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Economics

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John Blechacz

on 16 September 2016

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Transcript of Economics

Resources are the foundation of an economy that are used to produce products and services.

There are four types of resources:
Factors of Production
What was the hardest purchasing decision you have ever made?
The most-valued alternative that was sacrificed when another option was selected.

When choosing between two high value options, this is the option that was not chosen.
Opportunity Costs
How do these factors impact price and demand?
What Impacts Price? What Impacts Demand?
Demand
What resources are needed to product automobiles?
Production Possibility Frontier:
Opportunity Costs
Economics
The social science of studying how people, both individually and in groups, decided to use scare resources to produce, distribute, and consume products and services.
Production Possibility Frontier:
Opportunity Costs
Demand
What products are in ghigh demand right now
Quantities of a particular good or service that consumers are willing and able to buy at different prices at a particular time.
Predictions of the amount of Godiva chocolate Mr. B will purchase at different prices
Godiva Chocolate
Demand
Microeconomics (Small Scale)
An area of economics that studies the behavior and decision making process of individual consumers, companies, and industries.
what do you buy with your money and how much do you spend?
Macroeconomics (Large Scale)
An area of economics that studies the performance of the economy as a whole (both nationally and globally).

Macroeconomics examines the connection of unemployment, income, growth, gross domestic product, inflation and price levels and how they change.
what impact does our shopping habits have on others?
Land: (Natural Resources) such as water, soil, oil, minerals, and wood

Labor: (Human Resources) the physical and mental efforts people use to create goods and services

Capital: (Manufacturing Resources) the buildings, tools, and machines used to help to product goods and services.

Entrepreneurship: (Ideas) the imagination, innovative thinking, and managerial skills need to start and operate a business.
What happens if there is not enough food or water?
The inability to support and satisfy wants due to either a shortage or limited availability of a desired resource.

Wants > Resources
Scarcity
Example: Oil and Water
what is the best resource for producing energy?
Renewable Resources:
After a resource has been used, it can be replenished over time.

(solar energy, wood, and soil)

Non-Renewable Resources:
After a resource has been used, it cannot be renewed (it won't come back)

(fossil fuels, copper, gold)
Resources
Example:
If a farmer has to choose between planting corn and soybeans, what is the opportunity cost if he/she decided to plant corn? Soybeans?
A curve depicting all maximum output possibilities for two or more goods based on the use of available resources.

The PPF assumes that all inputs are used efficiently.
Represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible.

It shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.
The Law of Demand:
The inverse relationship between the demand for a product and the price of the product.
Example:
Consumers will buy more gas if the price is low, and less if he price is high.
Change in Income
Availability or Prices of Substitutions
Availability or Prices of Complementary Goods
Change in Weather or Season
Change in the Number of Buyers
Changes in Styles, Tastes, and Habits
Change in Expectations
# of chocolates
Price
$50
$40
$30
$20
$10
$5
0
20
40
60
80
90
Demand Curve
Who has the most buying power?
What Impacts Price? What Impacts Demand?
Demand
Buying Power:
The quantity of goods and services person can buy with a given amount of money.
Diminishing Marginal Utility:
The where an additional unit of a product consumed is less satisfying than the one before it.
Substitutes:
A good or service that can be replaces with a different good or service.
What happens to the demand of jelly if the price of peanut butter goes up?
Demand
Complementary Goods:
Products that are often used together or support each other.
Price Elasticity of Demand:
Consumers are less likely to purchase something at higher prices compared to lower prices
Market Demand:
The total number of individuals demanding a product or service in a given market at a particular time.
Demand
Changes in Demand
How does the demand for a product decrease?
Consumers are buying less of a product at all possible prices
What products are hard to find?
Quantities of a particular good or service that companies are willing and able to sell at different prices at a particular time.
Supply
Law of Supply:
The positive relationship between the quantity supplied and the price of the product.
Example:
If the price of gasoline increase, then the supply does as well.
How might these factors impact supply of a product?
What Impacts Supply?
Supply
Change in the Cost of Production
Change in Technology
Change in the Number of Producers
Change in Expectations
Market Supply:
The total supply of a product available in a market.
(adding the inventories of all companies together)
Price Elasticity of Supply:
Supply
Price Inelasticity of Supply:
Large or major changes in supply due to price changes
Small or minor changes in supply after a change in price
Predictions of the supply of chocolates that Godiva has at each price.
Godiva Chocolate
Supply
Chocolates Supply
Price
$50
$40
$30
$20
$10
$5
900,000
700,000
500,000
300,000
200,000
0
Supply Curve
Supply
Changes in Supply
How does the supply of a product increase and decrease?
If the price of a product is low, then consumer will buy more of it thus reducing supply.

If the price of a product is high, then consumer will buy less of it thus increasing supply.
Why is this also called the market clearing point?
Supply and Demand
Equilibrium:
Is the price at which the amount of the supply is equal to the amount of demand. This is the price that "clears the market"
This is the point where the supply curve and demand curve intersect.
Supply and Demand
Equilibrium:
Equilibrium
Supply and Demand
Market Shortage:
Equilibrium
The difference between the amount supplied and the amount demanded when the asking price is below the equilibrium.
Shortage
Supply and Demand
Market Surplus:
Equilibrium
The difference between the amount supplied and the amount demanded when the asking price is greater the equilibrium.
Surplus
Supply and Demand
Price Floors:
A price floor is the lowest legal price a product can be sold at.
Binding Price Floor:
Setting the price floor above the equilibrium price





Non-Binding Price Floor:
Setting the price floor below the equilibrium price.
Supply and Demand
Price Ceiling:
A price ceiling is the highest legal price a product can be sold at.
Binding Price Ceiling:
Setting the price ceiling below the equilibrium price





Non-Binding Price Ceiling:
Setting the price ceiling above the equilibrium price.
What is the difference between a wage and a salary?
Consumer Spending and Investing
Wage:
Earnings paid by the hour or unit of production.
Salary:
Earning paid weekly, monthly, or yearly.
Gross Income:
The amount of money an individual or company earns before paying taxes and other obligations.
Net Income/Net Worth:
The amount of money an individual or company earned after paying taxes and other obligations.
Consumer Spending and Investing
Taxes:
Collection of money from citizens and businesses, by the government and used to provide needed services.

Progressive Tax:
Types of Taxes
Taxes that take a larger share of income as the amount of income grows. Generally the range of tax is about 10-40%
This is taxing system is used by the United States.
Regressive Tax:
Taxes that take a smaller share of income as the amount of income grows.
The more money you make the less you pay in taxes.
Why might this be a good idea?
Why might this be a bad idea?
Excise Tax (Sin Taxes):
Special taxes imposed on specific goods and services like gasoline, alcohol, cigarettes, telephone service, and some travel services.
Arizona's Gas Tax= 8.0% per gallon
Arizona's Tobacco Tax= $2.00 per carton
Proportional Taxes (Flat Tax):
Tax rates that are the same rate regardless of the income.
Regardless of income, the tax percentage would be the same.
Sales Tax
Consumer Spending and Investing
Interest:
Simple interest:
Compound Interest:
Interest paid on the original principal and also on the unpaid interest that has accumulated.
The charge for the privilege of borrowing money, typically expressed as an annual percentage rate (APR).

Interest is commonly calculated using one of two methods: simple interest calculation, or compound interest calculation.
Interest paid only on the principal

Simple Interest= P x I x T
Principle:
The amount that is borrowed and owed
Interest Rate:
The percentage rate that is owed on borrowed money.
Time:
The length of the loan. When it must be paid back.
Compound Interest= (P x I) +P
Consumer Spending and Investing
Credit:
Loan Credit:
Sales Credit:
Trade Credit:
Creditor:
The one who lends the money or gives out a loan (Banks)
Debtor:
Anyone who buys on credit or receives a loan (Borrower)
Borrowing money to buy something now, with the agreement to pay it back later.

The use of someone else’s money
Promise to repay the amount owed within a period of time
Interest is usually paid ( money added onto the amount owed)

Money borrowed and used for a special purpose.

Auto Loan
Mortgage
Student Loans (College)
Usually offered by most retail and wholesale business. Involves the use of charge accounts and credit cards by consumers.
Used by businesses when it receives goods from a wholesaler. The retail business pays for products at a later date. Normally there is a price discount for early payment.

Consumer Spending and Investing
Taxation
Anyone who collects wages or earns money through investments and other forms of income are subject to federal income taxes.

Purpose of Taxes:
To Raise money to finance government programs and services.
Education, Law Enforcement, Roads, etc.
Taxes regulate or restrict certain types of business, products, or services.
Income, sales, estate and gift taxes are revenue taxes.
Excise taxes and import duties are regulatory taxes.

Consumer Spending and Investing
Government Spending
Government revenue (national, state, and local) from from the collection of taxes.

Deficits vs. Balance

Is the United States in a deficit or a surplus?
Internal Revenue Service (IRS):

Agency under the department of the Treasury. Country’s Tax collection agency with the responsibility to assist the tax payer in filing and paying taxes.

Power to Tax:

The power to levy taxes rests with Congress. The Constitution states that “all bills raising revenue shall originate in the House of Representative.”

Consumer Spending and Investing
Facts About Credit:
In 2013, Average Credit Card debt in the U.S. was roughly $5,047

Over 80% of all purchases in the U.S. are made with credit rather than cash.

70% of Americans are in debt
73% of 18-49 year olds are in debt
60% of 50+ year olds are in debt

80% of these people do not have a budget or financial plan

Consumer Spending and Investing
The 3 C’s of Credit:
Three factors are used to help decide whether or not to grant someone credit.

Character: Your honesty and willingness to repay a debt.

Capacity: This is your ability to repay a debt.

Capital: The value of your processions. Includes available money from accounts.
Consumer Spending and Investing
Granting Credit:
Credit Information:
References, Income, Current Debt, Employment, Assets

Three Major Credit Agencies:


Credit rating:
When credit is used wisely you will build a positive credit rating.

The Higher your credit score the better!
Makes future purchasing easier

Collateral:
Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral.

Co-Signer:
A person who signs an official document (such as a loan, contract, or law) with another person. The person who cosigns something is also responsible for ensuring repayment.
If you borrow $1,000 at 9 percent for one year, what is the amount of interest owed?

I = $1,000(P) x 0.09%(R) x 1(T)= $90

If you borrow $1,000 at 12 percent for one month, what is the amount of interest owed?

I = $1,000(P) x 0.12%(R) x 1/12(T)= $10

Annual Percentage Rate (APR)-
Percentage cost of credit on a yearly basis. By law, all sales and loan credit must disclose the APR.
Think of Car Commercials!

How much money should you save?

What are you saving for?
Saving and Investing

Putting aside money to help reach a financial goal.

Savings Plan:

Using your savings to earn more money.

Investing:
Stock Market
Bonds
Money Markets

Savings Account
Checking Account
Why Should You Save and Invest?
Short-term needs
-Purchase Goods or Services

Long-term needs
-Home ownership
-Education
-Retirement
-Investing

Financial security
-Medical Costs
-Home/Car Repairs

How much money should you save?

What are you saving for?
Saving and Investing
Yield (Rate of Return):
Liquidity:
Percentage of interest that will be earned over a time period
The ease which investments can be converted into cash without losing value
Rate of Return
Savings Account:
0.60% -0.90%
CD (Certificate of Deposit):
1.00%- 1.50%
Money Market:
0.75%-1.00%
Bonds:
1.00%-3.00%
Stock Market:
Loss-10.00% +
Liquidity
vs.
Illiquidity
Bonds
Stocks
Savings
Real Estate
Collectables
Automobiles
Investing (Risk and Reward)
Risk and reward are directly related. The more risk you are willing to take the more potential for reward.
Low Risk/Low Return
Corporate and municipal bonds
U.S. government savings bonds
Treasury securities

Medium Risk/Medium Return
Stocks
Mutual funds
Annuities
Futures
Options
Penny stocks
Collectibles
Stocks

High Risk/High Return
What is the difference between a public company and a private company?
Stock Market
Private Companies:
Does not offer or trade its stock to the general public. They are privately owned.

Public Companies:
Company ownership (stocks) can be purchased by the general public.
IPO (Initial Public Offering)
Initial sale of a company’s stock
Get financial books and contracts organized
Get approved by the SEC

Private
Public
Stock Market: Public Companies
Common Stock:
Preferred Stock:
Type of stock that…
Pays variable dividends
Gives stockholders voting rights
Type of stock that…
Pays fixed dividends
No stockholder voting rights

Dividends:
Part of a company’s profits that are shared with stockholders
Amount paid out per share
% of earnings/number of shareholders

(companies don't always pay out dividends)
Stock Market
Stock Exchange:
A regulated market which provides services to buy and sell stocks, bonds, and other securities

NASDAQ (National Association of Securities Dealers Automated)
-All trading done electronically

NYSE (New York Stock Exchange)
-All trading done on the floor

Stock Market
Stock Market Index:
Is a number that measures the value of a collection of stocks. As the stocks in this group change value, the index also changes value.
If an index goes up by 1% then that means the total value of the securities which make up the index have gone up by 1% in value.

Example: Dow Jones and S&P500
Stock Market
Bull Market:
Bear Market:
Prolonged periods of rising stocks and a general feeling of investor optimism
Prolonged periods of falling stocks and a general feeling of investor pessimism

Changes in the Value of Money
The value of money is always changing.
The Buying Power of the U.S. Dollar
1900:
2016:
~ $28.00
$1.00
Purchasing Power:
The amount of goods or services that can be purchased with a unit of currency.
What causes this change?
Changes in the Value of Money
Inflation:
An increase in the general price level of goods and services over a period of time.
When price level rise, each unit of currency buys fewer goods and services.
The price for a bottle of Coca-Cola in 1920 was 5 cents
The price for a bottle of Coca-Cola today is $1.29
The average price for a new car in 1960 was $2,275
The average price for a new car today is $32,890
Changes in the Value of Money
Hyperinflation:
When inflation becomes extremely rapid or out of control.
An imbalance in the supply and demand for the money. This causes prices of goods and services to increase, while currency (money) loses its value.
Example:
Post WWI Germany (Weimar Republic) from 1921-1924
Pre-WWI: 1 USD = 4.2 German Marks
1924: 1 USD = 4,210,500,000,000 German Marks
Changes in the Value of Money
Cost-Push Inflation:
Demand-Pull Inflation:
The general rise in price levels of products and services due to increases in the cost of wages, raw materials, and other resources.
The rise in price levels due to the demand in an economy strongly outweighing its supply. When this happens, prices increase.
(Too many dollars chasing too few goods).
Changes in the Value of Money
Stagflation:
Deflation:
A condition of slow economic growth (high unemployment) accompanied by a rise in prices (inflation).
A general decline in prices, often caused by a reduction in the supply of money or credit. This is due to a decrease in government, personal or investment spending.
What happens if consumers are not buying or investing?
Example: U.S. in 1970
Production and Productivity
In order for us to consumer the things we love (food, music, clothing) we need someone to produce it.
Name one thing you cannot live without?
Production and Productivity
Consumers demand having products and services available and easily accessible.
Productivity:
The output of goods and services measured by per unit of land, labor, and capital.
Labor Productivity:
The amount of goods and services the work force can produce during a given time period (hour, day, week, month, or year)
Production and Productivity
How can a company increase its productivity/output?
Technological Advancements
Increasing the Workforce
Outsourcing
Improvements in the Supply Chain
Educating the Workforce
Production and Productivity
Learning Curve:
Experience Curve:
Naturally Occurring Ways Production Increase:
Where the same task or series or tasks are repeated over and over and knowledge is learned over time.
The more you do something, the easier, faster, and better you do it.
Production and Productivity
Law of Diminishing Marginal Returns:
Negative Impacts on Production Increase:
If out of all stages in a production process, a company adds more of one stage, while holding all others constant, at some point the production process will produce lower per-unit returns.
Bottlenecks:
A phenomenon where the performance of an entire system is limited by components or resources.

Production and Productivity
Economies of Scale
Reductions in cost resulting from mass productions of a product or a large number of services being performed.
Production and Productivity
Gross Domestic Product (GDP)
The final value of all goods and services produced within a country.
Nominal Gross Domestic Product (GDP)
GDP that is calculated and reported in current prices.
The more produced, the less cost per unit.
Trade
Import
Export
When a country receives goods, services, or commodities from another country.
When a country sends goods, services, or commodities to another country.
Trade
Tariff
Quota
A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers.
A trade restriction that limits the number of goods and services that can be imported or exported during a particular time period.
Trade
Trade Surplus
Trade Deficit
An economic measure of a positive balance of trade, where a country's exports exceeds its imports.
An economic measure of a negative balance of trade in which a country's imports exceeds its exports.
$$$
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Market Systems
A set of laws, institutions, and activities that guide economic decision making
Four fundamental questions:

What goods and services should be produced?
What quantity of goods and services should be produced?
How should goods and services be produced?
For whom should goods and services be produced?

Market Systems
The way nations answer the four basic economic questions determines their economic system.

Traditional system:
Relies on farming and simple barter trade

Market system:
Based on supply and demand with little government control

Command system:
Run by a strong centralized government
Tariffs:
A tax imposed on imported goods and services to increase the price, making them more expensive to consumers.
Why do this?
Domestic Goods and Services:
grown, produced, or manufactured in a country then sold and consumed in the same country.
Imported Goods and Services:
grown, produced, or manufactured in one country then sold and consumed in another country.
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