What Economics Is About

INTRODUCTION

Thinking like an Economist

Why are some people and nations wealthy and others poor? This simple sounding question has no easy answer. In fact, over the past two centuries, some of the world’s best thinkers have wrestled with it. Their answers have generated many of the ideas and principles at the heart of the social science we call ECONOMICS.

Economics – ______

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The first person to consider this question was Adam Smith, a political economist and philosopher who authored the book The Wealth of Nations. In his book, Smith argued that competition is the key to a healthy ECONOMY.

Economy – ______

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Nations prosper when buyers and sellers are free to do business in the marketplace without government interference. In the United States, Adam Smith is revered today as the father of modern economics. Smith observed that people want not only the basic necessities of life – food, clothing, and shelter – but also things that make life easier, or more convenient, and that entertain them. The more of such things they have, the richer they are, at least in economic terms.

When people think about economics, they see, numbers, charts, graphs, and equations. But that is not what economics is all about. In their popular book Freakonomics, economist Steven Levitt and journalist Stephen Dubner argue that economics is about “stripping a layer or two from the surface of modern life and seeing what is happening underneath”. When economists do this, they uncover curious mysteries and enigmas. These economic enigmas are puzzles that are explained through an economic analysis.

Economic Enigma #1: Why does popcorn cost so much in a theater?

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Economic Enigma #2: Why do prices often end in 99 cents?

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Economists divide their study of how people use their scarce resources into two main branches.

Micro Economics –

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Macro Economics –

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Economists have developed principles that represent an economic way of thinking about the world.

What Tools do Economists Use?

Economists try to solve the economic enigmas that exist in our society. To do this they examine economic events, try to simplify them, and to figure out how a given economic decision can affect their work. In order for them to have some success, they need a set of tools. The three they use the most are:

1. Scientific Method -

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2. Graphs -

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3. Economic Models -

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Good economic models are useful for both explaining and predicting how the economy operates. Remember, humans make decisions based on their own best interests. You have had a brief introduction to the principles and tools that help economists look at the world in a special way. In this unit you will use those principles and tools to develop your own understanding of how the world works. In the process you will become a better consumer and citizen.

SCARCITY

Every society is endowed with ______which are used to ______the goods and ______that enable it to survive and prosper. These resources, called ______, can be classified into three groups: natural resources, human resources, and capital resources.

Define and give examples of the following:

Natural resources: ______

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Human resources: ______

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Capital resources: ______

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The study of economics explains how productive resources are used to provide the goods and services that satisfy human wants.

When are goods and services LIMITED? ______

When are goods and services UNLIMITED? ______

Define SCARCITY: ______

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Answer the following questions by putting a Yes if it is a SCARCE resource or No if it isn’t.

• Trees in a forest while walking through a forest______

• Playstation 3 during the holiday season______

• iphone 5 at the Apple store in November______

• Apples at a supermarket______

• Sand on a beach while walking on a beach______

Scarce goods and services command a ______in the ______. The price indicates how scarce a good is relative to other goods. The higher the price of a good, the more ______it is.

THE BASIC ECONOMIC PROBLEM

What are the 3 Basic Questions Every Society Must Answer?

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OPPORTUNITY COST: THERE IS NO SUCH THING AS A FREE LUNCH

Because of scarcity, any time a choice is made, there are alternatives that ______. The value of the next best alternative is called ______.

Read the scenario and answer the question:

I come home from school with a lot of math and science homework. I know it will take me 2 hours to get it done. After school I have track practice that goes from 3-4 and later my friends are going out to a movie and dinner from 4:30 – 9. I want to go out with my friends and skip doing my homework. What is the opportunity cost if I follow this plan? ______

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Both ______and ______incur opportunity costs when making decisions.Define the following:

Producers: ______

Consumers: ______

Answer the following questions:

1. Sally goes to the Apple store to but and ipod. Who is the producer? ______

2. Johnny buys a stereo from Sony. Who is the consumer? ______

3. Ralph hires a plumber to fix his toilet. Who is the producer? ______

The “cost” of buying an item is not really its price; rather it is… ______.

Answer the following questions:

1. My mom gives me 20 dollars to do whatever I want with it. I want to get something to eat or I can use it to buy a used video game. I decided to use it to buy a double cheeseburger meal with fries and a drink for $7.75. Due to this I do not have the $15 I need to buy the game I want. What was the true cost of my meal? ______

2. Dell only has enough money to make either MP3’s or laptops. The company decides to make MP3 players over laptops because they expect more people to buy and use them. What is the true cost of their business decision? ______

The concept of opportunity cost also relates to the use of ______. Since time is scarce, the time spent doing one activity cannot be spent ______.

Answer the following questions:

1. I decide to spend time with my mother over listening to Justin Beiber on my ipod. What is the cost of my decision? ______

2. I decided to go to a basketball game with my friends instead of going out to dinner with my Valentine? ______

Because of this, economists tell us, there is “______.”

What do you think that means in regards to opportunity cost? ______

ECONOMIC SYSTEMS

PRODUCTIVITY

Economic activity is directed toward a distinct goal: ______

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Production –

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Input -

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Output -

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Production

Division of Labor -

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Specialization -

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How does specialization result in a higher degree of interdependence?

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MONEY: REDUCING THE COST OF TRADE

Money –

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Barter –

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Why is using money better than bartering? Summarize the example given using the term “transition costs”.

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Money serves as a ______a ______and a medium of ______.

CHARACTERISTICS OF MONEY

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In the United States the basic money supply is known as M1 and M2.

M1: ______

M2: ______

MARKET ECONOMY: HOW THE MARKET DIRECTS ECONOMIC ACTIVITY

Since all countries have limited productive resources, they need to determine WHAT, HOW, and for WHOM to produce. Market economics rely on the ______to accomplish this task.

Prices as Guides: Selling Tennis Rackets!

In a market economy, changing prices in the marketplace guide economic activity by coordinating the diverse interests of millions of individuals in their roles as producers and consumers. Read the example about the tennis rackets. Draw a demand curve to show the change in demand when a new craze for tennis hits Berwyn. Your graph should have the original demand curve and the new demand curve to show the change.

Note: the PRICE in tennis rackets coordinated the independent desires of consumers and producers. The rise in tennis racket prices showed the tennis racket makers that they would make more profits if they made more rackets.

Pricing is efficient because people get to choose what they want to buy and sellers get to choose what they want to sell. This happens through competition.

Competition - ______

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Efficiency - ______

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Final Thought: The government does not need to be involved (regulate) in pricing goods like tennis rackets. If a buyer is willing to pay a high price for a tennis racket, then the seller can get that high price.

Read Adam Smith’s Wealth of Nations.Explainthe metaphor of the invisible hand in your own words

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Price Controls – When the government intervenes in a market economy to set prices, the results are predictable:

Surplus- ______

Shortage -______

Market Clearing Price/ Equilibrium Price - ______

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THE CIRCULAR FLOW MODEL OF A MARKET ECONOMY

Products Market -

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Productive Resources Market -

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Wage/Salary -

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The Financial Capital Market -

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Supply -

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Demand -

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THE ROLE OF GOVERNMENT

The government in any society plays a role in dealing with the basic economic problem of scarcity. In the United States, the government performs the following roles:

Stabilizes Economy:

Recession ______

Inflation ______

What causes long-term inflation?______

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What does the government do to keep the economy stable? ______

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What does the Federal Reserve Bank do? ______

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Growing Role of Government: The role of the U.S. Government has grown over the last century, and the government has assumed a larger role in certain parts of the economy. Do you think the government should assume all of the roles identified above? Why or why not?

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