Economics Unit 1. Name: Period: Teacher: Mrs. Povletich
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1 Economics Unit 1 Name: Period: Teacher: Mrs. Povletich
2 Ten Principles of Economics Principle What it is What it means 1 People face trade-offs 2 The cost of something is what you give up to get it. 3 Rational people think at the margin. 4 People respond to incentives. 5 Trade can make everyone better off.
3 6 Markets are usually a good way to organize economic activity. 7 Governments can sometimes improve market outcomes. 8 The standard of living depends on a country s production of goods and services. 9 Prices rise when the government prints too much money. 10 Society faces a shortrun tradeoff between inflation and unemployment.
4 WHAT IS ECONOMICS? Chapter 1, Section 1 KEY TERMS Want Resource Scarcity Opportunity Cost Trade-Off Production Possibilities Frontier Rationing Device Economics FOCUS QUESTIONS Why does scarcity exist? How is choice related to scarcity? How is opportunity cost related to choice? Why are rationing devices needed? What is the purpose of the production possibilities frontier? What activity determines how rationing devices are distributed?
5 UNDERSTANDING OPPORTUNITY COST List 5 items that you recently purchased or did List what you could have purchased or done instead of what you did What is the opportunity cost of the good you purchased or the activity you did? PRODUCTION POSSIBILITIES FRONTIER - One Diagram, Three Economic Concepts o o o o o o A PPF shows ALL possible combinations of TWO goods that an economy can produce in a certain period of time. Looking at the production possibilities curve, answer the following questions If this economy produces 40,000 skis per year, how many snowboards can it produce? If this economy produces 50,000 snowboards per year, how many skis can it produce? Any point on the PPF itself (A-D in the example) is to us. We can also have the combination of goods represented by any point the PPF, such as point. Because resources are limited, we don t have enough to produce at point which is the PPF. Continuing to use the example, answer the following questions about opportunity cost If we narrow our choices to only points B and C. Then we make a final decision to produce at point B, what is the opportunity cost of a set of skis over this range?
6 Applying the Principles Scarcity - CHAPTER 1, SECTION 1 GUNS OR BUTTER (Military vs. Consumer Spending) Economists often speak of the way a society allocates its resources between military and consumer spending as a method for choosing guns or butter. Of course, guns represent resources allocated to a nation s defense; butter represents resources allocated for consumer goods. Economists use the phrase guns or butter because scarcity mandates that we choose how to use available resources. Illustrate the relationship between guns and butter as directed in question Use the following data to draw a production possibilities frontier (PPF) on the grid shown. Guns Butter Use the graph you created in question 1 to answer questions Can this economy produce 6 units of guns and 12 units of butter? Explain. 3. Can this economy produce 11 units of guns and 11 units of butter? Explain. 4. What does this PPF represent? 5. How does this PPF illustrate the concept of scarcity? 6. How does this PPF illustrate the concept of opportunity cost? 7. If the economy is presently producing 0 units of guns and 15 units of butter, what is the opportunity cost of increasing the production of guns from 0 units to 3 units? 8. If the economy is presently producing 12 units of guns and 4 units of butter, what is the opportunity cost of increasing the production of butter from 4 units to 11 units?
7 The Production Possibilities Frontier and Efficiency The PPF represents what an economy can produce when it is using all its resources efficiently. As long as the economy is producing at a point on its PPF, it is producing at an efficient level and using all its resources. When an economy is already using all its resources efficiently, it cannot use the same resources to produce something beyond, or outside, its PPF. Therefore, economists say that a point outside an economy s PPF is unattainable. An economy can produce at a point inside its PPF. However, if an economy is producing at a point inside its PPF, then either the economy is not using all its resources or it is using them inefficiently. Economists label a point inside the PPF underutilization because such a point indicates that the economy is underutilizing its resources. X Y Z Efficiency, unattainability, and underutilization are shown on the PPF and Efficiency graph above. Use the graph to answer questions The point that represents an unattainable point is 10. The point that represents underutilization is. 11. An economy that is using all its resources efficiently is producing at point. A society makes choices that determine how it will allocate its resources between guns and butter. For each of the events in questions 12-16, circle either guns or butter to indicate whether the event would cause a shift along the PPF toward producing more guns or toward producing more butter. 12. After World War I, America pursues a policy of return to normalcy and defense spending is cut. 13. America enters World War II. Shift towards GUNS or BUTTER Shift towards GUNS or BUTTER 14. The Cold War escalates and the number of nuclear warheads increases. Shift towards GUNS or BUTTER 15. After the prosperous 1990s, the terrorist attacks of September 11, 2001, led the United States into wars in Afghanistan and Iraq and increased spending on homeland security. Shift towards GUNS or BUTTER
8 THE ECONOMIC WAY OF THINKING Chapter 1, Section 2 KEY TERMS Marginal Incentive Microeconomics Macroeconomics Theory FOCUS QUESTIONS How do costs and benefits affect decisions? Why are incentives important? Explain the difference between micro- and macroeconomics. Why do economists develop theories? Make a T-Chart reflecting the costs and benefits of continuing your education after high school.
9 The Story of a Broken Window Use the story to explain why it s important for economics to look at what would have been. ****************************************************************************************** Applying the Principles Incentives - CHAPTER 1, SECTION 2 Most of economics can be summarized in four words: People respond to incentives. -Steven Landsburg, economist Governments use economic incentives to influence the behavior of citizens in a way that benefits society. They create incentives through laws and through taxes. For example, a government could pass a law prohibiting children from purchasing a product meant for use by adults. Such a law would make it difficult for children to obtain the product. A government could also place a tax on a certain good to discourage its use. Such a tax would increase the cost of the good. For some people, the cost would then be greater than the benefit, and these people would decrease their consumption of the good. A government could give tax benefits to encourage an activity. For example, it might provide a credit by giving taxpayers back a portion of a tax, or it might provide a deduction by allowing taxpayers to subtract a certain amount from their income before calculating their taxes. Such a credit or deduction would reduce the cost of the activity. For some people, the benefit will then be greater than the cost, and these people would increase their participation in the activity. For each of the goals in questions 1-6, think of a government incentive that accomplishes the goal. EXAMPLE Goal: Decrease the consumption of alcohol. The government taxes the manufacture and sale of alcohol. Such taxation increases the cost of alcohol. For some people, the cost is now greater than the benefit, and these people have decreased their consumption of alcohol. 1. Goal: Decrease smoking. 2. Goal: Increase the level of education.
10 3. Goal: Increase the rate of private home ownership. 4. Goal: Decrease the consumption of fuel oil. 5. Goal: Increase the rate of personal savings. 6. Goal: Increase donations to charities. Refer to the goals and incentives in questions 1-6 as you answer questions 7 and What is the trade-off of using tax benefits as incentives? 8. Could any of these incentives have unintended effects? Give a specific example.
11 BASIC ECONOMIC LANGUAGE Chapter 1, Section 3 KEY TERMS Tangible Intangible Goods Utility Disutility Services Land Labor Capital Entrepreneurship FOCUS QUESTIONS Choose an item in the classroom and list the materials/resources that were used to produce it. What are the different ways that economists talk about goods? What are the four types of resources or factors of production? Why are labor and entrepreneurship different categories of resources?
12 Applying the Principles Resources - CHAPTER 1, SECTION 3 Use the following key to label each of the resources in questions 1-16 as land, labor, capital, or entrepreneurship. If a resource is land, identify it as either renewable or nonrenewable. If a resource is a capital good, identify it as either physical or human. (Hint: Physical capital is a tangible, human-made resource-such as tools or machinery-used to produce other goods and services. Human capital is the knowledge and skills a worker gains through education and experience. ) 1. coal 2. telephone 3. natural gas 4. computer 5. truck driver 6. accountant 7. forklift 8. oak trees 9. corn 10. education 11. Bill Gates 12. cotton 13. gold 14. hammer 15. Henry Ford 16. lawyer Ld-r = land (renewable) Ld-n = land (nonrenewable) Lbr = labor C-p = capital (physical) C-h = capital (human) E = entrepreneurship
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