1 Fundamentals of EconomicsCivics Unit 6 Fundamentals of Economics Chapters 16-17 Standards: C 1.1 and C
2 Guiding Questions Explain why the economic concept of scarcity drives all economic decision-making? (Chapter 1 section 1&2) Demonstrate how changes in the factors of production affect the market? (Chapter 1 section 1&2) Describe the role of the factors of production as part of the circular flow of goods and service model? (pg ) Explain how different economic systems address the three basic economic questions: What should be produced? How should it be produced? and For whom should it be produced? (chapter 2) Evaluate how different economic systems allocate resources in terms of their benefits to society? (chapter 2) Explain how productivity affects the standard of living and Gross Domestic Product (GDP) of a country? (pg 26 &59) Explain why supply and demand is the foundation of economic activity in a market of buyers and sellers? (chapters 4-6)
3 The Key Issue of EconomicsPeople must make choices because of SCARCITY- limited quantities of resources to meet unlimited wants What items are scarce? Why are they scarce?
4 Scarcity vs. Shortage Shortage- when good or service is temporarily unavailable Goods- Physical objects Services- actions or activities a person performs for another person Scarcity always exists because our needs and wants are always greater than our resource supply.
5 Needs and Wants Needs Items necessary for survivalAir, food, and shelter Wants Items that we desire but are not essential for survival Cars, gas, large houses
6 Trade-Offs and Opportunity CostsTrade-Off- an alternative that we sacrifice when we make a decision Opportunity Cost- the most desirable alternative given up as the result of a decision. It is the most desirable trade-off
7 Guns or Butter The trade-off that nations face when choosing whether to produce more or less military or domestic goods
8 Guns or Butter WWII Vietnam Iraq/Afghanistan WarWhat were the trade –offs for each of these war? What were the opportunity costs for each of the wars? What effects did these wars have on the U.S. economy? Should the U.S. have entered these wars? What did we produce during each of these wars?
9 The Factors of ProductionLand Capitol Labor
10 Land- all of the natural resources that are used to make all goods and services.Labor- the effort people devote to a task for which they are paid Capitol- Any Human made resource that is used to create goods and services
11 Production and Natural ResourcesEfficiency- using resources in such a way as to maximize the production of goods and services. Underutilization- using fewer resources then an economy is capable of using.
12 Natural Resources What natural resources do we use in Louisiana?How do those natural resources shape our states economy? How could we better use those resources?
13 Entrepreneur ambitious leader who combines land, labor and capitol to create and market new goods and services. Name a famous entrepreneur What good or service did he/she create? How did he/she combine the factors of production? What impact did they have on the economy? How did their contribution shape or change society?
14 Steve Jobs "What a computer is to me is the most remarkable tool that we have ever come up with. It's the equivalent of a bicycle for our minds." (film "Memory & Imagination," 1990) "Innovation distinguishes between a leader and a follower." ("The Innovation Secrets of Steve Jobs," 2001)
15 What factors of production do you sell to firms?How can you make your land, labor and capitol more appealing to firms? What items do you buy from firms? How do firms entice households to buy their goods and services? Do you think Free Markets work? Explain
16 Circular Flow of Goods and ServicesFirms supply households with goods and services Product Market Monetary Flow (profits) Households pay firms for goods and services Physical Flow Households Firms Physical Flow Firms pay households for land, labor and capital Households supply firms with land, labor and capital Monetary Flow (Rent and wages) Factor Market
17 Households (Consumers )A person or group of people living in the same residence They own the factors of production They are consumers of goods and services
18 Firms (Producers) An organization that uses resources to produce a product which it then sells “inputs” factors of production “outputs”- products
19 Factor Market Firms purchase or rent the factors of production form the households Households sell land, labor, and capitol to the firms
20 Product Market Firms produce goods and servicesHouseholds purchase goods and services from firms
21 What effects production?1. Availability of natural resources 2. Technology- the use of science to develop new products and new methods for producing goods and services. 3. educational level of a country’s population
22 Technology Assembly Line Division of labor Mechanization AutomationName a piece of technology that we use today. How has it changed over time? How will it change in the future? How has it shaped our economy? How has it shaped society? How has it changed education? Have the changes been good or bad? How will it shape the future? Assembly Line Division of labor Mechanization Automation Robotics
23 Steps of Production Planning Purchasing HiringManufacturing good or providing service Quality control Inventory control
24 Standard of living and GDPGross Domestic Product (GDP)- The total value of all final good and services produced in a country in a given year. Standard of living- level of economic prosperity. Name countries with high stands of living. Why do you think their standard of living is high? Name countries with low stands of living. Why do you think their standard of living is low? If a country has a high gross domestic product (GDP) what do you think the standard of living is like? What will happen to the standard of living in a country as their GDP falls? How can production and efficiency alter a countries GDP and standard of living?
25 Economic Systems * see other powerpoint *
26 Supply and Demand
27 The desire to own something and the ability to buy it.Demand The desire to own something and the ability to buy it. Demand= Consumers
28 Law of Demand When a good’s price is lower consumers will buy more of it. When the price is higher consumers will buy less of it. Lower prices Higher demand Lower demand Higher prices
29 Behaviors that Cause Demand
30 Substitution Effect A price increase or decrease of one good will cause consumers to buy more of another good When have you substituted a more expensive item for a less expensive item? How did prices of those items change over time? People buy more hamburgers and less pizza People buy fewer hamburgers and more pizza The price of pizza goes down The price of pizza goes up
31 Income Effect If prices are low You feel like you have more money$100.00 $200.00 If prices are low You feel like you have more money You feel like you have less money If prices increase
32 Demand Schedule Demand Curve Price 5 10 4 17 3 26 2 38 1 53Quantity Demanded 5 10 4 17 3 26 2 38 1 53 Helps businesses predict total sales at different prices Vertical Axis- Prices Horizontal Axis- Quantities
33 Shifts in the Demand CurveMovement to the right = rise in demand Movement to the left = lowering of demand
34 What Causes a Shift in the Demand Curve?
35 Income Inferior goods- goods that consumers demand less of when their income increases When would you be unwilling to substitute a normal good for an inferior good? Why? Normal Goods- a good that consumers demand more of when their income increases Steak Hamburger
36 Consumer ExpectationsIf you think an item will increase in price in the future you will buy it now If you think an item will decrease in price in the future you will wait to buy it When have you waited to buy an item? What was the outcome?
37 Population An increase in population will cause a rise in demand for certain goods EX- the Baby Boom caused a rise in demand for baby items How has today’s population shaped the demand for a particular good?
38 Consumer Preferences and AdvertisingWhen have you been influenced by advertising?
39 Demand for one good can change the demand for another goodComplements- two goods that are bought and used together. Ex. Tooth brush and toothpaste Cars and gas Peanut butter and jelly Are there two items that you must have together no matter what the cost? Substitutes- goods used in place of another good. Margarine and butter What substitutes do you use?
40 Elasticity of Demand Elasticity- A measure of how consumers react to change in price Inelastic- When the price changes demand does not change much - Like a piece of string Ex- gas Elastic- when the price changes demand will change a great deal– like a rubber band Ex- chocolate and computers
41 Factors Affecting ElasticityAvailability of substitutes- If there are few substitutes you may still buy an item even if the price goes up Ex- concert tickets Relative importance- the amount of your budget that you spend on a good. If you spend a lot of your budget on the good it will be hard to spend more on it if the price increases –elastic If you spend a small part of your budget on the good you will still buy it even if the price goes up. –inelastic EX- salt
42 Factors Affecting ElasticityNecessities vs. Luxuries- People will always buy necessities- inelastic Ex- Milk Luxuries are elastic Ex- steak Changes over time – customers can not respond quickly to change because it takes time to find a substitute Ex- gas- if price goes up over time people will buy more fuel efficient cars
43 Total Revenue & Demand Total revenue- the total amount of money a firm receives by selling goods and services Determined by- Price of goods sold The quantity of goods sold Total revenue and elastic demand If the price is lowered demand will increase so total revenue will increase If the price is raised then demand will decrease and total revenue will decrease Total revenue and inelastic demand A change in price will not change demand or total revenue
44 The amount of goods available Supply= producer
45 Law of Supply If prices are higher suppliers will offer more of the good or service If prices are lower suppliers will offer less of that good or service Higher prices Higher supply Lower prices Lower supply
46 Supply Curve Price 1 10 2 30 3 40 4 50 5 60 Supply ScheduleQuantity supplied 1 10 2 30 3 40 4 50 5 60 Lowering of supply moves to the left Rise in supply moves to the right
47 Determinants of SupplyNumber of Producers If more producers enter a market, the supply will increase Resource Prices The prices that a producer must pay for its resources (inputs) influence supply. Resource prices affect the cost of production. As resource prices increase, the cost of production increases. As a result, producers must charge higher prices Technological Changes Changes in technology usually result in improved productivity. Increased productivity can reduce the cost of production. A decrease in the cost of production will increase supply.
48 Determinants of Supply Cont.Prices of Other Products of the Firm If a firm produces more than one product, a change in the price of one product can change the supply of another product. For example, automobile manufacturers can produce both small and large cars. If the price of small cars rises, the producers will produce more small cars. This draws the resources of the plant into the production of small cars and away from the production of large cars. Therefore, the supply of large cars will decrease. Producer Expectations Changes in producers' expectations about the future can cause a change in the current supply of products. For example, if producers of peanuts were to anticipate a price rise in the future, they may prefer to store their peanuts and sell them later. As a result, the current supply of peanuts would decrease.
49 How the Government Affects SupplySubsidy- government payment that supports a business or market U.S.- the government pays farmers to keep land out of cultivation. Keeps prices high Excise tax- a tax on the production or sales of a good. Used to reduce the supply of goods Discourages the sale of goods seen as harmful to public goods Ex.- alcohol, tobacco, and gas Regulations- government intervention in a market that affects the production of a good Safety regulation, environmental regulations
50 Elasticity of Supply Time is what determines if a good is elastic or inelastic Inelastic-orange groves- it would take time to grow more. Given time supply may become elastic Elastic- hair cuts- easy to hire more employees or increase hours
51 Costs of Production
52 Labor and Output Suppliers must decide how many workers to hireMarginal product of labor- the change in output from hiring one additional worker Increasing marginal returns- production increases as more workers are hired Diminishing marginal returns- production decreases as more workers are hired There are not enough resources for all employees to use. Employees have to wait to use the available resources
53 Production Costs Fixed costs- cost that do not changeEx- rent, property taxes, salaries Variable costs- a cost that changes depending on how much is produced Ex- materials, electric bills, number of employees being paid Total costs= fixed costs + variable costs
54 Marginal cost- the cost of producing one more unit of a good Marginal revenue- income earned from selling one more unit of a good; sometimes equal to price Profit= total revenue-total cost If total revenue is lower then total costs then the company is losing money Ideal amount of output is when marginal revenue (price) is equal to marginal cost
55 Equilibrium Equilibrium- The balance between price and quantity, or where supply meets demand Disequilibrium-When quantity supplied is not the same as quantity demanded Surplus- when quantity supplied is greater than quantity demanded Producers will lower prices Shortage- when quantity supplied is less than quantity demanded Producers will raise prices surplus Shortage Equilibrium is a “moving target”
56 Prices In a free market prices are a tool for distributing goods & resources Prices provide a language for buyer and sellers Advantages of prices They act as an incentive They act as a symbol They are flexible They are free Price ceilings-the legal maximum price for a good or service Ex. Rent control Price floors- a minimum price for a good or service Minimum wage
57 Supply Shock Supply shock- a sudden shortage of a goodTo combat supply shock rationing maybe used Rationing- a system of allocating scarce goods and services using criteria other than prices Rationing was used in the US during WWII Black Market- a market in which goods are sold illegally. It is in part a reaction to rationing.
58 Problems with Markets and PricesImperfect competition Spill over costs- costs of production that people have no control over Imperfect information- buyers can not make informed decisions