2. What is Economics?

3. Unit 1 – What is Economics?

4. Unit 1 – What is Economics?

5. Unit 1 - What is Economics?
Basic What, how, for
Economic whom to
produce
Questions
Command GOVERNMENT
answers the
Economy basic questions
Market WE own the
WE answer
factors of
Economy basic questions
production

6. Unit 1 – What is Economics?
Adam Smith & the
invisible hand
• We are all rationale
humans who act in our
OWN SELF INTEREST
• Our decisions help
make the economy
efficient

7. Supply and Demand

8. Unit 2 – Supply and Demand
 Law of Demand - ↑ P, ↓ Q-d // ↓ P, ↑ Q-d
 Shifts in Demand Curve (entire curve left or right)
 Consumer income
 Consumer taste
 Price of complement goods & substitute goods
 Movement ALONG the Demand Curve
 Change in PRICE of a product

9. Unit 2 – Supply and Demand
 Law of Supply - ↑ P, ↑ Q-s // ↓ P, ↓ Q-s
 Shifts in Supply Curve (entire curve left or right)
 Technology
 Number of Sellers
 Cost of inputs
 Future expectations …
 Movement ALONG the Supply Curve
 Change in PRICE of a product

10. Unit 2 – Supply and Demand
 Demand Elasticity – how responsive will you be to the change in
the price of a product?
 ELASTIC DEMAND – “stretchy” – very responsive
 Examples?
LUXURY GOODS – things you don’t have to have right now…

 INELASTIC DEMAND – “not stretchy” – buying habits
unchanged
 Examples?
MILK – things you must have for survival

 Law of Diminishing Marginal Utility
 Donut / Candy simulation

11. Unit 2 – Supply and Demand
 Be able to analyze the following on a S & D Graph
 Equilibrium (price and quantity), Shortages, Surpluses
 Shifts in supply curve (upward sloping curve)
INCREASE = Rightward shift

DECREASE = Leftward shift

 Shifts in demand curve (downward sloping curve)
INCREASE = Rightward shift

DECREASE = Leftward Shift

 MOVEMENT along curves (due to a change in PRICE)

12. Unit 2 – Supply and Demand
 Government Intervention – prevents our market
systems from going back to equilibrium
 Price Ceilings- major drawbacks?
 Price Floors- major drawbacks?

13. Business Organization and Investment

14. Unit 3 – Business Organizations &
Investment
 Stock - issued by corporations to obtain funds for
growth
 Reading Stock Quotations
 52 week high and low
 closing price = next day’s opening price
 Bonds – “borrowing money” from the people
 Government Bonds = SAFEST form of investment

15. Unit 3 – Business Organizations &
Investment
 Types of Business Organizations
 Sole Proprietorship
Easiest to form

Most Common

 Corporation
 Largest sales volume
 Limited Liability
 Other characteristics?
 Entrepreneurship – starting your own business
 VERY RISKY but can be very rewarding too!

16. Unit 3 – Business Organizations &
Investment
Monopoly:
“Mono” – one Sole producer /seller of
a good or service

17. The Macroeconomy

18. Unit 4 - Macroeconomy
• Preferred by economists because it measures what is produced WITHIN OUR
BORDERS with our domestic resources
GDP
• Real – measured in “constant dollars’
• Not distorted by inflation
• Allows us to determine how much production changes overtime
Real GDP v. • Nominal – measured in “current dollars’
Nominal GDP • Distorted by inflation

19. Unit 4 - Macroeconomy
• Market basket of goods/services
Consumer Price WE typically buy
• Used to measure inflation
Index (CPI) (changes in price level overtime)
• Demand – pull
Types of Inflation • Wage-price spiral
MAIN • Hurts your purchasing power …
what you can buy with a dollar
CONSEQUENCE of • Ex – Inflation rate of 15%, salary
increase of 5% … you lose
INFLATION purchasing power

20. Unit 4 - Macroeconomy
Phases of the Business Cycle
• Expansion = increasing GDP
• Recession = declining GDP for 2+ quarters
• Peak = GDP at its highest
• greatest level of production & employment
• Trough = GDP at its lowest
Index of Leading Indicators – predicts changes in the business
cycle 12-15 months in advance
• Ex – turns up 12-15 months before EXPANSION
• Ex – turns down 12-15 months before RECESSION

21. Managing the
Nation’s economy

22. Unit 5 – Managing the Nation’s
Economy
 Taxes
 Progressive – increased tax rate as income rises
Income tax - % paid in tax rises as you make more money

 Regressive – decreased tax rate as income rises
 Sales Tax - % paid in tax will be greater for those with lower
incomes
 Proportional – same tax rate regardless of income
 All pay 15% tax
 Ability-to-Pay Principle: those with “the ability to pay”
the tax should be the ones who pay it

23. Unit 5 – Managing the Nation’s
Economy
 Deficit Spending – government spends more than it is
receiving in revenue
 PROBLEM – contributes to the inflationary spiral
 Crowding-Out Effect – deficit spending by the government
“crowds” other corporations out of the market
 Government sells bonds (loans) to finance the deficit + we are
more likely to buy their bonds because they are safer
 We stop buying corporate bonds + corporations are “crowded-
out” of the market.

24. Unit 5 - Managing our Nation’s
Economy
 Aggregate Supply / Aggregate Demand Curves
 Y-axis  Price Level
 X-axis  GDP
 Shifts in the curve tell us about P-O-E in our economy
Price, Output, Employment

 Fiscal Policy – changes in G & T to shift AD
 To fight “inflation” = decrease AD = causes unemployment
ACTION: ↓ G & ↑ T

 To fight “unemployment” = increase AD = causes inflation
ACTION: ↑ G & ↓ T


25. Unit 5 – Managing the Nation’s
Economy
 Supply-Side Policy – “best of both worlds”
 TAX CUTS to increase Aggregate Supply!
 Action: ↑ in AS (rightward shift)
↑ in PL (fights inflation)

↑ in GDP (fights unemployment)


26. Unit 5 – Managing the Nation’s
Economy
 Money
 M1 – money as a medium of exchange - cash, checks,
debit
 M2 – money as a store of value – M1 + savings accounts
 Fractional Reserve Banking – banks must keep a
“fraction” of all deposits in reserves (RR = 10%)
 The rest goes into ER – can be loaned out / used in
OMO

27. Unit 5 – Managing the Nation’s
Economy
 Most important function of the Federal Reserve:
 Controlling Money Supply
 Loose MP – stimulates the economy (↓ IR, ↑ MS)
 When interest rates go down, the quantity-demanded of
loans will increase because it is less costly to borrow
*interest rates represent the cost of borrowing
 Tight MP – slows the economy (↑ IR, ↓ MS)
 When interest rates go up, the quantity-demanded of loans
will decrease because it is too costly to borrow

28. Unit 5 – Managing the Nation’s
Economy
 Using Tight and Loose MP, the Fed can control money
supply in four ways – each way will help achieve the goals of
increasing/decreasing MS & IR
 ↓ FFR, ↓ DR, ↓ RR, Fed buying bonds = ↓ IR and ↑ MS
 When the fed “buys bonds”, more money goes into the banks
ER + allows them to make more loans…thus, money supply
expands
 ↑ FFR, ↑ DR, ↑ RR, Fed selling bonds = ↑ IR and ↓ MS
 When the fed “sells bonds”, less money is in the banks ER
because they used that money to buy the bonds…thus, money
supply contracts

29. Unit 5- Managing Our Nation’s
Economy