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Chapter 1 - The Economic Way of Thinking

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Kevin Krizan

on 25 June 2015

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Transcript of Chapter 1 - The Economic Way of Thinking

Chapter 1 - The Economic Way of Thinking
Scarcity: The Basic Economic Question

What is Scarcity?
Wants are unlimited but resources are limited (we can’t have everything we want)

Two Principles of Scarcity
(1)People have wants
•We must make choices between our wants and needs
•These are unlimited and constantly changing
•New products, technology, increase or decrease in incomes can all cause changes in wants (and even needs)
•Examples? ___________________________________________________________
(2)Scarcity Affects Everyone

Scarcity leads to 3 Economic Questions
•What to Produce
•How to Produce it
•Who will receive these products or services (For Whom to produce)

What to Produce
Every country must look at available resources to determine what they will use these resources to produce

•Natural Resources (Land)– must also think of conservation and environmental issues
•Labor and their skills or abilities (may decide to allocate resources for education)
•Capital Resources – What factories and tools are available
•Entrepreneur – someone who is available to take risk to produce new products and companies

Countries may decide to import the resources needed to produce goods (iron ore in Japan).
Countries (like ours) may allow producers(businesses) and consumers (us) to make most of these decisions
How to Produce
This is partially determined by skill level of workforce and available capital resources.
May also bring values of the society into the decision. (Amish).
Economic growth and new technology will change the answer to this question over time

Inventor Elon Musk reveals new super-fast 'Hyperloop' transport
For Whom to Produce
The basic philosophy of the society (country).
•Should everyone share equally? (Socialism)
•Should those with the most money have more of the resources? (Capitalism)
•Should the government decide and reward those they decide worthy? (Communism)

Four Factors of Production
Natural Resources
(Often referred to as Land) All resources that come from nature in their natural state (not processed)
Human Resources
(Often referred to as Labor) Work performed by humans to provide goods and services
Capital Resources
- Capital goods are used to produce other goods and services.
Capital goods DO NOT refer to financial capital (money).
Sometimes called Real Capital or Physical Capital

The taking of risk to combine resources to create a new business, products or process (Bill Gates, Oprah Winfrey)
Usually done to secure financial gain but may be for other reasons (medical advancements, Tim Berners-Lee, etc.)

Section Two: Economic Choice Today:
Opportunity Cost
Economic Choices are Shaped by:

-These are benefits that encourage people to act a certain way)
When the personal incentive from choosing an option increases a person becomes more likely to choose that option (Jaywalking; Picking up $$$; Speeding)
(The benefits and satisfaction gained from using goods or services)
(Making decisions using the best combination of costs and benefits)

Trade-offs and Opportunity Cost

is givings up something (or part of something) to have or do something else
Not going to post-secondary school to work after high school (Trade-off?)
If a resource is used to produce one good or service it cannot be used for another - That sacrifice is called a trade-off
Opportunity Cost
Value of the next-best alternative; The last thing you give up when making a decision
Opportunity Cost is the value (not monetary cost) of the last alternative you gave up
Decision Making Grid
With tough decisions, it pays to make a list of benefits and opportunity cost for each alternative
(Post-secondary education or full-time job; Move for a job; Move out on your own)
This is called a Cost Benefit Analysis
Marginal Costs and Benefits
Costs and benefits change over time
Goals and circumstances also change
Marginal Cost - cost of using one more unit of good or service (example - hot dog)

Marginal Benefit - benefit or satisfaction received from using one more unit of good or service (hot dog)
Section 3 : Analyzing Production Possibilities
Economic models are used to represent economic activities
Production Possibilities Curve (PPC)
A graph showing the impact of scarcity on an economy showing the max number of goods or services that can be produced with the available resources

Assumptions of PPC Model
Resources are fixed - cannot add more
All resources are fully used - full production
Only two things can be produced
Technology is fixed (does not account for advances)
PPC shows:
Opportunity cost of each choice
Producing one more of item "Guns" means less "Butter"
Efficient production (Points B, C and D (along the curve)
Can also show inefficiencies (Point A) and future production plans or overutilization of resources (Point E)
Why cost increases by adding additional production?
Need new resources, machines, and factories
May need to retrain workers
Section 4: The Economist's Toolbox
Working with Data-
Economics is something we all are involved in every day, but may not realize (Individuals, Business Owners, Government).
All sectors make economic decisions all the time

How Economists fit in-
Economists study decisions made by the three sectors (Consumers/households, Businesses and Government)
Then try to make sense and logic out of those decisions.
They use statistics to see patterns of behavior then organize and interpret the information into Economic Models

Economic Models
Help economists explain why things happen the way they do. (Can be Words, Graphs or Equations)

Charts and Tables
Used to look for trends, connections and other relationships. Because data is arranged in rows and columns these can be used to show patterns in that data (ex. comparing economic growth of different countries using more than one statistic, unemployment rates per state)

Using Graphs
Used to identify trends in statistics. Information can be taken from charts and tables.
•Line graphs – can show change over time(such as economic growth of one country over time)
•Bar graphs – compare data (such as economic growth of different countries)
•Pie graphs – shows relationship of parts of data to the total data (such as pie graph of your budget – different slices represent different areas of of spending)

Two types of Economics
-Looks at parts of economy, such as, pricing, consumer and producer behavior, competition)
Microeconomics looks at the behavior of individual people and companies within the economy.
Microeconomics is interested in how specific parties choose to use the limited resources that are available to them
-Looks at the entire economy – the “big picture”, such as unemployment rates, gross domestic product (GDP), overall price levels, and inflation)
Instead of focusing on individual households and firms, it examines conditions within the economy as a whole

Positive and Normative Economics
Positive Economics
– based on facts, which can be tested and proved
Normative Economics
is “subjective” – goes beyond the statistics bringing in value systems
Sometimes difficult to distinguish between the two
"government should provide basic healthcare to all citizens" (normative - governments "should" provide is subjective
"government-provided healthcare increases public expenditures"(positive - that is a fact)

Adam Smith
Published “Wealth of Nations” in 1776. Was a philosopher and “moralist” – no such thing as Economics at the time.
Considered Father of free market economics.
Was basis of economic ideas for some of our founding fathers – Hamilton, Jefferson.
Included idea that society should operate by “natural law” rather than written law.
Developed the Invisible Hand Theory

Invisible Hand Theory
(Laissez-Faire) – if government keeps hands off economy the economy will function as if an invisible hand were controlling it.

Why? Smith believed all mankind (consumers and businesses) would work in the best interest of themselves. Because it is in our best interest to have a well functioning economy this would cause us to work in the best interest of the society as a whole.

Problem with Smith’s theory?
•Individuals may take advantage of others
•Corporations may not care about the external problems with their business:
(Current economic situation, pollution, worker and product safety. child labor laws, minimum wage laws)

Free Market Assumption
Many promoting free market economics assume those making a profit will use much of that profit to improve product/services, expand business, increase standard of living for workers, etc)(Most of the time this is the case, but not always)
Sadly this has not always happened (Oil company spills; Dangerous working conditions)
This is why each government of the world feels the need to not have a completely hands off approach to markets.

Trip to Florida
Option #1 - Take the bus - $200
Option #2 - Take a plane - $400

The bus is cheaper - does this mean taking the bus is the correct decision?
Plane Bus
ticket $400 $200
time $8x8=$64 $8x48=$384
total $464 $584

Think - Pair - Share

Find $ pay per hour that would make the plane/bus equal
Plane Bus
$400 (ticket) $200 (ticket)
+8 hours +48 hours
solve for x solve for x

Time spent traveling
bus - 24 hours
plane - 4 hours
Enough information?
Value of a person's time:
Suppose a person's time is worth $8/hour
Should they take the plane or bus?
8x + 400 = 48x + 200
-200 -200

8x + 200 = 48x
8 8

200 = 40x
40 40

5 = x
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