1. Economics: The power to choose
Mr. Kimerling/ Mr. May
Spring Semester 2015
February 2, 2015
2.
3.
4. Economics pre-test
Don’t worry, it doesn’t
count!
The purpose of the pre-test is to set a
baseline to show your learning gains.
In a few weeks we will revisit these
questions and you will be amazed at
how much you have learned!
5. Thinking like an economist
• If you could choose between two nearly identical
products-one that is free and one you have to pay
for-which would you choose? Why?
• If you were opening a new business, would you
select a location closer to, or further away from a
business that sold similar products? Why?
• If you could make a small change to your daily
routine that would save you time and money,
would you make the change? Why
6. Tuesday February 3, 2015
What is Economics?
• Adam Smith
• Enigmas!!!
• Using limited resources to satisfy unlimited
wants
• Science of decision making
• What is and what should be
7. Who is Adam Smith?
– Wealth of Nations 1776
– Father of economics
– Observed that people not only need basic
necessities, but have wants as well
– How do they choose?
– Competition is key to healthy economy
– Free markets make efficient markets
– Strong impact on American values
8. Everyday Mysteries and Enigmas
• A puzzle or riddle of everyday life that can be
explained through economic analysis
• “Stripping a layer or two from the surface of
modern life and seeing what is happening
underneath.”
• “The hidden side of everything”
• Why does popcorn cost so much at movie
theaters?
• Why do prices often end in .99?
9. I want it but I can’t have it
• Economics from the Greek oikos-house and
nomos-law or custom= Rules of the house
• Resource: anything used to produce an economic
good or service.
• Resources are scarce and exist in finite amounts
• Resources also have alternative uses
• Resources are limited but our wants are not
• “a study of mankind in the ordinary business of
life”
10. Micro vs Macro
• Microeconomics: the study of decision making
by individuals, households, and businesses.
• Macroeconomics: the study of the economy as
a whole and how it relates to other global
economies
11. How things are, how should they be?
• Positive economics: the study of how things are
• Normative economics: the study of how things
should be.
• Ex: What impact will increased enrollment, salary
increases, and rising maintenance costs have on
next year’s budget?
• Ex: What actions should we take now to reduce
expenses in order to balance next year’s budget?
12. Economics is about…
• Analyzing everyday enigmas
• Teaching better decision making
• Studying how people use limited resources to
satisfy unlimited wants
• Making policy recommendations (normative)
• Analyzing how economies work (positive)
13. What kind of economics?
• The study of spending habits among seniors at Reynolds High
School.
•
• What is the best federal policy will result in job creation?
•
• A tally of various prices is tabulated to make up the consumer price
index (CPI) for the entire country.
•
• A study to determine ways to decrease the trade deficit.
•
• A shopkeeper lowers his prices to compete with a neighbor’s store.
•
• The President’s economic counsel meets to determine why
unemployment is still too low.
14. Wednesday, February 4, 2015
• Seven principles of economic thinking
• They key to everything else we do in this course!
• Page 6 in your text book
• Read each section and fill out the first two
columns
• The definition from the book/ a summary in your
own words
• We will do the examples tomorrow
15. Thursday, February 5, 2015
• You will know the seven principles of
economic thinking
• You will be able to give real life examples of
each principle
16. Scarcity forces trade-offs
• Limited resources force people to make
choices and face tradeoffs
• Scarcity: the condition that results because
people have limited resources but unlimited
wants
• Tradeoff: the exchange of one benefit or
advantage for another that is thought to be
better
• “There is no such thing as a free lunch”
17. Costs versus benefits
• People choose something when the benefits
of doing so are greater than the costs.
• Cost-benefit analysis: a way to compare the
costs of an action with the benefits of that
action. If the benefits are greater than the
costs, then the action is worth taking
18. Thinking at the Margin
• Most decisions involve choices about a little
more or a little less of something, rather than
all or nothing
• Margin: the edge
• Marginal cost: what you give up to add one
unit to an activity
• Marginal benefit: what you gain by adding
one more unit
19. Incentives Matter
• People respond to incentives in generally
predictable ways
• Incentives can be positive or negative
• “incentives are the cornerstone of modern
life” finding these incentives is the key to
solving any mystery or enigma
20. Trade Makes People Better Off
• It is better to focus on what you do best, and
trade for other things. You will have more
and better choices than doing everything
yourself.
21. Markets Coordinate Trade
• Open or free markets do better than anyone
else at arranging exchanges between buyers
and sellers
• Invisible Hand: the term used to describe the
market forces that coordinate fair trade
22. Future Consequences Count
• Decisions made today have consequences not
only for today, but also in the future
• The law of unintended consequences: all
actions have effects that are not expected, or
unintended. Economists try to predict these
consequences
23. Friday February 6, 2015
• Welcome to the first Freakanomics Friday!
• We will work in groups to try and uncover the
mysteries of ordinary life
• video
24. The Mystery
• Many professional athletes never finish college. Some go
directly into professional sports from high school. Yet
professional athletes are frequently paid salaries totaling
millions of dollars a year. The story is much the same
among professional athletes in basketball and baseball.
• Yet other people who perform worthy services – nurses,
police officers, firefighters and teachers – receive salaries
far short of the amounts paid to professional athletes. Is
there something wrong with our values, or is there a
hidden reason?
• Why are grown men and women paid salaries totaling
millions of dollars just to play games?
25. Instructions
• Goal: Use principles of economic thinking to
propose a solution to the problem
• Arrange the given clues in a pyramid, with the
most useful clues at the top, and the less
useful ones at the bottom.
• Decide and record in your notebooks why you
made your choices, noting which economic
principles were most important in deciding
26. Monday February 9, 2015
• You will know the steps of the scientific
method and give examples of how economists
use this method
• You will know how to take data from a chart
and turn it into a graph
• You will be able to explain how economists
use graphs
• You will be able to explain the rational-
behavior model and give examples
27. Daily Activity
• Read page 12-15 in your textbook
• Answer questions 1-4 in Section 4 in your pink
notebook guide sheet
• You may work in pairs to help each other with
the material
• Work should be completed individually in your
own notebook. Remember-Your notebook will
be periodically checked and is 20% of your
grade.
28. Tuesday February 10, 2015
• Why can’t you always get what you want?
• Why is what we want scarce?
• What are goods and what are services?
• What are the factors of production?
29. Preview exercise
• Follow the instructions for the preview activity
• Fill out the table in your notebook
• What kinds of decisions did you have to
make?
• What constraints did you face?
• For each decision you made, what did you
have to give up?
30. Why is what we want scarce?
• Our wants exceed our resources
• Resource= anything used to produce a good
or service
• Goods= physical objects produced for sale
• Services= activities done for us by others
• Goods and services are scarce because the
resources to produce them are scarce
31. Scarcity vs shortage
• Scarcity is a permanent condition because
resources are inherently scarce, by their nature.
Think: time, land, materials are not infinite
• Shortage: a temporary condition where there is a
lack of a good or service available
• examples: One Direction CD sells out when the
band comes to the Moda Center
• Before a big storm the supermarket runs out of
bottled water and canned food
32. Production equation
• Everything you see around you was produced
to satisfy someone’s wants.
• inputs: the scarce resources that go in to the
production process
• outputs: the goods and services produced
using these resources
• Land + Labor + Capital + Entrepreneurship =
goods and services
34. Land
• The gift of Nature
• Not just land but all natural resources including:
air, soil, minerals water, forests, plants, animals,
solar energy, wind
• Natural resources vary in abundance but are still
scarce
• Perpetual resource: wind, solar energy
• Renewable resource: forests, fresh water, fish
• Nonrenewable resource: once used, gone
35. Labor
• Labor: time and effort people devote to
producing goods and services
• The quality of labor depends on the skill of the
workers
• The quantity of labor depends on the population
size and the willingness of the population to work
• Human capital: the knowledge and skill people
gain from education, training and other
experiences
36. Capital
• Capital: tools, machines, and buildings used in
the production of other goods and services.
• money= financial capital
Examples:
Tools, factories, warehouses, bakeries, airports,
Roads, sewers, the internet
37. Entrepreneurship
• A specialized and highly valued form of human
capital
– Innovator: thinks of new ideas
– Strategist: makes key business decisions
– Risk Taker: invests time and money not knowing if
they will succeed or fail
– Sparkplug: supplies energy, drive and enthusiasm
to turn ideas into reality
38. Productivity
• Since all the inputs are scarce, we will never
produce as much as we want
• But we can be more productive by using the
inputs more efficiently
• Productivity= the measure of efficiency of
production shown by output/input
• the more output we get with the least amount
of input= most productive
39. Wednesday February 11, 2015
• You will understand opportunity costs and
how they effect your life
• You will understand the production
possibilities curve and how it represents
opportunity cost
40. Key terms
• Utility: the satisfaction or pleasure one gains
from consuming a product or taking an action
• We are all trying to maximize utility!
• Opportunity cost: the value of the next best
alternative that you could have chosen when
you make a choice
• Diminishing Marginal Utility:
as the quantity of a good consumed increases,
the marginal utility decreases
41. Daily Activity #1
• Turn to section 4 in your notebook guide
• Complete numbers 2, 3, 4 in your notebook
• What are your trade-offs? Opportunity Costs?
• What are some examples of diminishing
marginal utility?
42. Thursday February 12, 2015
• You will understand and the production
possibility frontier curve and know how to
interpret the graph
• Review for quiz tomorrow
43. Production Possibility Frontier
• An economic model which shows how an
economy or individual uses its resources to
produce goods or make choices
• Khan Academy video:
http://www.khanacademy.org/economics-
finance-domain/microeconomics/choices-opp-
cost-tutorial/production-
possibilities/v/production-possibilities-frontier
44. Activity #1
• Practice using the Production Possibility
Frontier on your own using the graphs
provided.
• Why are points inside the curve not as
efficient as those on the curve?
• How is the curve useful in calculating the
opportunity cost?
45. “What’s all on the quiz?”
• Chapters 1 and 2 in the text
• Everything covered in class: all slides are on
the web slideshare.net/skimerling
• Review your notes, 7 principles worksheet
• I am available 3rd period and after school
everyday for help.
46. Wednesday February 18, 2015
• Production Possibilities Frontier (curve)
production simulation
47. The Rules
• Balls on the chair represent raw materials or
resources- balls on the cart represent finished
goods- tennis balls and golf balls
• The production process is students passing the
ball one at a time from the chair to the cart
• We will run production for 30 seconds. After
each run record the production on your chart
48. Questions
• After filling in the charts, graph the points
labeling each round.
• How do you calculate the opportunity costs in
terms of tennis balls as we increase production of
golf balls?
• In what round were we able to more golf balls
without any opportunity cost? Where is that
point on the graph?
• How is the curve different in part 2 of the game?
49. Thursday February 19, 2015
• Today’s goal is mastery of the Production
Possibility Frontier curve
• Your last opportunity to ask questions about
the material before the assessment tomorrow
• Notice the 7 principles of economic thinking
that I posted around the room!
• Why did yesterday’s exercise not give us a nice
PPF curve?
50. Friday February 20, 2014
• Write your full name and period on the single
sheet with the graph.
• Write your name on the scantron sheet
• Do not write on the multiple choice sheet- use
the scantron!
• Take your time, read each question carefully!
51. When you are finished…
• Read the article on page 34 and 35 in the text
book
• Think about how you choose to use your free
time
• Are you maximizing your utility for today?
• Or building your human capital for tomorrow?
• Take notes in your notebook and…
• Be prepared to answer questions about the
article in class on Monday
52. Wednesday, February 25, 2015
• We will evaluate the characteristics of 3
economic systems
– Market based
– Command
– Developing
53. What is GDP, anyway?
• Gross Domestic Product
–The market value of all final
goods and services produced
within a country in a given
period of time
54. Daily Activity
• 1. Compare the data on your Comparative
Systems Worksheet with your neighbor and
make sure your data is similar
• 2. Turn over your data sheet and answer the
questions. Put your name at the top of the
sheet, you will hand this in at the end of class.
• 3. Prepare to discuss your answers and how
you characterize the 3 different economies.
55. Final Thoughts
• Who decides what, how, for
whom to produce?
• How do those decisions affect the
standard of living in the countries
we studied?
56. Friday , February 27, 2015
• Video: China’s ghost cities
– How does the video compare to our simulation?
– Why do they keep building even though they are
all empty?
• Read chapter 3.3 in text book and fill out
economic systems chart
57. Monday, March 2, 2015
• Understand the circular flow of money in a
market and mixed economy
• Understand the key features of the U.S.
economy
• Back to Adam Smith… (p.43)
• Why does the Invisible Hand work?
58. Circular Flow
• The reason why markets work well at
coordinating trade: people act in their own
interest
• Very simple model
• Assumptions: Households own factors of
production; Firms use the these factors to
make and sell goods and services
• Two kinds of markets: product market and
factor market
59.
60. The mixed economy
• In reality most economies are mixed; not
purely market, traditional, or command
• Government and individuals both make
decisions about: what, how, and for whom.
• What is the role of government in a mixed
economy?
61. Role of Government
• To provide institutions that enable the markets to
operate
– legal system
– currency
• To step in when the market operates in ways
society finds unacceptable
– Consumer/ worker protections
• To provide certain goods and services that
markets do not provide
– Roads, bridges, dams
– Social security
62. Ciruclar flow with gov’t
• Money flows to government in the form of
taxes
• Government spends tax money on labor and
products
• Households and firms receive goods and
services
63. Key features of U.S. system
• Free enterprise system:
–Individuals own the factors of
production and make decisions about
how to use those factors within the
framework of the law.
64.
65. Wednesday, March 4, 2015
• Key U.S. characteristics
– share
• Estonia case study
– share
• Benefits of trade intro
• Notebook check info
66. Case study: Estonia (p.54)
• What economic changes does Estonia’s former
prime minister argue gave his country one of
the freest economies in the world?
• Which economic change do you think was
most crucial for Estonia?
67. Jack of all trades?
• Is it better to be good at lots of things or really
good at one or a few things?
• Chapter 4 preview
68. Key terms
• Opportunity cost
– The value of the next best alternative
• Comparative advantage
– The ability to produce something at a lower
opportunity cost than other producers
• Absolute advantage
– The ability to produce something at a lower cost or
fewer resources than other producers
• Law of comparative advantage
– Any individual or firm with the lowest opportunity
cost should specialize in that good
69. Should LeBron James mow his own
lawn?
• LeBron is a great basketball player as
well as an expert lawn mower
• His neighbor Scotty is not as good as
LeBron at basketball and lawn
mowing
• Should LeBron mow his own lawn?
70. The facts
• LeBron can mow his lawn in two hours.
• In two hours he can also film a commercial for
Nike and make $10,000
• What is his opportunity cost if he chooses to
mow his lawn?
71. The facts
• Scotty can mow LeBron’s lawn in 4 hours
• He could also work at Mikey D’s and make
$8/hour
• What is Scotty’s opportunity cost for choosing
to mow LeBron’s lawn?
72. Who?
• Has an absolute advantage of mowing the lawn?
Why?
• Has a comparative advantage of mowing the
lawn? Why?
• LeBron is better at mowing the lawn, would he
benefit from trade? How?
• If he pays >$32
73. Chapter 3 Notebook check
• All class notes from lectures
• Comparative economies webquest worksheet
• Comparative economies chart
• Notebook guide reading notes section 2, 3,
and 5
• Estonia questions
74. Trade Simulation
• You are farmers from two different regions
• You produce potatoes and pineapples
• Each region must reach certain goals
• You will trade to make this possible
75. Simulation Debrief
• How did it feel to be from Region A/ Region B?
• Regions A and B had different production
schedules. In real life why would two regions
have different production abilities?
• How were you able to meet your trading goal?
• Did both groups benefit from trade?
• How does trade make people better off?
76. Demand
• Law of demand
– Price and demand go in opposite directions
77. Change in quantity demanded
• Law of diminishing marginal utility
– Our satisfaction decreases the more we have of
something
• Income effect
– Because income is limited we cannot afford to
keep buying at same amount as price goes up
• Substitution effect
– Two different goods satisfy the same want
78. Changes in demand
• Movement along the curve shows how price
affects demand
• Other factors can influence demand and cause
the curve to shift
79. Causes of demand shift
• Changes in income
– An increase in income leads to an increase in
demand
• Changes in the numbers of consumers
– An increase in customers causes an increase in
demand
• Changes in consumer tastes and preferences
– Independent of price
80. Causes of demand shift
• Changes in consumer expectations
– Expectation of future price changes
• Changes in the price of substitute goods
– As the price of the substitute good increases
people move to the cheaper alternative
• Changes in the price of complementary goods
– Demand will follow the increase or decrease in
price of complementary good
81. Monday March 30, 2015
• How do Supply and Price interact?
• On the other side from every consumer in a
transaction is a producer.
• Producers decide what to supply and how
much to make
• Supply
– What producers are willing and able to sell at
various prices
83. Supply side of the market
• Producers want to make the most profit they
can
• They would rather produce more at a higher
price
• Like demand, supply is about the willingness
and ability-to produce instead of purchase
(demand)
84. Law of Supply
• As price increases, quantity supply increases
• As price decreases, quantity supply decreases
-producers act in predictable ways
Makes sense, but why?
• production decisions by existing producers
• market entries and exits
85. Production decisions by existing
producers
• In a market based economy, every producer’s
primary goal is to maximize profit.
• Profit is determined by the revenue minus the
costs of production.
• Revenue: the amount of money received from
selling product.
• Increase in revenue leads to increase in profit
86. Market entries and exits
• When the price of a good increases, new
companies enter the market because they see
the potential for big profit
• This affects the overall supply of all producers
of a given product or market supply
87. Changes in Supply
• Price affects supply along the curve
• Other factors can change supply at all prices (6)
– Change in cost of inputs
– Change in numbers of producers
– Change in conditions due to disasters or international
events
– Change in technology
– Change in producer expectations of price
– Change in government policy
88. Supply Shifters
• Change in cost of inputs
– An increase in the cost of any factor of production
will lead to decrease in supply
• Change in number of producers
– Producers enter the market when they think they
can make big profits-supply goes up as more
producers enter market
89. Supply Shifters
• Changes in conditions from disasters or crises
– Can affect supply beyond control of firm
• Changes in technology
– Technology can lower the cost of production-
leading to increase supply
90. Supply shifters
• Change in producer expectations
– Expectations of future prices affect supply now
– Ex: crops
• Change in government policy
– Subsidies: government payment to help producers
• Can be used to increase or limit supply
– Excise tax: tax on manufacture of good
• Adds to production cost
92. Elasticity of Demand
• Elasticity: how much the quantity demanded
changes in response to a change in price
93. Demand elasticity
• Elasticity tells us how consumers will respond
to a change in price.
• How sensitive we are to changes in price
depends on the item
94. Elasticity of demand
• If the price of salt increased 50% would you
still buy it? Why?
• If the price of gasoline increased 50% would
you still buy it? Why?
• If the price of your favorite protein or candy
bar increased 50% would you still buy it?
Why?
• If the price of domino’s pizza increased 50%
would you still buy it? Why?
95. What makes it elastic?
• Availability of substitutes
– Can you switch out to another thing?
• Price relative to income
– More elastic for big ticket items
• Necessities vs luxuries
– Can you just skip it?
• Time needed to adjust to price
– Eventually you will adjust, but not now…
96. A little math…
E>1 it is elastic
E<1 it is inelastic
E=1 unitary elastic
97. Total Revenue Test
• Another way to see if demand is elastic or
inelastic is the total revenue test
• Multiply price times quantity to get total
revenue earned for each price
• TR=PxQ
98.
99.
100. Total revenue test
• What do you notice about total revenues for
gas and pizza?
• Why does it make more sense to discount
pizza than gasoline?
101. Supply elasticity
• A measure of the sensitivity of producers to
change in price
• As prices rise, producers are motivated to
increase production to make more profit
• How quickly and easily producers adjust their
supply to price changes
• The more flexibility producers have, the more
elastic
102. • Supply of bananas are
relatively inelastic to
price.
• It takes too long for
suppliers to plant and
harvest more bananas
103. Factors influencing supply elasticity
• Yogurt makers can
control the supply of
their product quicker
and easier
• If the price goes up,
they can quickly
increase supply
• Yogurt is said to be
relatively elastic
104. Factors influencing supply elasticity
• Availability of inputs
– If supply of inputs is readily available=elastic
• Mobility of inputs
– How those inputs get from one place to another
• Storage capacity
– How easy are these inputs to store
• Time needed to adjust to price change
– Over time becomes elastic