to a Diamond.
• This is known as the Paradox of Value- Assigning
  value to items with little utility, but high
  scarcity.

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Making Economic Decisions

• For every decision you have choices, some big,
  some small, sometimes you have many, other times
  you have only a few.
• Term Trade-off any alternative choice.

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OPPORTUNITY COST

• The next best alternative use of a resource that
  is given up when a decision is made to use
  resources in a particular way.

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Back to the Candy Purchase

• Snickers or Skittles
• Lets presume, that if Bel-Air was out of
  Snickers, your next choice for candy would be
  Skittles.

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If you had to choose between the two

• Snickers or Skittles
• If Bel-Air had both in stock, and you chose
  Snickers, your Opportunity Cost would be the
  Skittles, since you cant buy both.

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Illustrating Opportunity Cost.

• You cant buy everything you want
• Countries cant produce everything they need.
• In Economics, we use graphs to explain the range
  of choices in any decision.

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Ok. . An Odd example. . . (I really didnt make
this one up)

• Suppose there is an imaginary country.. .
• In this country, they are very productive, but
  not very creative. They can only make two things
  Guns and Butter

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• As President, you can order your people to make
  Guns, Butter or both at the same time.

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• If you order everyone to make Guns, they can
  produce a maximum of 50 Guns
• If you order everyone to make Butter, they can
  make a maximum of 50 Butter.

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If you had to graph your options it would look
like this

• 50

Point A
Point A represents Everyone producing Guns Point
B represents Everyone producing Butter
Guns
Point B
0
Butter
50
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If you had to graph your options it would look
like this

• 50

Point A represents Everyone producing Guns Point
B represents Everyone producing Butter Point C
represents ½ of your population producing Guns,
and the other ½ producing Butter
Point A
Guns
Point C
Point B
0
Butter
50
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The Curve is called a Production Possibilities
Curve or Production Possibilities Frontier

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The Curve represents all possible options that
you have. In this case, how much guns or butter
you can produce.
Point A
Guns
Point C
Point B
0
Butter
50
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Opportunity Cost

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Point A
If your country is currently at point A, and you
decide to produce a few pounds of Butter, the
opportunity cost are the guns you have to stop
producing.
Guns
Point C
Point B
0
Butter
50
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Economic Growth

• 50

Suppose you invade a neighboring country and
obtain more resources, your PPF line would shift.
Point A
Guns
Point C
Point B
0
Butter
50
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Economic Growth cont.

• 50

Based on your new curve, you could produce more
guns and butter, because your resources
Increased.
Point A
Guns
Point C
Point B
0
Butter
50
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Guns and Butter- Translation

• Guns It represents Government Spending- Roads,
  the FBI, the Army, the Post Office etc. .
• Butter- Private Spending- Buying a house, a
  cheeseburger, a cell phone etc. . .
• During the Cold War, we beat the USSR, because we
  could produce more Guns and Butter at the same
  time, they spent all of their resources on Guns.

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Which of the following is anopportunity cost?

• a. A bad grade on a quiz because you didnt study
• b. Your mothers hurt because you forgot her
  birthday
• c. Not going out with your friends because you
  are called in to work.
• d. All of the above are opportunity costs.

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Thinking in Economics

• Economists use
• Models
• No, not that kind. . . Graphs. . .
• Cost- Benefit Analysis weighing the consequence
  of a decision against its benefits.
• Taking Small Steps.