economics chapters 1-4 notes bju-2

 Services : intangible items Ex/ labor of an accountant, singer or teacher  Economic goods and services : goods and services that bear a positive economic cost a price tag higher than

What is Economics? Chapter 1

how and why people, businesses, and

governments make the choices they do.

Economists observe how and why choices are made b Economists use these observations as

a basis to predict cause-and-effect relationships

c Economists attempt to control future events through altering important variable

Why do we make choices?

 Insatiability : refers to the fact that everyone has

unlimited “wants” (Prov 27:20) (Ecc 5:10) page 4

textbook

 What does God through the Bible say about our choices? (Matt 6:24), (Matt 6:33) (Col.3:2) page 3 textbook

 What should we desire to choose (or not to)? (Prov

8:11)- wisdom (Prov 23:4) labor not to be rich (1 Tim 6:6-11) page 4 read

 Scarcity : Everything is “finite”, or limited in quantity

(time, labor, money, and natural resources are scarce or limited in quantity)

 Because of the conflict between insatiability and scarcity, choices become necessary!!!

Contentment and Stewardship

Satisfaction with what you have or own and who you are, regardless of the circumstances (Heb 13:5) pg 5

has given you (Luke 12:48) God will hold you accountable for what He has given you

Economics (1 Cor 4:1-2)

The Cost of Choice

 Economic cost : the value people place on a good or service

 Goods: is any tangible thing that has a measurable life span (Ex/ shoes, clothing, car, glasses, etc.)

 Services : intangible items (Ex/ labor of an accountant, singer or teacher)

 Economic goods and services : goods and services that bear a positive economic cost (a price tag higher than zero)

 Nuisance goods : goods that consumers pay to have removed and have a negative economic cost (Ex/ trash, sewage, toxic waste,

etc.)

 Recycling : the service of turning nuisance goods into economic goods (recycling is an application of the stewardship principle).

 Free goods and services : goods and services with a price tag of

“zero” (Ex/ wind for a windmill, geothermal steam, air and water)

Intrinsic vs Subjective Value Opportunity Benefit vs Opportunity Cost

 Diamond-Water Paradox: What has more value a handful of diamonds

or a single glass of water?

 Intrinsic Value: This principle holds that a thing is valuable because of the nature of the product, such as its scarcity or the amount of labor and

natural resources that goes into its production

 Subjective Value: states that it is an object’s usefulness to the buyer that determines its worth (Carl Menger proposed this as the solution the

The Scope and Purpose of Choice

 Microeconomics: deals with the choices made by “individual” units:

individual people, households, or business firms

 Macroeconomics: examines large-scale economic choices and issues

(government)

 Positive Economics: observing economic choices and predicting economic events (Ex/ An economist predicts that the stock market will rise again this year)

 Normative Economics: refers to making value judgments about existing

or proposed economic policies (Ex/ “Everyone “should” save 10% of their income”, “It is “unpatriotic” to buy foreign made clothing”, “Illegal

immigrants are taking all our jobs”

 Carl Menger: Founder and “Father” of the Austrian School of Economics

He advocated personal financial freedom, and that a person makes his

decisions more efficiently than the government because the individual’s

decisions are based on personal utility Menger explained that it is “utility” that gives value to anything

 Chapter 1 Review pg 15

Personal Finance: Budgeting

 Budget: is a tabulation of income and planned expenditures

 Impulse buying: purchasing things that we think that we need at the

moment or that merely strike a fancy

 Fixed expenses: expenses that do not rise or fall as the family’s income increases in the short term (Ex/ rent or mortgage payments, food expenses, utilities and property taxes)

 Variable expenses: those costs that rise and fall as the family’s income changes (Ex/ vacations, gifts, entertainment, new clothes and allowances)

 Engel’s Law: observes that as a family’s income increases: the % of

income spent on food decreases, the % spent on clothing, rent, fuel, and electricity stays about the same, and the % spent on education and

Economic Models: Chapter 2

Circular Flow Model

 Tabular model or schedule : explains simple relationships

between pairs of variables (Figure 2-1) pg 25 The info is limited

to a few observations

 Line Graph : provides significantly more data and can tell

economists approximately how much of a product will be sold at any given price on the graph (Figure 2-2) pg 25

 Production Possibilities Curve (PPC ): enables the economist

to see the “maximum” feasible amounts of two commodities that

a business can produce when those items are competing for that business’s limited resources (Figure 2-3) pg 26

 Circular Flow Model : a visual explanation of how a complete national economic system functions (Figure 2-5 pg 28)

 Consumption Expenditures : the total amount of money that households spend on goods and services

Factors of Production

 Factors of Production: The resources that businesses need/use to produce their goods and services

 4 factors of production: Land, Labor, Capital and Entrepreneurship

 Land: all of the natural resources that go into the production of goods (animal, vegetable or mineral resource)

 Labor: all of the human “effort” (physical and mental) that goes into the creation of goods or services

 Capital: refers to the goods used to produce other goods Two

categories of Capital: Financial and Real

 Financial capital: is all the money the household sector loans to the business firms

 Real Capital: Business firms use the financial capital to purchase real capital: the tools they use to produce their goods and services

 Entrepreneurship: the activity of creatively combining natural

resources, human labor, and capital in unique ways to produce new goods and services Entrepreneurship is the most important factor of

process

Factor Costs

 4 Factor Costs : Rent, Wages, Interest and Profit and are the payments business firms make in exchange for the four factors of production

 Rent : includes all payments for the use of an owner’s property (buildings, land, royalties to an author, etc.)

 Wages : all payments for labor used to produce goods

or services (salaries, hourly wages, bonuses, etc.)

Wages make up the largest portion of all the factor

costs

 Interest : the payment business firms make on

borrowed money (Ex/ corporate bonds)

 Profit : the difference between the revenue received from the sale of a product and the cost of the land,

labor, and capital that went into its production

Government as an economic entity

 Transfer payments : payments of money or goods to persons for which the government expects no specific economic repayment (Ex/ welfare benefits, food stamps, social security, and unemployment compensation)

 Budget deficit : when government spending exceeds the amount it receives in taxes

 Budget surplus : the government receives more in

taxes than it spends

 Taxes : government imposes taxes to pay for its

spending Households pay sales, income and property taxes (etc.) Businesses pay corporate, social security, unemployment, and many other taxes

 Government in the Circular Flow: Figure 2-8 pg 33

The Financial Market: The Heart of

companies, and stock brokerage firms) See Figure 2-9 pg 35

 Principal function : to circulate money from households to

 Ludwig Von Mises : Advocate of Free Markets Author of “Human Action” the most complete and persuasive exposition and defense

of the free market (pg 34).

Principles of Purchasing

to entice you to come to the store to

purchase but when you arrive…

38-40 textbook

 Ralph Nader : America’s first and most vocal consumer advocate

pg 42

 Federal Agencies that enforce consumer rights: FDA (Food and

Drug Administration), FTC (Federal Trade Commission), CPSC

(Consumer Product Safety Commission) pg 41 textbook

Value and Demand Chapter 3

less and less additional satisfaction from any good or service as they obtain more and more of it during a specific period of time.

the Law of Diminishing Marginal Utility

The Function of Prices

Eccles 5:10-11 and the rich fool (Luke 12:16-21)

textbook

the lower the price charged for a good or service, the greater the quantity of it people will demand, and the higher the

price, the lower the quantity they will demand.

3-6, 3-7 and 3-8 for examples

Change in Income

consumers’ income

consumers’ income (Ex/ powdered milk, recapped tires, used cars, secondhand clothing).

the goods rises, consumers tend to buy more of the substitute (Ex/ chicken for beef, hot dogs instead of hamburgers, etc) pg 55 Fig 3-9 Category: Change in the price of related goods

cameras and memory cards, French fries and ketchup, gas and cars, peanut butter and jelly) Fig 3-10 Category: Change in tastes and preferences.

expectations of future prices If people expect the price of a good to increase they will buy more of it ASAP (Ex/ food, gas, If people expect the price to decrease in the future they postpone their purchase until the price has gone down (Ex/ housing market, computer, etc.)

Personal Finance: Insurance

injury incurred by any visitor on the insured person’s property

heavy loss due to misfortunes such as fire, theft, windstorms, hail and lightning damage

repair the policyholder’s car (medical payments, uninsured

motorist, no-fault insurance,

the insurance company will cover the remainder

Insurance: Life and Health

 Life insurance: (Cor 12:14 pg 59) insurance to cover the responsibilities (family, burial, etc.) due to the death of a person

 Types of Life insurance: Term, Whole, Universal

 Term life insurance: provides only death protection for a specified period

of time

 Beneficiary: the person(s) who receive the proceeds of the insurance

 Premium: a monthly payment given in exchange for a fixed death benefit

 Whole life insurance: provides a savings component along with a death benefit Premiums are level over the lifetime and the savings value of a

whole life policy are called its “Cash Value”

 Universal life insurance: hybrid form that provides policyholders with a term life insurance but includes a flexible savings plan Premiums are called

“contributions”

 Health Insurance: disability income insurance, major medical insurance, hospitalization, group health insurance

Supply and Prices Chapter 4

 Proverbs 11:24-26 and Philippians 4:19

 Supply: is the amount of goods and services business firms are willing and able to provide at different prices

 Law of Supply: holds that the higher the price buyers are willing to pay, other things being held constant, the greater the quantity of a product a firm will produce and that the lower the price consumers are willing to pay, the smaller the quantity the supplier will produce

 Supply schedule: Figure 4-1

 Supply Curve: Figure 4-2 are positively sloped, meaning that if prices rise producers will increase supply, and vice-versa: prices decrease: supply will decrease

 Change in quantity supplied: Whenever a change in the price

consumers are willing to pay causes a change in the number of goods

produced and sold

Changes in Supply

suppliers produce less of their product at any given price Figure 4-4

willingness of business firms to produce more of their product at any given

price Figure 4-5

services (Ex/ computer, automation) Ex/ calculator: pg 68 Fig 4-6

resources, labor, and capital that goes into their products If a firm’s costs rise,

it must decrease the quantity of what it provides at the same price Fig 4-7

pay for a substitute rises, business firms naturally become willing to sell more of that good or service and (normally) decrease their supply of the original good Fig 4-8

Determining Prices Chapter 4b

 Market Equilibrium Point: it represents the price at which consumers are willing to take from the market the exact quantity of a product that

suppliers are willing to put into the market Figure 4-9 pg 71

 Market Equilibrium Price: The price at which supply meets demand

 Alfred Marshall: Architect of the Demand and Supply Model pg 70

 Surplus: If a supplier raises the price of his product above the market

equilibrium price, the law of supply will motivate him to increase the

quantity of the product he puts into the market At the same time, however, the law of demand will compel consumers to buy less of his product The combined effect of the two opposite laws will result in a surplus Figure 4-

10 pg 72 Figure 4-11 and 4-12 pg 73

 Price Floor: a barrier intended to prevent the prices of those items from falling below the market price

 Demand solution to a surplus: decrease price increase demand

 Supply solution to a surplus: decrease supply

 Simplest solution: allow the market to work: supplier will lower price until supply meets demand and surplus is gone Figure 4-13

lower then that business will “die” because they will not be able to sell their products

 “3” Solutions to a shortage: decrease demand Figure 4-15, increase supply Figure 4-16, or allow price to rise to the market equilibrium point Figure 4-17

 Seven Good Years Followed by Seven Lean Years: Genesis

41:46-57 and 47:13-20 Biblical example of surplus and shortage

Personal Finance: The Christian

 Default: fail to pay a loan on time

 Garnish: when a lender gets permission to take a part of a borrower’s

wages