Unit 1: What Is Economics

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Unit 1 What Is Economics?
ECONOMICS for Christian Schools
By Alan J. Carper Bob Jones University Press. 1998
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Chapter 3 Supply and Prices

• Chapter 4 The Government as an Economic Entity

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Objectives

• Define supply, budget deficit surplus
• Identify the law of supply
• Explain how changes in supply occur
• Explain the existence of the market equilibrium
  point.
• Describe the causes of a surplus and a shortage
• Explain how the market price system works to
  alleviate a surplus or a shortage.

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BIBLICAL INTEGRATION (Chapter 3)

• Instead of pursuing earthly wealth, pursue the
  wisdom of God and what glorifies Him and He will
  bless you with prosperity as He chooses. (Prov.
  21-11 35-10)

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BIBLICAL INTEGRATION (Chapter 4)

• God orchestrates every event in our live as
  believers for His purpose. We, therefore, need to
  trust God to work all things together for good
  for those who love Him. (Rom 828)

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Todays Scripture

• For by Him were all things created, that are in
  heaven, and that are in earth, visible and
  invisible, whether they be thrones or dominions,
  or principalities, or powers all things were
  created by Him, and for Him And He is before all
  things, and by Him all things consist. (Col.
  116-17)

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Chapter 3 II. Determining Prices(p.36-44)

• Market equilibrium price is the price when the
  supply curve meets the demand curve.

• An excess of unused products is called a
  surplus.
• Businesses try to avoid surpluses because of
  the costs of carrying large inventories.

(Carper 36, 37)
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Solutions to surplus

• (1) increase demand

(2) decrease supply
(3) allow the price to fall to the market
equilibrium point (price cutting) the simplest
solution.
(Carper. 40-44)
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Chapter 4 (p. 49-64)

• Economic model is a simplification of how
  factors in the environment affect choices.

Used for two purposes
(1) Instruction - Used to explain to students
the appearance and operations of more complex
objects.
(2) Predicting the future - Used to help assist
the economist.
Carper. 49
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We as Christians are to be models of Jesus
Christ, imperfect simplified versions of our
Saviour.

• Behold what manner of love the Father has
  bestowed on us, that we should be called children
  of God! Therefore the world does not know us,
  because it did not know Him. Beloved, now we are
  children of God and it has not yet been revealed
  what we shall be, but we know that when He is
  revealed, we shall be like Him, for we shall see
  Him as He is. And everyone who has this hope in
  Him purifies himself, just as He is pure.
• I John 31-3

(The New King James)
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The Day Welfare hit the Classroom (p.50-51)

• The illustration was intended to show the
  inequities of the modern welfare system not to
  learn how to cheat the system, but to encourage
  the honest evaluation of the governmental social
  programs and to motivate you to work towards
  improving the system.

Carper 50, 51
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Two popular forms of economic models

• (1). Tabular models (or schedules)

(2). Line graphs The line graph displays
more information than the schedule (or tabular
model).
Carper. 52
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Two groups of the economic system and also the
starting points of the circular flow model
II. The Circular Flow Model
Attempts to explain how an entire national
economy system works.

• households consumers

• businesses account for appx. 75 of all
  employment and 80 of all production in the
  United States.

(Carper. 53)
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When we add up all the goods and services
business produced and sold to final consumers, we
would have a figure the economist call the gross
national product. (GNP)
Carper. 53
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Gross Domestic Product

• Gross domestic product , or GDP, measures the
  value of all final goods and services produced in
  the economy. It does not include the value of
  intermediate goods.
• GDP measures both inflation and savings.
• GDP is used as a measure of the size of an
  economy and can also be used to compare the
  economic performance in other countries.
• In 2004, the GDP of the U.S. was 11,734 billion

(Erbi)
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Gross Domestic Product

• Aggregate spending, the sum of consumer spending,
  investment spending, government purchases, and
  exports minus imports, is the total spending on
  domestically produced final goods and services in
  the economy.
• Aggregate Spending
• GDP C IG G XN
• C Consumption
• IG Gross Private Investment
• G Government Spending
• XN Net Exports
• Exports (X) Imports (IM
  or M)

(Erbi)
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GDP WHATS IN AND WHATS OUT

• Included
• Domestically produced final goods and services
  (including capital goods)
• New construction of structures
• Changes to inventories
• Not Included
• Intermediate goods and services
• Inputs
• Used goods
• Financial assets like stocks and bonds
• Foreign-produced goods and services
• Underground or black market activity is not
  counted.

(Erbi)
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Four factors of production

• (1)   land
• (2)   labor
• (3)   financial capital
• (4)   entrepreneurship

Carper. 54
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Land refers to all of the natural resources that
go into the production of goods. Economic
good - contains some form of animal, vegetable,
or mineral resource.
(Carper. 54)
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Labor is the factor of production denoting all
human effort that goes into the creation of
goods and services.

• According to the economists it is human effort.
• Labor includes mental as well as physical work.
• The work of a poet is as much labor as that of a
  construction worker.

(Carper. 54)
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Financial capital is all money loaned directly
to the business firms (monetary loans) and real
capital is the tools used to produce goods and
services. - real capital includes factories,
equipment, and other tools of production.
(Carper. 54)
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Entrepreneurship is the creative activity of
combining natural resources, human labor, and
financial capital to develop new and useful
products and services.

• Entrepreneurship is the most important factor of
  production, because it directs, organizes, and
  plans the production process.

(Carper. 55)
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Scripture regarding entrepreneurship

• No prohibition on business ownership per se, but
  it does limit our involvement in certain
  enterprises.
• We should avoid ungodly association, such as
  investing in enterprises whose activities are
  condemned in Scripture.

(Carper. 56))
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Scripture regarding entrepreneurship

• Many use the verse Matt. 2520-21 to reflect
  being a good steward of material possessions
  commended for investing wisely and bringing forth
  an increase.

So he who had received five talents came and
brought five other talents, saying, Lord, you
delivered to me five talents look, I have gained
five more talents besides them. His lord said
to him, Well done, good and faithful servant you
were faithful over a few things, I will make you
ruler over many things. Enter into the joy of
your lord.
Matt. 2520-21
(The New King James)
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• Christians should always be responsible and
  should display the character of Christ -
  especially when we occur losses in investing,
  day-to-day business affairs and/or life (Lev.
  1913-14 Ps. 15).

but as He who called you is holy, you also be
holy in all your conduct, because it is written,
Be holy, for I am holy!
1 Peter 115-16
(The New King James)
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• Transfer payments are payments of money or goods
  to persons for which no specific economic
  repayment is expected. (Ex. Social Security,
  Welfare, Unemployment, etc.)

(Carper. 57)
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Deficit vs. Surplus

• Usually government spending exceeds the amount it
  receives in taxes thereby operating under a
  budget deficit.

When a government receives more in taxes than it
is paying out, it is operating under a
budget surplus.
(Carper. 56)
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• Just as the heart circulates blood throughout the
  body, the financial market efficiently circulates
  money from the nations households to its
  business firms. (Its the heart of the economy.)

(Carper. 59)
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• Public Trust Theory observes that elected
  representatives ultimately make most governmental
  decisions according to their own personal
  interests.

(Carper. 60)
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Saving vs. Dissaving

• The economist considers saving whenever
  households put money into financial institutions
  (savings acct., payment on loans, etc.).
• Dissaving is when money is withdrawn from an
  account or borrowed.

(Carper 61, 64)
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Crowding Out

• When government borrows it leads to a problem
  called crowding out.

• Money is finite like all other resources
  every dollar borrowed by the
  government is one less dollar available for
  businesses to use in purchasing the real capital
  they need to produce goods.

• They are in other words crowded out of the
  financial market by government budget deficits.

(Carper. 64)
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Federal Reserve System

• The Federal Reserve System was created by
  Congress in 1913, as a solution to the deficit
  dilemma for it has the ability to create new
  money.
• (This financing can cause other serious problems
  in the economy.)

(Carper 64)
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Circular Flow

• Five participants in the circular flow

(1) Households
(2) Business Firms
(3) Governments
(4) Financial Markets
(5) Federal Reserve System
(Carper. 64)
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The National Accounts Households

• Consumer spending is household spending on
  goods and services. (Largest amount)
• Most households receive the majority of their
  income from wages.
• Some households receive income from the
  ownership of stocks (a share in the ownership
  of a company held by a shareholder) and bonds
  (borrowing in the form of IOU that pays
  interest).
• generating profit and interest income
  (dividends)
• Additionally, other households receive rent on
  land.

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The National Accounts Households

• Government transfers payments by the government
  to individuals for which no good or service is
  provided in return.
• Disposable income, equal to income plus
  government transfers minus taxes, is the total
  amount of household income available to spend on
  consumption and savings.
• Private savings, equal to disposable income
  minus consumer spending, is disposable income
  that is not spent on consumption.
• The total sum of flows of money out of
  householdsthe sum of taxes paid, consumer
  spending, and private savingsmust equal the
  total flow of money into householdsthe sum of
  wages, profits, interest, rent, and government
  transfers.

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Circular Flow

• Financial Market The banking, stock, and bond
  markets, which channel private savings and
  foreign lending into investment spending (I),
  government borrowing, and foreign borrowing.
• Government
• Government borrowing is the amount of funds
  borrowed by the government in the financial
  markets.
• Government purchases of goods and services (G)
  are government expenditures on goods and services.

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Circular Flow Chart
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Circular Flow

• In the simplified circular-flow model the two
  sectors are households and firms.
• Business firms sell goods and services to
  households.

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Works Cited

• Carper, Alan. Economics for Christian Schools.
  Greenville Bob Jones University Press, 1998.
• "The New King James Version." Logos Bible
  Software. CD_ROM. ed. 2004.