1. The Economic Way of Thinking
Chapter 1

2. Scarcity: The Basic Economic Problem
KEY CONCEPTS
Economics — study of how people use resources to satisfy wants
how individuals/societies choose to use resources
organizes, analyzes, interprets data about economic behaviors
develops theories, economic laws to explain economy, predict future

3. Scarcity: The Basic Economic Problem
is the economic problem of having seemingly unlimited human needs and wants, in a world of limited resources.
Why does it exist?
It exists because wants are unlimited and resources are limited

4. Basic Economic Principles Principle 1: People Have Wants
Wants — desires that can be met by consuming products
Needs — things necessary for survival
Scarcity — lack of resources available to meet all human wants, not a temporary shortage
People make choices about all their needs and wants
Wants are unlimited, ever changing

5. Basic Economic Principles Principle 2: Scarcity Affects Everyone
Scarcity affects which goods and services are provided
Goods — physical objects that can be bought
Services — work one person does for another for pay
Consumer — person who buys good or service for personal use
Producer — person who makes a good or provides a service

6. Video Clip: Scarcity & Choice

7. Three Basic Economic Questions
Every society must answer three basic economic questions because of scarcity.
Societies answer these questions differently, leading to a variety of economic systems.

8. Three Basic Economics Questions
Question 1: What Will Be Produced?
Societies must decide on mix of goods to produce
depends on their natural resources
Some countries allow producers and consumers to decide
In other countries, governments decide
Must also decide how much to produce; choice depends on societies’ wants

9. Three Basic Economics Questions
How Will It Be Produced?
Production decisions involve using resources efficiently
Influenced natural resources
Societies adopt different approaches
labor-intensive methods versus capital-intensive methods depends on availability

10. Three Basic Economics Questions
For Whom Will It Be Produced?
How goods and services are distributed involves two questions
how should each person’s share be determined?
how will goods and services be delivered to people?

11. The Factors of Production
resources needed to produce goods and services
land
labor
Capital
entrepreneurship
supply is limited

12. The Factors of Production
Factor 1: Land
Land means all natural resources on or under the ground
includes water, forests, wildlife, mineral deposits

13. The Factors of Production
Factor 2: Labor
Labor is all the human time, effort, talent used to make products
physical and mental effort used to make a good or provide a service

14. The Factors of Production
Factor 3: Capital
Capital is a producer’s physical resources
includes tools, machines, offices, stores, roads, vehicles
sometimes called physical capital or real capital
Workers invest in human capital — knowledge and skills
workers with more human capital are more productive

15. The Factors of Production
Factor 4: Entrepreneurship
Entrepreneurship — vision, skill, ingenuity, willingness to take risks
Entrepreneurs anticipate consumer wants, satisfy these in new ways
develop new products, methods of production, marketing or distributing
risk time, energy, creativity, money to make a profit

16. Label the 4 Factors f Production
Practice
Label the 4 Factors f Production
(CL Lesson 5, pg 26)
Factors of Production CL Lesson 6 Activity in groups of

17. Making Economic Choices
Two factors affect economic decisions:
Incentives — benefits that encourage people to act in certain ways
Utility — benefit or satisfaction gained from using a good or service
Choices vary between individuals based on what is best for him / her

18. Making Economic Choices
Factor 1: Motivations for Choice
People motivated by incentives, expected utility, desire to economize
They weigh costs against benefits to make purposeful choices
Motivated by self-interest

19. Making Economic Choices
Factor 2: No Free Lunch
All choices have a cost
choosing one thing means giving up another, or paying a cost
cost can take form of money, time, other thing of value

20. Trade-Offs and Opportunity Cost
is alternative people give up when they make a choice
usually means giving up some, not all, of a thing to get more of another

21. Trade-Offs and Opportunity Cost
Example of a Trade Off
Jessica wants to earn college credit over summer
semester-long university course offers more credits
six-week high school course leaves time for vacation

22. Trade-Offs and Opportunity Cost
Opportunity cost is value of next-best alternative a person gives up
not the value of all possible alternatives
Example of Opportunity Cost
Dan chooses to work for six months so he can travel for six months
opportunity cost = six months of salary

23. Video Clip: Opportunity Cost

24. Opportunity Cost Activity
In a group of 2 -3 consider this scenario:
You have won $1,000. Create a chart with these columns:
What will you buy?
What will you gain from each choice?
What do you give up with each choice? (What’s the opportunity cost?)

25. Analyzing Economic Choices
Cost-benefit analysis:
examines the costs and expected benefits of choices
one of most useful tools for evaluating relative worth of economic choices

26. Analyzing Economic Choices
Marginal Costs and Benefits
Marginal cost
additional cost of using one more unit of a good or service
Marginal benefit
additional benefit of using one more unit of a good or service

27. Analyzing Production Possibilities
KEY CONCEPTS
Production possibilities curve (PPC) is one model (graph)
PPC shows the maximum goods or services that can be produced from limited resources
also called production possibilities frontier
PPC
PPC based on assumptions:
resources are fixed
all resources are fully employed
only two things can be produced
technology is fixed

28. Graphing the Possibilities
Production Possibilities Curve
PPC runs between extremes of producing only one item or the other
Data is plotted on a graph; lines joining points is PPC
shows maximum number of one item relative to other item
PPC shows opportunity cost of each choice
more of one product means less of the other

29. What We Learn from PPCs
Efficiency — producing the maximum amount of goods and services possible
Underutilization — producing fewer goods and services than possible

30. Why is the PPC a Curve? Law of increasing opportunity costs
as production switches from one product to another, more resources needed to increase production of second product
Reasons for increasing cost of making more of one product
need new resources, machines, factories
must retrain workers
Costs paid by making less and less of other product

31. Let’s Look at Some Examples
PPC Practice

32. Changing Production Possibilities
A country’s supply of resources changes over time
Example: U.S. in 1800s grew, gained resources, workers, new technology
new resources mean new production possibilities beyond frontier
Increased production shown on PPC as shift of curve outward
Increase in total output called economic growth

33. PPF—The Curve What Does Guns And Butter Curve Mean?
In a theoretical economy with only two goods, a choice must be made between how much of each good to produce.
As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa. 

34. Video Clip: Individual and Society PPCs

35. CL Lesson 7 Activity pg. 35 – PPC Problems

36. Microeconomics and Macroeconomics
Microeconomics examines specific, individual elements in an economy
prices, costs, profits, competition, consumer and producer behavior
Some Topics of Interest: business organization, labor markets, environmental issues

37. Microeconomics and Macroeconomics
Macroeconomics studies sectors — combination of all individual units
Includes consumer, business, public or government sectors
Macroeconomics studies national or global topics:
monetary system, business cycle, tax policies, international trade

38. Examples of Macro and Micro
Which is it?
National Unemployment Figures Rise
World Trade Organization Meets
Shipbuilder Wins Navy Contract
Cab Drivers on Strike!
Gasoline Prices Jump 25 Cents