Reading homework
Lisa
02ch7.pptxWhat is Economics?
I. What is Economics?
A. Definition: Economics is a social science that deals with how consumers, producers, and societies choose among the alternative uses of scarce resources in the process of producing, exchanging, and consuming goods and services
II. What do we mean by scarce resources?
A. Scarcity refers to the finite quantity of resources that are available to meet society’s needs
B. What are resources?
1. 3 kinds
a. Natural resources (land)
land
water
minerals
biological
b. Human resources (labor)
c. Manufactured resources (capital)
machines & equipment
structures
C. Because resources are scarce we have to make choices about how best to use them
1. Choice has a time dimension
a. Going to college today increases earning potential in the future
2. Choice has an opportunity cost
a. Interest that could have been earned from money spent on a car
b. Salary that could have been earned at a job instead of going to college
3. Choice leads to specialization
a. Choose to use resources for what they are best suited for
b. Teacher pays someone to provide medical advise, work on car, etc.
c. U.S. exports grains and imports coffee
III. 2 branches of economics
A. Microeconomics
1. Focuses on the economic actions of individuals or specific groups
B. Macroeconomics
1. Focuses on aggregates, totals, big groups
a. Wealth of a whole country
b. Policies that effect the nation
growth of the economy
inflation
unemployment
monetary policy
fiscal policy
Policy defined:
A high-level overall plan embracing the general goals and acceptable procedures especially of a governmental body
IV. Alternative economic systems
A. Definition of an economic system:
“The institutional means by which resources are used to satisfy human desires.”
1. Institutions
a. Laws
ex: protecting private property & enforcing contracts
b. Habits & customs
ex: businesses display their prices & consumers usually pay that price
c. Ethics
ex: bureaucrats give you a license for a business without being paid a bribe
B. Capitalism
1. A free market economic system in which individuals own resources & have the right to employ their time & resources however they choose, with minimal legal constraints from government.
C. Socialism
1. A centrally planned economic system in which resources are generally collectively owned & government decides how resources are to be used.
D. Mixed economic system
1. An economic system in which some markets are not entirely free to determine price. Government may control selected markets & a welfare system may influence the labor market.
2. The U.S. is mostly a capitalist system with several aspects of a mixed economy.
a. Minimum wage law controls minimum price paid for labor
b. Prices controlled in some ag and utility markets
Alfred Marshall
Father of Modern economics
Example of raspberry patch
Supply & Demand Curve
Be able to draw this Figure
X & Y Axis
Line for consumers
Line for Producers
If the price is above the equilibrium, what happens?
Lower consumer demand
Higher production
Look at Box 7.2
Can you find anything wrong with this?
In the paragraph they say increasing fertilizer and they are talking seed
Can you see what is meant by diminishing marginal returns?
Why does the curve go down at the end?
When you plant too many seeds, yield actually decreases
See Box 7.2, Figure C
Explain what that graph means
Is it a producer or consumer curve?
Fewer inputs increase yield more at the low end
More inputs do not increase yield as much to the high end
Box 7.2 Figure E
Explain the meaning of the Figure
If you want a producer to make more product, they will have to sell the product for more than the marginal cost increase to produce it
Or in other words the producer has to make a profit greater than the input costs
Combining Goods into Groups
Aggregate supply and demand
All food lumped together, or
All vegetables or fruits lumped together
Apples are expensive, so I will eat fewer apples but more oranges, which are cheaper
Read Box 7.3 and explain its meaning
First published in 1776
What increases the price of food?
The number of people in the economy increases
The people become more affluent
People’s taste changes
Willing to spend more of their income the better food
The price of other non-food items goes up, making better food more appealing
Pleasure per dollar
Spend $4 for a very small container of Haagen dazs ice cream (I can buy 5 quarts For $6)
Higher population does what to this graph?
Price
Quantity
What happens to price?
Price
Quantity
If the resources to produce food become more available, what happens?
Price
Quantity
What happens to price?
Price
Quantity
What happens if?
Technology increases efficiency of production?
Mechanization reduces labor costs?
Fertilizer prices go up?
Weather in Brazil is wet during soybean harvest?
Household incomes increase by 10%?
Concept of Elasticity
This is a measure of consumer response to changes in supply of a good, or changes in income
If prices of apples goes up, then people eat fewer apples and more oranges or grapes, etc.
That means the price is highly elastic
The demand curve is not very steep
Small changes in price result in large changes in demand
Price
Quantity
Quantity
Concept of Elasticity
If the price of rice goes up, and you are used to eating rice three times per day, you are still going to buy rice
The price of rice is not very elastic
The demand curve is steep
Large changes in price result in small changes in demand
Price
Quantity
Quantity
Income Elasticity of Demand
The percentage change of consumption of something
Book gives example of eating rice
If a poor person looses 1% income, they may eat less rice
If a rich person looses 1% income, they may give up something else
Studies show
Increases in income result in ‘more food consumption’ (or so the book says, I like better: they spend more on food)
As income gets even higher, food spending continues upward but not as fast
Graph 7.6a (What is it saying?)
Graph 7.6b (What is it saying?)
Graph 7.6c (What is it saying?)
Graph 7.6d (What is it saying?)
Inferior Goods
As income rises, demand for a good goes down
Why is cassava considered an inferior good?
Cassava provides the most calories for the dollar, but does not taste great
An increase in price of bread causes what to happen among the poorer people, consumption wise?
Increase in consumption – why?
They have to cut down on meat and other goods. Thus they buy more bread to meet their caloric needs
Inferior Goods (cont.)
Example of people of Africa with Maize
By the way, what is maize?
Maize is corn to Europeans
Corn are any of the small grains (wheat, oats, barley, rye)
7.7 What does it tell us?
