What is Economics?

The study of choice under the conditions of scarcity.

Microeconomics-study of the behavior and decision making by small units such as individuals and businesses.

Macroeconomics-study of the behavior and decision making of large units such as governments.

What is Economics?

Scarcity and Shortage

Scarcity~ The concept that there are limited resources for unlimited wants

Shortage~ A condition that occurs when producers will not or cannot offer goods and services at the current price.

What is the difference between scarcity and shortage?

Chapter 1, Section 2:“Choosing is Refusing”

Trade-offs- All the alternatives that we give up whenever we choose one course of action over another.

Individuals

Businesses

Governments

Opportunity Cost- The most desirable alternative given up as the result of a decision. The next best thing!!

Thinking at the Margin- Deciding whether to do or use one additional unit of some resource.

The Government Trade-Off: GUNS OR BUTTER?

Our Role in Funding the Government

We authorize the government, through the Constitution and elected officials, to raise money through taxes. Must originate in the House (Ways and Means)

House-Senate-President

Taxation is the primary way that the government collects money.

Without revenue, or income from taxes, government would not be able to provide goods and services.

Power and Limits of Taxation

The Power to Tax Article 1, Section 8, Clause

1 of the Constitution grants Congress the power to tax.

The Sixteenth Amendment (introduced 1909, ratified 1913) gives Congress the power to levy an income tax.

Historical Context: Great Depression- Social Security Act (1935)- WWII – 80’s - Present

Limits on Power to Tax1. The purpose of

the tax must be for “the common defense and general welfare.”

2. Federal taxes must be the same in every state.

3. The government may not tax exports.

Tax Structures

Proportional TaxesA proportional tax is a tax for which the percentage of income paid in taxes remains the same for all income levels.

Progressive TaxesA progressive tax is a tax for which the percent of income paid in taxes increases as income increases.

Regressive TaxesA regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases.

Tax Activity

Person A (Low-Income)- $15,000

Person B (Middle-Income)- $75,000

Person C (High-Income)- $225,000

What is a “good” tax?

Simplicity Tax laws should be simple and easily understood.

Economy Government administrators should be able to

collect taxes without spending too much time or money.

Certainty It should be clear to the taxpayer when the tax is

due, how much is due, and how it should be paid.

Equity The tax system should be fair, so that no one

bears too much or too little of the tax burden.

Types of TaxesSocial Security Taxes

This program is funded by the Federal Insurance Contributions Act (FICA). Most of the FICA taxes you pay go to Social Security, or Old-Age, Survivors, and Disability Insurance (OASDI)

Medicare TaxesMedicare is a national health insurance program that helps pay for health care for people over 65 and for people with certain disabilities. Medicare is also funded by FICA taxes.

Unemployment TaxesUnemployment taxes are collected by both federal and state governments. Workers can collect “unemployment compensation” if they are laid off through no fault of their own and if they are actively looking for work.

Other Taxes Federal Income TaxesExcise TaxesEstate TaxesGift TaxesImport Taxes

The Federal Budget:“Guns or Butter”

The Politics of Tax and Spend

Obama Defends Budget

Hannity on the Budget

Ron Paul on Government Spending

Spending Categories

Mandatory Spending

Money that lawmakers are required by law to spend

• Interest payments on the national debt

• “Entitlement” programs (Social Security, Medicare and Medicaid)

• Makes up almost 2/3 of federal budget

• Problem because Congress and the President cannot control much of spending.

Discretionary SpendingMoney that government planners can choose how to spend. • Defense • Education• Training• Environmental

cleanup• National parks

and monuments• Scientific

research

How the Money Comes In: Revenue

, Individual Income Taxes,

1164, 45%

, Social In-surance Pay-

roll Taxes, 870, 34%

, Corporate Income Taxes, 370, 14%, Excise Taxes, 65, 3%

, Other Taxes, 100, 4%

Total Revenue: $2.57 Trillion

Individual Income Taxes Social Insurance Payroll Taxes Corporate Income Taxes Excise Taxes

Other Taxes

Where the Money Goes: Spending

Social Security; Series1; 581; 21%

Medicare; Series1; 371; 14%

Medicaid & SCHIP; Series1; 197; 7%

Other Manda-tory; Se-

ries1; 302; 11%

Net In-terest;

Series1; 237; 9%

Security Discretionary; Series1; 594; 22%

Non-Se-curity Discre-tionary; Series1; 448; 16%

Total Spending: $2.73 Trillion

Social Security Medicare Medicaid & SCHIP Other Mandatory

Net Interest Security Discretionary Non-Security Discretionary

Manda-tory;

Series1; 1451; 53%

Net In-terest;

Series1; 237; 9%

Security Discretionary; Series1; 594; 22%

Non-Se-curity Discre-tionary; Series1; 448; 16%

Total Spending: $2.73 Trillion

Mandatory Net Interest Security Discretionary Non-Security Discretionary

http://upload.wikimedia.org/wikipedia/en/6/64/GAO_Slide.png

Conference Committee Meets to Resolve

Differences

The Budget ProcessHouse Senate

Sent to the Floor

Full Committee Approves

Sent to the Floor

Appropriation Subcommittee Reports a Bill

Full Committee Approves

Appropriation Subcommittee Reports a Bill

Sent to President

What is the budget timeline?Fall/Winter• Agencies send initial budget requests to the

Office of Management and Budget (OMB) February to August• President submits budget request to Congress• Congress debates budget requestSeptember• House-Senate resolve differences and agree

on spending bills• President signs or vetoes final billsOctober 1st • Beginning of fiscal year

Guns or Butter?Analyze the federal spending pie chart on page 371.

Consider the difference between mandatory and discretionary spending as described on pages 371-374.

1. Create your own federal spending pie chart based on your priorities. You may not “leave it the same”…think critically about what you think is the best way to spend our tax dollars! You can add and delete items!

2. Explain the rationale for your spending choices. Also, identify “winners and losers” with your additions.

3. If you had to maintain all mandatory categories how would your decisions have been different? Discuss.

Production Possibilities Graph: A graph that shows alternative ways to use an economy’s resources. The graph can only consider two items at once and these items are each placed on an axis.

Chapter 1, Section 3: Production Possibility Graphs

Production Possibilities Frontier: The line on a productionpossibilities graph that shows an economy’s maximum possibleoutput of any two products.

What can we learn from looking at a Production Possibilities Graph/Frontier?

· Trade-Offs/Cost- Alternative given up as a result of a decision. Every point on the PPF indicates a cost in on item or another.

· Efficiency- Making the best possible use of resources (any point on the PPF)

· Underutilization/Inefficiency- Misuse or waste of resources (any point inside the PPF)

· Growth- Expanding an economy’s ability to produce (shift of the entire curve to the right or any point to the right of the PPF)

~New Technology/Innovation

~Increase in Resources