Economics 101

Economics 101Prof. Edgren

Economics

How societies use scarce resources to produce valuable commodities and distribute them among people.

Question: What's the best way to distribute the goods that are produced in a society?

Macroeconomics

Dealing with the decision making of an economy as a whole.

Microeconomics

Dealing with how individual markets behave.

Think LARGE!

Macroeconomics

Which is better?

Command vs. Market Economies

Command Economies

• Centrally controlled by the government

• Central Planners decide what to produce and decides who will produce the goods

Question: What problems can you foresee with this type of economy?

Examples of Command Economies

Think COMMUNISM

• North Korea

• China

• Russia

Market Economies

• Freedom to enter any contract or refuse any contract

• Goods and services flow naturally to where there is need/demand

• Free markets are self-correcting

Trade

ANY two countries will benefit from trade!

This is true even if one country can produce ALL goods more cheaply.

Example

With 1 acre of land, one tractor, and two workers:

The US can produce 100 bushels of wheat or they can produce 30 sheep.

New Zealand can produce 80 bushels of wheat or they can produce 50 sheep.

**The US has an absolute advantage over NZ in wheat. NZ has an absolute advantage in producing wool.

Specializing

Countries focus on what they're good at.

Countries will trade for other goods they cannot produce efficiently

Example - Mutually Advantageous Trade

US - produces wheat NZ - produces wool

US can't produce wool as cheaply as NZ, and it is less costly for them to pay for it than to produce it themselves.

Same goes for NZ and wheat.

Conclusion: both countries come out ahead via trade.

Trade Barriers

• Tariffs

• Quotas

• Subsidies

1970s and the Auto Industry

• Detroit auto workers fought for protection

• Japanese import quota

Two things happened

• Less competition for US-made cars caused prices to rise

• Less supply of Japanese cars caused prices to rise

• LOSE-LOSE situation!

Buy American?

Why you SHOULDN'T Buy American

False reasons to buy American made goods:

• Patriotism

• National Security

• Jobs

Be American and allow Free Trade!

Microeconomics

Dealing with how individual markets behave.

Supply and Demand

Supply - how much goods or services someone is willing to provide at a certain price.

Demand - how much goods or services someone is willing to buy at a certain price.

The Supply Curve

Quantity

Price

The Demand Curve

Quantity

Price

Supply and Demand

Quantity

Price

Supply

Demand

Surplus

Shortage

Equilibrium

Quantity

Price

Supply

Demand

Equilibrium Price

Price Elasticity

Price

Rev

enue

Questions?

Economics 101 AssignmentOption #1

Question: Should we have free trade with our enemies?

• Based on what you have learned today, is it a good idea to have free trade with our enemies such as Iran, Russia, Afghanistan, North Korea, etc.

• Describe the pros and cons of your view on free trade, write a summary of your viewpoint.

Economics 101 Assignment Option #2

Question: How do we make the school store more profitable?

• Based on what you have learned today, create a pricing schematic that you think would maximize the revenue of the school store.

• List the items you would change (or create a matrix) and explain how your pricing scheme would maximize the revenue. Make sure you include the old and new prices of each item.