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Chapter 1 Econ.

I’m taking a course that has the
highest failure rate at college.

Uncle Sam wants you to
do better in economics.

What is Economics?
Economizing Problem

Dealing with “Scarcity”
“Econ, Econ,
The Hot Major For Undergrads Is E conomicsIinwant to major
Econ.”
WSJ – 2005
• Universities awarded 16,141 economics degrees last year
at 272 colleges & universities which is up 40% in five years.
years
• There has been a clear explosion of economics as a major, major
particularly at the top colleges.
• At New York University,
University the econ major has doubled in
10 years.
years At 800,
800 it is now the most popular major. Economics is also the
number one major at Harvard (964 students), Columbia (up 67% in 5 yr.),
Stanford,
Stanford Penn,
Penn Princeton,
Princeton Chicago (24% of graduating class),
class) and 2nd
at Brown,
Brown Yale,
Yale and University of California at Berkeley.
Berkeley
• The increase in the numbers is the result of many students seeing
economics as the best vehicle promising good pay and security.security
• Students realize that understanding economics has become a fundamental
necessity of life.
life Economics rising popularity is even global.
global Econ majors
in Poland have doubled in 6 years. In Russia,
Russia econ majors have jumped
from 18% of students to 31%. 31% Also, the chairman of the economics
department at London School of Economics says econ’s popularity is at
an all time high.
high
“Beautiful
forest!.
MACROECONOMICS...

“Beautiful
leaf!”

MICROECONOMICS...
Great Forest!

• Macro [national] economics – concerned
with the economy as a whole Macro
examines the “forest, not the trees,
leaves, or specific pieces of bark.”

2. Micro [details of the big picture] – concerned with specific
.

economic units or individual markets under a microscope.
Emphasis is on individual households, industries, or firms
[like the # of workers employed by Ford] [Concerns the
components of the economy]
Micro examines the “trees, leaves, & pieces of bark,
rather than the forest.”
Nice bark!
Macro[large
Macro ](telescope) “whole economy” [economy-wide issues]
Micro[
Micro small](microscope] “segment of the economy” [issues in the economy]
“Beautiful,
“Check out those beautiful forest!”
pieces of bark!.

Production
Microeconomics Macroeconomics
How much steel Total industrial output
How much office space
.
Gross Domestic Product

Prices
Price of individual goods Price of medical care
Rate of inflation
Employment
Jobs in the steel industry Total number of jobs
Economy’s unemployment
Is the following Micro or Macro?
1. The price of digital cameras increased 5% last year.
2. Unemployment was 5.4% for the U.S. workforce.
3. Unemployment in the auto industry was 8% last year.
4. Duck National Bank lowered its interest rates on CDs to 8%.
5. The Inflation rate rose to 2.7% last year.
6. The computer industry laid off 8% of its workers last year.
7. The price of gasoline rose 25% last year.
“What forest, check
these branches,
limbs, and leaves.”
THE FOUNDATION OF ECONOMICS
SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

BUT LIMITED OR SCARCE RESOURCES!
Scarcity – Wants > Availability
of Resources
ECONOMICS - “Science of scarcity”
-the study of the choices people make in an effort to satisfy
their unlimited needs and wants from limited resources.
resources

Scarcity Choices Opportunity Cost

Economics is the academic discipline most discussed by the general public.
It is also one of the least understood.
understood [“Language of graphs”]
Scarcity Problem

Food, clothing, shelter, Land, Labor, Capital, Entrepreneur
Chrysler 300, mansion, Nintendo DS,
jewelry, iPod, projector, digital camera, Rent, Wages, Interest, Profits
good health, children, camcorder, laptop
warmth, indoor plumbing, rollerblades,
a sense of personal worth, Plasma TV,
literacy, high economics grade, cell
phone, compact discs, money

Unlimited Human Wants Limited Resources
“Need” those first
three to survive.
THE FOUNDATION OF ECONOMICS
SOCIETY HAS VIRTUALLY UNLIMITED WANTS...
GOODS & SERVICES PROVIDE...

UTILITY [satisfaction]
satisfaction
GOODS & SERVICES PROVIDE...

UTILITY[satisfaction]
satisfaction

LUXURIES
Luxuries

V.
NECESSITIES
.

Food Clothing Shelter
The Opportunity Cost is the Opportunity Lost
1st Choice
(and a good one)
[“what is possible for $10,000”]
$10,000

Opportunity Cost
2nd Choice

.

Scarcity Choices Opportunity Costs
Trade-offs–decision (choice)
choice to get more of
one thing means to accept less of another.
Opportunity Cost – 2nd Choice
(most important concept in economics)
[what you sacrifice when you make a choice]

“I’m in love with
both, but can
have only one.”

Sarah B Krisily

The Bachelor
Charlie O’Connell
And – As 40 Million Watched,
Joe Millionaire chose Zora over Sarah
Economic Way of Thinking
Do the Benefits outweigh the cost?
Scales of Economics

Expected marginal benefits Expected marginal costs

Choices are primarily marginal – not all or nothing.
…are all the alternatives in making
a decision

…the cost of the next best use of
money, time, or resources (you’re 2nd
Choice)
… Are all of the alternatives that go
into making a decision….
In this case let’s say you have many
different choices of what you want
to do on Saturday night.
Here are all of your Choices on
Saturday night…which are…
• Go on a Date
• Hang out with friends
• Watch TV These are
• Read a good book all of your
• Hang out with parents
trade-offs
• Go to bed early

Opportunity Cost is different, though…
• Remember… Opportunity
Cost is the next highest
valued alternative. (The 2nd

Best Choice)
As you recall, these are the choices
on Saturday night
• Go on a Date
• Hang out with friends
• Watch TV
• Read a good book
• Hang out with parents
• Go to bed early
You choose the one that will give the most
satisfaction for the price that has to be paid
The ranking’s are…
1 • Go on a Date Obviously you
3 • Hang out with his friends do not go
through this
6 • Watch TV much thought
2 • Read a good book when making a
4 • Hang out with parents decision…
5 • Go to bed early
What is the opportunity cost of
going on the date?
Look again at the definition of
Opportunity Cost

…… thecost of the next best use of
money, time, or resources
• The opportunity cost was
giving up the reading of a
good book, the 2nd Choice

• Also, you must consider the
financial cost of the date, how
else you could have spent the
money.
Remembering Opportunity Cost
when making a decision is the
start of your new way of thinking,
the Economic Way of Thinking.
RESOURCE
PAYMENTS

Property Resources
LAND RENTAL INCOME

CAPITAL INTEREST INCOME
HUMAN RESOURCES

LABOR WAGES
ENTREPRENEUR PROFIT & LOSS
When It comes to Smoking, Don’t Let Your
Peers Knock You Down To Their Level
“Don’t smoke,
don’t Smoke.”
Bring Your Peers Up To Your Level
Review
• What is the fundamental economic
problem?
• What does TANSTAAFL mean?
• Every choice has a __?__.
• Your next best use of time, $,
resources?
• Why did the chicken cross the road?
• What are the 4 Factors of
production, with examples please?
• How does economics help people
make better decisions?
5 PPC Concepts
• Scarcity is represented by the frontier line.

2. Choices - represented by pts A, B. or C.

3. Opportunity Cost is illustrated in terms of moving
from one point to another when resources are utilized
.

to their full potential. [must make choices]
4. Efficiency - producing maximum output with
available resources and technology.

5. Economic growth
And How Is Economic Growth Demonstrated
on a Graph? Like This

Economic Growth
C [Ability to produce a larger
total output over time]
Capital Goods
A

b
a

0 B D
Consumer Goods
PRODUCTION POSSIBILITIES
Assumes...
Efficiency
Fixed Resources
Fixed Technology for example...
Two Products

A Capital Good A Consumer Good
PRODUCTION POSSIBILITIES
What if we could only produce ...
10,000 Robot Arms

or
400,000 Pizzas
Using all of our resources, to
get some pizza, we must give
up some robot arms!
for example...
PRODUCTION POSSIBILITIES

in table form
PIZZA 0 1 2 3 4
(in hundred thousands)
Robots 10 9 7 4 0
(in thousands)
PRODUCTION POSSIBILITIES

in table form
PIZZA 0 1 2 3 4
(in hundred thousands)
Robots 10 9 7 4 0
(in thousands)
graphical form

(thousands)
Robots

Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES

in table form
PIZZA 0 1 2 3 4
(in hundred thousands)

Robots 10 9 7 4 0
(in thousands)

graphical form

(thousands)
Robots

Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES

in table form
PIZZA 0 1 2 3 4
(in hundred thousands)

Robots 10 9 7 4 0
(in thousands)

graphical form

(thousands)
Robots

Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES

in table form
PIZZA 0 1 2 3 4
(in hundred thousands)

Robots 10 9 7 4 0
(in thousands)

graphical form

(thousands)
Robots

Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES

in table form
PIZZA 0 1 2 3 4
(in hundred thousands)

Robots 10 9 7 4 0
(in thousands)

graphical form

(thousands)
Robots

Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES

in table form
PIZZA 0 1 2 3 4
(in hundred thousands)

Robots 10 9 7 4 0
(in thousands)

graphical form

(thousands)
Robots

Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Limited Resources means a limited output...

At any one point in time, a
full-employment, full-production
economy must sacrifice some of
product to obtain more of
product .
PRODUCTION POSSIBILITIES

Q 14
13
Robots (thousands) 12 Unattainable
11 A
10 B
9 C W
8
7
6
D Attainable
5 & Efficient
4 Attainable
3 but
2 Inefficient
1 E

1 2 3 4 5 6 7 8
Pizzas (hundred thousands) Q
PRODUCTION POSSIBILITIES

Q 14
13 Notes...
Robots (thousands) 12 Unattainable
LAW OF INCREASING
11 A OPPORTUNITY
B COSTS
10
9 C W
8
7
6
D Attainable
5
4
Attainable & Efficient
3 but
2 Inefficient
1 E

1 2 3 4 5 6 7 8
Pizzas (hundred thousands) Q
PRODUCTION POSSIBILITIES

Q 14 Notes...
13
12
LAW OF INCREASING
Unattainable
11 A OPPORTUNITY COSTS
Robots (thousands)
Economic
B resources are
10
not completely adapt-
9 C
able to other uses. W
8
7 D
It will be a CONCAVE curve Attainable
6
5 & Efficient
Attainable
4
3
but
2 Inefficient
1 E

1 2 3 4 5 6 7 8
Pizzas (hundred thousands) Q
PRODUCTION POSSIBILITIES

Q 14 Unemployment &
13
Robots (thousands) 12
11
Underemployment
10 Shown by Point U
9
8 More of either or
7
6
both is possible
5 U
4
3
2
1

1 2 3 4 5 6 7 8 Q
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES

Notes...
Q 14 Economic Growth
13
The ability to produce
12
a larger total output - a
Robots (thousands)

11
10 rightward shift of the
9 production possibilities
8 curve caused by...
7
6
5
4
3
2
1

1 2 3 4 5 6 7 8 Q
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES

Q 14 Notes...
13 Economic Growth
12 1. Increase in resources -
Robots (thousands)

11
10
9
8 2. Better resource quality -
7
6
5
4 More of either or
3. Technological advances -
3 both is possible
2
1

1 2 3 4 5 6 7 8 Q
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES

Q 14 A’
13 B’ Economic
12
Robots (thousands)
11 Growth
10
C’
9
8
7
6 D’
5
4
3
2
1 E’

1 2 3 4 5 6 7 8 Q
Radios (hundred thousands)
PRODUCTION POSSIBILITIES
Two Examples of Economic Growth

FAVORING PRESENT GOODS
CURRENT
Goods for the Future

CURVE

CONSUMPTION

Goods for the Present
PRODUCTION POSSIBILITIES
Two Examples of Economic Growth

FAVORING FAVORING
PRESENT GOODS FUTURE GOODS

CURRENT CONSUMPTION
Goods for the Future

Goods for the Future
CURVE

FUTURE FUTURE
CURVE CURVE
CONSUMPTION CURRENT
CURVE

Goods for the Present Goods for the Present
Going to War (U.S.) When the U.S. entered WWI, we had severe unemployment.
We were able to step up production of consumer goods and war materials simply by
getting to full production. We went from 14.6% unemployment in 1940 to 1.2% in 1944.
Over 7 million people went to work that were not working in 1940.

War Goods
C United States
F [Beginning of WWII]
Civilian Goods
Going to War(Russia).
War(Russia) Russia, on the other hand, entered WWII at full capacity.
So their preparedness entailed a shifting of resources from civilian goods and a drop in
their standard of living.
The U.S. position was similar as we entered the Viet Nam War at full employment.
We increased both military spending and domestic spending on the “War on
Poverty.” Our attempt to achieve more “guns and butter” in a FE economy was
doomed. We were trying to spend beyond capacity and ended up with double
digit inflation in the 1970s.
C
War Goods Russia
D [Beginning of WWII]

Civilian Goods
C
AB PPC
A
C G
P
I
T
A D
L

G F
O
O
D E
S
Consumer Goods
recession F
40. At what letter is there unemployment [recession]?
41. What letters represent resources being used in their
most productive manner?
manner [full employment, full
production, and best available technology] A,B,C,D,E
42. What letter represents an improvement in technology,
technology
therefore a new PPC frontier line? G
43. The (straight line/curve) illustrates the “line of increasing cost”?
44. The (straight line/curve) illustrates the “law of constant cost.”
45. At what letter would there be the most economic growth in
the future if a country were producing there now? A
46. What is the opportunity cost when moving from “C” to “D”; Capital
Consumer E to B; D no
B & do we have to give anything up when moving from F to D?
PPC Practice Questions
1. An economy that is fully employing all its productive
resources but allocating less to investment than
to consumption will be at which of the following
positions on the PPC to the right?
a. A b. B c. C d. D e. E

2. Which of the following best explains the shape of the
PPC for the two-commodity economy shown above?
a. Opportunity cost of producing another unit of each stays the same.
b. Opportunity cost of producing another unit of each decreases.
decreases
c. Opportunity cost of producing another unit of each increases.
increases

3. Which of the following is true of the PPC on the right?
a. Point Q is attainable but undesirable.
b. Point R is unattainable but undesirable.
c. A technological improvement of watches would move
the economy from T to P.
d The opportunity cost of moving from S to T is the # of
watches given up.
A
4. If we move from B to C on the graph (right), B
H
the opportunity cost is?
a. AH units of good Y C
G
b. OG units of good Y
c. EF units of good X
O
d. HG units of good Y
PPC Practice Questions [continued]
5. Which of the following would cause the
PPC shown (right) to shift outward?
a. Reopening steel plants that had been closed
b. Rehiring laid-off workers Missiles
c. Using machinery for missile production
instead of steel production
d. Using machinery for steel production
instead of missile production
Steel
e. Developing a more efficient steelmaking process

6. Base on the graph (right), which statements
are true?
I. The opportunity cost of moving from P to R
is 10 units of Y.
II. The opportunity cost of moving from R to P
is 8 units of X.
III. The opportunity cost of moving from Q to R
is 0 units.
a. I only b. III only c. I & II only d. I, II, & III X
The Four Factors of Production

1. Land [natural resources]
resources – [“gifts of nature”]
nature

.

Water Wind

Sun Fossil fuels “Gifts of Nature”
2. Labor [human resources]
resources
anyone who works [“paid work”]
work”
A. Physical – pro athletes & lumberjacks
B. Intellectual – accountants & lawyers

.

“Hired Help”
3. Capital Resources – all “man-made inputs” used to produce
consumer products (machinery, physical plants, & tools).
tools)
A. Capital goods – goods [machinery, buildings, & tools] used to
produce other goods.
goods [crane, Ford plant, hammer]

.
Rent Wages Interest Profits
Land Labor Capital Entrepreneur

.

4. Entrepreneurship – Combines land, labor, & capital to
produce products.
products

Resource payments. The resource owners receive rent [for
the use of their land; wages [for their labor]; interest [payment
for financial capital], and profits [for their entrepreneurial ability].
Real Capital v. Financial Capital

Notes...
INVESTMENT
REAL CAPITAL
.

[tools, machinery, & factories]
Can produce something
directly with these

FINANCIAL CAPITAL
Can’t produce anything [stocks, bonds, & money]
directly with these
The Harley Hog Circular Flow
Resource Market

Product Market
Hog CIRCULAR FLOW MODEL

RESOURCE MARKET
1

2
Mechanic

BUSINESSES
Flow 4. Goods/services HOUSEHOLDS
Flow 3: Consumer expenditures

PRODUCT MARKET
3

4
Hog CIRCULAR FLOW MODEL

RESOURCE MARKET
1

2
Mechanic

BUSINESSES
Flow 4. Goods/services HOUSEHOLDS
Flow 3: Consumer expenditures
Flow 1: Land, Labor, Capital, Entrepreneur
Flow 2: Rent, Wages, Interest, Profits
PRODUCT MARKET
3

4
CIRCULAR FLOW MODEL

RESOURCE MARKET

BUSINESSES HOUSEHOLDS
Mechanic

Businesses supply hogs g/s
I demand that hog & will pay.
PRODUCT MARKET

ouseholders demand hogs & will pay
CIRCULAR FLOW MODEL

Resource Market

RESOURCE
MARKET
Mechanic

Householders
Businesses Show me the money!
BUSINESSES & you’ll get this hog.
HOUSEHOLDS

GOODS & GOODS &
SERVICES SERVICES
PRODUCT
$ REVENUE
REVENU MARKET $CONSUMPTION
CIRCULAR FLOW MODEL

Resource Market

RESOURCE
MARKET
Mechanic I demanded this hog
and had to pay for it.

Householders
Businesses Show me the money!
BUSINESSES & you’ll get this hog.
HOUSEHOLDS

GOODS & GOODS &
SERVICES SERVICES
PRODUCT
$ REVENUE
REVENU MARKET $CONSUMPTION
CIRCULAR FLOW MODEL

Resource Market

RESOURCE
HH supply hog labor MARKET
Mechanic I demanded this hog
and had to pay for it.

H.D. demands hog labor & will pay
Householders
Businesses Show me the money!
BUSINESSES & you’ll get this hog.
HOUSEHOLDS

GOODS & GOODS &
SERVICES SERVICES
PRODUCT
$ REVENUE
REVENU MARKET $CONSUMPTION
CIRCULAR FLOW MODEL

Resource Market
$ COSTS $ INCOMES

BUSINESSES Give me your hog labor & I’ll
show you the money.

HOUSEHOLDS
GOODS & GOODS &
PRODUCT MARKET
SERVICES SERVICES
CIRCULAR FLOW MODEL

Resource Market
$ COSTS $ INCOMES

I supplied hog
BUSINESSES labor & was paid..

HOUSEHOLDS
GOODS & GOODS &
PRODUCT MARKET
SERVICES SERVICES
CIRCULAR FLOW MODEL

$ COSTS $ INCOMES
RESOURCE
MARKET

RESOURCES INPUTS

BUSINESSES HOUSEHOLDS

GOODS & GOODS &
SERVICES SERVICES

PRODUCT
MARKET
$ REVENUE $ CONSUMPTION
The Circular-Flow Diagram
Product Market
1
2

What flow are the following?
2 A. Consumer expenditures?Businesses
1 B. Goods and services?
4 C. Land, labor, capital,
and entrepreneurs?
3 D. Rent, wages, interest, Businesses
Households and profits?
Labor
3

4

Resource Market
The Circular-Flow Diagram
Resource Market

1

2
What flow are the following?
4A. Goods/services?
Businesses 3B. Consumer expenditures?
1C. Land, labor, capital and
entrepreneurial ability?
2
F. Rent, wages, interest,
Businesses and profits? Households

3

4

Product Market
NS 56-59

Fuzzy Wuzzy

56. In the product market (householders/businesses) are the
demanders and (householders/businesses) are the suppliers.
suppliers
57. In the resource market (householders/businesses) are the
demanders and (householders/businesses) are the suppliers.
suppliers
58. In the resource market,
market (householders/businesses)
sell resources to (householders/businesses).
59. In the product market,
market (householders/businesses) sell
products [goods/services] to (householders/businesses).
And finally – the real opportunity cost of a bad education
is that you have to drive a Communist Car.

YUGO
Only way to get up a hill
Which would begin to rust while still in the show room,

Would shake when it hit 35 mph,

Would break in half going over RR tracks,

And would never be stolen even if you left the
keys in it with the motor running.
The Yugo on the inside or under the hood

Anytime you filled the Yugo with gas,
you doubled its value.
Putting seats in tripled its value.]
The End