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Economic Principles Economic Principles


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Title: Economic Principles Economic Principles

Economic PrinciplesEconomic Principles
Unit 1 Vocab
  1. Economics
  2. Microeconomics
  3. Macroeconomics
  4. Economic model
  5. Economic system
  6. Scarcity
  7. Trade-off
  8. Opportunity cost
  9. Marginal cost
  10. Cost-benefit analysis
  11. Factors of production
  12. Gross Domestic Product (GDP)
  13. Standard of living
  14. Productivity
  15. Specialization
  16. Division of labor
  17. Economic interdependence

Economic Models
  • Economy
  • All activity that affects production,
    distribution use of goods services
  • Economists use economic models to study the
  • They study past and present to predict the future
  • Based on assumptions
  • Businesses government make decisions based on

Economic Principles
  • Economics Study of how decisions are made when
    resources are limited.
  • Scarcity Not enough income, time, and resources
    to satisfy every desire. Faces individuals,
    businesses, and countries.
  • Economics must answer the questions of what, how,
    and whom when dealing with production.

  • Because of Scarcity we must answer 3 questions in
  • What to Produce?
  • How to Produce?
  • Whom to produce for?

Assessment Activity
  • All economic questions and problems arise from
    scarcity. Economics assumes people do not have
    the resources do satisfy all of their wants.
    Therefore, we must make choices about how to
    allocate those resources. We make decisions about
    how to spend our money and use our time. This
    activity will focus on the central idea of
    economics- every choice involves a cost.
  • Let's say you have five dollars. What would you
    like to spend it on? There are a million things
    you would love to spend five bucks on, but let's
    imagine there are only three things out there you
    really want to buy gum, soda, and movie tickets.
    Look at the price chart to the right and answer
    the questions.

Good Price
Gum . 50
Soda 1.oo
Movie Ticket 5.00
  • How many sodas can you buy instead of one movie
  • How many packs of gum can you buy instead of one
  • If buy 4 packs of gum, how many sodas could you
    have bought?
  • For example, if you go to the movies you have to
    give up a certain amount of gum and soda. If you
    are a sodaholic, you have to give up five sodas.
    If you are gum fanatic, you surrender ten packs
    of gum. But, the opportunity cost of a movie is
    not five sodas and ten packs of gum. It is five
    sodas or ten packs of gum.

Which of the following best describes scarcity?
  1. Not enough goods for everyone
  2. Not enough resources to provide every desire
  3. Lack of desire to produce enough resources
  4. The amount that people want

What is the fundamental economic problem?
  1. Money
  2. Time
  3. Scarcity
  4. Economics

All of the following are questions we must ask
because of scarcity except
  1. When to produce?
  2. How to produce?
  3. What to produce?
  4. Whom to produce for?

Goods and Services
  • Good Anything manufactured.
  • Service Something people do for others.

Needs and Wants
  • Need Basic item for survival.
  • Want Anything including and beyond needs.

Factors of Production
  1. Capital
  2. Land and Natural Resources
  3. Labor
  4. Entrepreneurship or management

  • Capital goods All tools, buildings, and
    machinery businesses use to make goods and
    provide services. Same as Resources

Land and Natural Resources
  • All land used for the business.
  • Natural resources are things that come form the
    earth such as water and minerals.
  • All energy is considered a natural resource.

  • Hired workers to help in production.
  • Labor earns money, which they use
  • to buy other goods and services.
  • Division of Labor Separating a big job into
    smaller jobs. Each person is responsible for
    doing one job. (Assembly line).

  • Entrepreneurs are people willing to take risks in
  • Plan and supervise production.
  • Decision makers.

With a neighbor, list the land, labor, capital,
and entrepreneur that went into making each of
the following (you can list more than one item
for each)
  • Your shoes
  • iPod
  • Dominos pepperoni pizza

Trade-off and Opportunity Cost
  • Scarcity forces people to make choices.
  • Trade-off Decision that must be made when
    choosing between items.
  • Opportunity cost Value of the next best
    alternative that was given up when a choice was
    made. Involves time or money.
  • When choosing to do something, you lose. You
    lose the ability(opportunity) to do something
  • ____________________________________________
  • Production Possibilities The combinations of
    goods and services that can be produced from a
    fixed amount of resources.

What was the opportunity cost of passing the
Health Care Bill?
  1. More people will have health care coverage.
  2. Grandparents will be put to sleep because of
    Death Panels.
  3. Obama will become the Devil and the Four Horseman
    will arrive.
  4. The government will have less money to spend on
    other services like the military.

  • How do you make trade-offs with your time? What
    do you give up?
  • Consider time studying, time with friends, or
    time sleeping.

Business Costs
  • Fixed Costs
  • Expense is the same no matter how much is
  • Example - Rent
  • Variable Costs
  • Expenses that change with number of items
  • Fixed Costs Variable Costs Total Cost
  • Marginal Cost
  • extra cost of producing one additional unit of
  • Marginal Benefit /Revenue
  • additional benefit after all costs are accounted
    for producing one more unit
  • Cost Benefit Analysis
  • economic model used to compare marginal costs
    benefits of a decision Which should be greater
    the benefits or the costs??

Considerations for Businesses
  • Productivity -
  • Measure of the amount of output produced by a
    given amount of inputs in a specific period of
    time. In other words How resources are being
    used efficiently to produce goods and services.
  • Specialization
  • Takes place when people, businesses, regions
    countries concentrate on goods or services that
    they can produce better than anyone else
  • Examples China and electronics
  • Human Capital
  • Sum of the skills, abilities motivations of
  • How would businesses and employees benefit from

  • Goes up when more output can be produced when
    scarce resources are used efficiently
  • Requires labor and human capital
  • Increases when businesses invest in human capital
  • Increases with specialization

What is an example of a fixed cost of doing
  1. Wages
  2. Cost of fuel
  3. Price of materials
  4. Rent on a building

Economic systems
Gross Domestic Product (GDP)
  • Measure of an economys size success (monetary
    measure - 16.72 trillion 2013 est. 1)
  • Total value of all the final goods services
    produced in a country during a single year
  • Used cars not counted in GDP because second hand
    sales are not counted
  • Used to measure standard of living (quality of
    life based on the possession of necessities and
    luxuries that make life easier) in a country
  • Measures quantity not quality

Gross Domestic Product (GDP) cont.
  • Per Capita GDP total GDP divided by the
    countrys population U.S. was 52,800 2013 est.
  • Compared yearly to check growth of country
  • Higher GDP from previous year growing economy
  • Lower GDP from previous year shrinking economy

Economic Systems
  • Three major types
  • Traditional
  • Command
  • Market
  • The distinguishing factors are the role of
    government in the economy and the decision making
    for production.

Traditional Economy
  • Economic decisions are made by customs handed
    down through generations.
  • Hunting, farming, and gathering.
  • No technology.
  • Activities center around the family.
  • Men and women have defined social roles.
  • Found in rural, non-industrialized areas.
    (Africa, S. America, Asia)

Traditional Economies
Command Economy
  • Government makes all economic decisions. (China,
    N. Korea, Vietnam, Cuba, and the former Soviet
  • Advantages
  • The Govt. can set prices of goods.
  • Set low prices for consumers and give help to
  • Disadvantages
  • No competition.
  • Factories are poorly run and shortages are
  • No individual freedoms.

Command Economies Former Soviet Union
Command Economies North Korea
Command Economies - Cuba
Market Economy
  • Decisions are made by the principles of supply
    and demand.
  • People buy, sell, and produce what ever they
    want. People can work where they want.
    Individual freedoms
  • Capitalism Private citizens own most means of
    production land, labor, capital
    entrepreneurship to make a profit.
  • Free Enterprise Freedom of businesses to
    compete for profit without govt. interference.

7 Characteristics of a Market Economy
  • Markets exchanges here determine prices of
    goods services. Its the free and willing
    exchange of goods and services between buyers and
  • Consumer Sovereignty the consumer is king of
    the market
  • They are the ones who determine what products
    will be produced
  • It exists only in Market based economies
  • Economic freedom freedom of choice with
  • Example an entrepreneur starts a business and
    it fails. The govt usually will not help out.
  • Private Property Rights the freedom to own,
    use, or dispose of our own property as long as it
    doesnt interfere with the rights of others.

  • 5. Competition struggle between buyers and
    sellers to get the best products and the lowest
  • Capitalism thrives on competition
  • Rewards the most efficient producers
  • Profit Motive the driving force that encourages
    individuals and organizations to improve their
    material well-being.
  • Purpose is to raise the standard of living
  • It is the reason for growth in a market system
  • 7. Voluntary Exchange act of buyers and
    sellers freely and willingly engaging in market
  • Both buyers sellers must feel a benefit

Mixed Economy
  • Any combination of Economic systems.
  • The United States is a mixed economy because
    capitalism and free enterprise exist with
    government regulations.
  • The U.S. govt. provides services such as
    highways, postal system, and transportation.
  • Some government regulation.
  • At certain times, govt. can take control of the
    means of production.

  • On the paper provided, NEATLY create a 4 square
    of the types of economies we just discussed
    Command, Traditional, Market, and Mixed.
  • Be sure to include several characteristics,
    examples, and pictures. These will be hung up and
    people should be able to easily understand the
    differences in each of the economies.

Warm up
  • 1. Economic system where the government makes all
    of the economic decisions?
  • 2. Economic system that is a combination of
    command and market economies?
  • 3. Total dollar value of all final goods and
    services produced in a country during a single
  • 4. Consumers are king of the market because
    they decide what produces will be produced?
  • 5. Characteristic of a market economy that
    describes the struggle between buyers and sellers
    to get the best products and the lowest prices?
  • 6. This is based on private ownership of the
    means of production and can decide how to use
    them to use them to make a profit?

Capitalism Free Enterprise
  • The U.S. economy is built on a market economy,
    but government still plays a role
  • Free Enterprise minimum govt interference
  • Capitalism private citizens own and use factors
    of production (land, labor, capital,
    entrepreneurship) to make a profit.

The Drawbacks of capitalism
The Drawbacks of capitalism
The Rise of Capitalism
  • 2 concepts developed
  • People work for economic gain
  • Government should have a limited role
  • 1200s C.E. trade routes opened between Europe
    the East
  • Silk Roads, Marco Polo
  • Throughout hundreds of years trade increased
  • Development of ideas of wealth
  • Adam Smith
  • Scottish Economist
  • Wealth of Nations
  • Basic Principles of Economics
  • Individuals who seek profit benefit all of
  • Laissez-Faire to leave alone
  • The government should not interfere in the market
  • Governments only role should be to ensure free

Adam Smith and The Wealth of Nations
  • Socialism belief that the means of production
    should be owned controlled by society either
    directly or through the govt
  • Karl Marx
  • Wrote The Communist Manifesto
  • Socialist believed industrialized nations
    divided into bourgeoisie (entrepreneurs)
    proletariat (workers)
  • Predicted revolution of the proletariat
  • Believed socialism would develop into communism

  • Communism one class would evolve where property
    would be commonly held there would be no need
    for government
  • Built on the idea of socialism

Transitioning Economies
  • Former Soviet Union the Soviet Bloc
  • Inefficiency of command economies led to no or
    very small growth
  • Transition of this type of economy led to
    transition from Communism to Democracies
  • Why would a transition be hard?

  • North America Free Trade Agreement (NAFTA)
    agreement between Canada, Mexico, and the USA
    where tariffs were almost completely eliminated
    (free trade)
  • Began on Jan. 1, 1994
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