Introduction: Economic Issues

EconomicsEconomics

Unit 1Chapters 1-3

The Nature of Economics and the Economy

Unit 1Chapters 1-3

The Nature of Economics and the Economy

Burlington Central High School

Mr. LaPlante

Grade 12 University Credit

Economics and Key SkillsEconomics and Key Skills

• Note taking

• News Issues & Analysis

• Debate

• Research

• Organisation

• Interpreting graphs and statistics

• Note taking

• News Issues & Analysis

• Debate

• Research

• Organisation

• Interpreting graphs and statistics

Basic principles of economics

Basic principles of economics

“Social Science of Scarcity and Choice”

“Social Science of Scarcity and Choice”

Economics definedEconomics defined

• Greek origins

• Oikos -– “house”

• Nemo– “to manage”

• Wise management of one’s house

• Greek origins

• Oikos -– “house”

• Nemo– “to manage”

• Wise management of one’s house

• “The study of the way we make decisions about the use of scarce resources”

• Why?– Because our needs

and wants are insatiable and our resources are finite

• “The study of the way we make decisions about the use of scarce resources”

• Why?– Because our needs

and wants are insatiable and our resources are finite

Human BehaviourHuman Behaviour

• Rational and social beings therefore we are able to predict the groups behaviour but not always the individuals that make up the group.

• Knowledge of the group behaviour can be useful for decision makers.

• Rational and social beings therefore we are able to predict the groups behaviour but not always the individuals that make up the group.

• Knowledge of the group behaviour can be useful for decision makers.

As a student are you?...As a student are you?...

• Effective?

• Using resources to achieve the desired results

• Effective?

• Using resources to achieve the desired results

• Efficient?

• Using the bare minimum of resources to achieve the desired result

• Efficient?

• Using the bare minimum of resources to achieve the desired result

Economic decisions need to be both effective and efficient

Efficiency means we have to realise we give up

something else to achieve our goals

Efficiency means we have to realise we give up

something else to achieve our goals

Opportunity costs-

the sum of all that is lost from taking one course of action over another.(maximum potential loss)

Opportunity costs-

the sum of all that is lost from taking one course of action over another.(maximum potential loss)

The Economic ProblemThe Economic Problem

• Economic problems– production and consumption

– Scarcity: the central economic problem

• Macroeconomic ideas– growth

– unemployment

– inflation

– balance of payments problems

– cyclical fluctuations

• Economic problems– production and consumption

– Scarcity: the central economic problem

• Macroeconomic ideas– growth

– unemployment

– inflation

– balance of payments problems

– cyclical fluctuations

The Economic ProblemThe Economic Problem

• Microeconomic issues– choices:

• what

• how

• for whom

– the concept of opportunity cost

– rational decision making

• Microeconomic issues– choices:

• what

• how

• for whom

– the concept of opportunity cost

– rational decision making

What are the four categories of Resources?

Land

Labor

Capital

Entrpreneurship

What is aLand Resource?

A shorthand expression for any natural resource provided by nature

What is Labor?The mental and physical capacity of workers to produce goods and services

What is Capital?

The physical plants, machinery, and equipment used to produce other goods

What isFinancial Capital?

The money used to purchase capital

What is Entrepreneurship?

The creative ability of individuals to seek profits by combining resources to produce innovative products

LandLandLaborLabor

CapitalCapital

Entrepreneurship organizesresources to produce goods

and services

Entrepreneurship organizesresources to produce goods

and services

What isCeteris Paribus?

A Latin phrase that means that while certain variables can change, “all other things remain unchanged”

What isPositive

Economics?

An analysis limited to statements that are verifiable

What isNormative

Economics?

An analysis based on value judgement

Unlimitedwants

Scarcity

Society Chooses

Resources

The Economic ProblemThe Economic Problem

• The production possibility curve– what the curve shows

• The production possibility curve– what the curve shows

0

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8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Un

its o

f foo

d (

mill

ion

s)

Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

A production possibility curveA production possibility curveA production possibility curveA production possibility curve

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0 1 2 3 4 5 6 7 8Units of clothing (millions)

Un

its o

f foo

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mill

ion

s)

Units of food Units of clothing (millions) (millions)

a 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

a

A production possibility curveA production possibility curveA production possibility curveA production possibility curve

0

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6

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8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Un

its o

f foo

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mill

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Units of food Units of clothing (millions) (millions)

8m 0.0b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

b

A production possibility curveA production possibility curveA production possibility curveA production possibility curve

0

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0 1 2 3 4 5 6 7 8Units of clothing (millions)

Un

its o

f foo

d (

mill

ion

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Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2mc 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

c

A production possibility curveA production possibility curveA production possibility curveA production possibility curve

0

1

2

3

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5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Un

its o

f foo

d (

mill

ion

s)

Units of food Units of clothing (millions) (millions)

8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m

A production possibility curveA production possibility curveA production possibility curveA production possibility curve

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0 1 2 3 4 5 6 7 8Units of clothing (millions)

Un

its o

f foo

d (

mill

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s)A production possibility curveA production possibility curveA production possibility curveA production possibility curve

0

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3

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0 1 2 3 4 5 6 7 8Units of clothing (millions)

Un

its o

f foo

d (

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s)

x

A production possibility curveA production possibility curveA production possibility curveA production possibility curve

w

The Economic ProblemThe Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:

The Economic ProblemThe Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

The Economic ProblemThe Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

Units of clothing (millions)

Un

its o

f foo

d (

mill

ion

s)Increasing opportunity costsIncreasing opportunity costsIncreasing opportunity costsIncreasing opportunity costs

x

y1

1

z1

2

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8

The Economic ProblemThe Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:

The Economic ProblemThe Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:• production within the curve

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:• production within the curve

v

x

y

O

Making a fuller use of resourcesMaking a fuller use of resourcesMaking a fuller use of resourcesMaking a fuller use of resourcesF

oo

d

Clothing

Production insidethe production

possibility curve

The Economic ProblemThe Economic Problem

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:• production within the curve

• shifts in the curve

• The production possibility curve– what the curve shows

– microeconomics and the p.p. curve:• choices and opportunity cost

• increasing opportunity cost

– macroeconomics and the p.p. curve:• production within the curve

• shifts in the curve

O

Growth in potential outputGrowth in potential outputGrowth in potential outputGrowth in potential outputF

oo

d

Clothing

Now

O

Fo

od

Clothing

Now

Growth in potential outputGrowth in potential outputGrowth in potential outputGrowth in potential output

5 years’ time

O

Fo

od

Clothing

Growth in potential and actual outputGrowth in potential and actual outputGrowth in potential and actual outputGrowth in potential and actual output

O

Fo

od

Clothing

Growth in potential and actual outputGrowth in potential and actual outputGrowth in potential and actual outputGrowth in potential and actual output

x

y

Canada’s Economic GoalsCanada’s Economic Goals

• Political stability

• Reduced Public Debt

• Economic growth

• Increased productivity and Efficiency

• Equitable distribution of Income

• Price Stability

• Full Employment

• Viable balance of payments and Stable Currency

• Economic Freedom

• Environmental stewardship

• Political stability

• Reduced Public Debt

• Economic growth

• Increased productivity and Efficiency

• Equitable distribution of Income

• Price Stability

• Full Employment

• Viable balance of payments and Stable Currency

• Economic Freedom

• Environmental stewardship

The Economic ProblemThe Economic Problem

• The circular flow of income– firms and households

• The circular flow of income– firms and households

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

The Economic ProblemThe Economic Problem

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

The Economic ProblemThe Economic Problem

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• money flows: consumer expenditure

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• money flows: consumer expenditure

Goods and services

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

$Consumer

expenditure

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

The Economic ProblemThe Economic Problem

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• money flows: consumer expenditure

– factor markets

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• money flows: consumer expenditure

– factor markets

The Economic ProblemThe Economic Problem

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• money flows: consumer expenditure

– factor markets• real flows: services of labour and other factors

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• money flows: consumer expenditure

– factor markets• real flows: services of labour and other factors

Goods and services

$Consumer

expenditure

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

$Consumer

expenditure

Services of factors of production (labour, etc)

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

The Economic ProblemThe Economic Problem

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• money flows: consumer expenditure

– factor markets• real flows: services of labour and other factors

• money flows: wages and other incomes

• The circular flow of income– firms and households

– goods markets• real flows: goods and services

• money flows: consumer expenditure

– factor markets• real flows: services of labour and other factors

• money flows: wages and other incomes

Goods and services

$Consumer

expenditure

Services of factors of production (labour, etc)

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

$Consumer

expenditure

Wages, rentdividends, etc.

$

Services of factors of production (labour, etc)

The circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomesThe circular flow of goods and incomes

The Economic ProblemThe Economic Problem

• The circular flow of income (cont.)– macroeconomic issues

• the size of total flows

– microeconomic issues• individual markets

• choices within goods and factor markets

• The circular flow of income (cont.)– macroeconomic issues

• the size of total flows

– microeconomic issues• individual markets

• choices within goods and factor markets

TOP 10 REASONS TO STUDY ECONOMICS

1. Economists are armed and dangerous: "Watch out for our invisible hands.”

2. When you call 1-900-LUV-ECON and get Kandi Keynes, you will

have something to talk about. 3. You can talk about money without every having to make any.

4. You get to say "trickle down" with a straight face.

5. Mick Jagger and Arnold Schwarzenegger both studied economics and look how they turned out.

6. When you are in the unemployment line, at least you will know why you are there.

...TOP 10 REASONS TO STUDY ECONOMICS ...TOP 10 REASONS TO STUDY ECONOMICS

7. If you rearrange the letters in "ECONOMICS", you get "COMIC NOSE".

8. Although ethics teaches that virtue is its own reward, in economics we get taught that reward is its own virtue.

9. When you get drunk, you can tell everyone that you are just researching the law of diminishing marginal utility.

10. Economists can supply it on demand.

1. Scarcity exists

a. when people consume beyond their needs.

b. only in rich nations.

c. in all countries in the world.

d. only in poor nations.

C. No matter what economic system a country has, it is always faced with the problem of scarcity.

2. Which of the following would eliminate scarcity as an economic problem?a. Moderation of people’s competitive

instincts.b. Discovery of large new energy

reserves.c. Resumption of steady productivity

growth.d. None of the above because scarcity can

not be eliminated.D. Because it is impossible to provide

everyone with everything they want, we will always have scarcity.

3. Which of the following is not a resource?

a. Land.

b. Labor.

c. Money.

d. Capital.

C. Money is not a resource because it has no intrinsic value. Money that is used to make an investment is called financial capital.

4. Economics is the study of

a. how to make money.

b. how to operate a business.

c. people making choices because of the problem of scarcity.

d. the government decision-making process.

C. Economics is the study of how people must decide among alternatives to meet their wants and needs in this world of scarcity.

5. Microeconomics approaches the study of economics from the viewpoint ofa. individuals or specific markets.b. the operation of the Federal Reserve.c. economy wide effectsd. the national economy.

A. Microeconomics is the study of the decision- making process for individuals, business owners, and government.

6. A review of the performance of the Canadian economy during the 1990’s is primarily the concern ofa. macroeconomics.b. microeconomics.c. both macroeconomics and

microeconomics.d. neither macroeconomics nor

microeconomics.

A. Macroeconomics is the study of the economy as a whole.

7. An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. The phrase “ceteris paribus” means that

a. other relevant factors like consumer incomes must be held constant.b. the gasoline prices must first be adjusted

for inflation.c. the theory is widely accepted, but cannot

be accurately tested.d. consumers need for gasoline remains the

same regardless of price.A. Anytime price changes we always make

the assumption that nothing else changes.

8. An economist notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. The economist has

a. confused association with and causation.b. misunderstood the ceteris paribus

assumption. c. Used normative economics to answer a

positive question.d. built an untestable model.

A. Just because one action follows another, does not mean that the first caused the second.

9. Which of the following is a statement of positive economics?a. The income tax system collects a lower

percentage of the incomes of the poor.b. A reduction in the tax rates of the rich

makes the tax system more fair.c. Taxes ought to be raised to finance

health care.d. All of the above are primarily

statements of positive economics.

A. Positive economic statements are testable by facts and explain the world as it is without making value judgements.

10. Which of the following is a statement of positive economics?a. An unemployment rate of greater than 8

percent is good because prices will fall.b. An unemployment rate of 7% is a serious

problem.c. If the overall unemployment rate is 7%,

black unemployment rates will average 15%.d. Unemployment is a more severe problem

than inflation.C. Other answers are based on a value

judgement concerning the relationship between black and white unemployment rates.

11. Which of the following is a statement of normative economics?a. A minimum wage is good because it

raises wages for the working poor.b. The minimum wage is supported by

unions.c. The minimum wage reduces jobs for

unskilled workers.d. The minimum wage encourages firms

to substitute capital for labor.A. Even though the minimum wage reduces

jobs for some working poor, it is a value judgement that the minimum wage is good for the economy overall.

12. Select the normative statement that completes the following sentence: If the minimum wage is raised rapidly, thena. inflation increases.b. workers will gain their rightful share of

total income.c. profits will fall.d. unemployment will rise.

B. To say that workers have right to a certain part of total income entails a value judgement.