2 Scarcity: The Basic Economic Problem KEY CONCEPTSEconomics — study of how people use resources to satisfy wantshow individuals/societies choose to use resourcesorganizes, analyzes, interprets data about economic behaviorsdevelops 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 productsNeeds — things necessary for survivalScarcity — lack of resources available to meet all human wants, not a temporary shortagePeople make choices about all their needs and wantsWants are unlimited, ever changing
5 Basic Economic Principles Principle 2: Scarcity Affects Everyone Scarcity affects which goods and services are providedGoods — physical objects that can be boughtServices — work one person does for another for payConsumer — person who buys good or service for personal useProducer — person who makes a good or provides a service
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 producedepends on their natural resourcesSome countries allow producers and consumers to decideIn other countries, governments decideMust 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 efficientlyInfluenced natural resourcesSocieties adopt different approacheslabor-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 questionshow 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 serviceslandlaborCapitalentrepreneurshipsupply is limited
12 The Factors of Production Factor 1: LandLand means all natural resources on or under the groundincludes water, forests, wildlife, mineral deposits
13 The Factors of Production Factor 2: LaborLabor is all the human time, effort, talent used to make productsphysical and mental effort used to make a good or provide a service
14 The Factors of Production Factor 3: CapitalCapital is a producer’s physical resourcesincludes tools, machines, offices, stores, roads, vehiclessometimes called physical capital or real capitalWorkers invest in human capital — knowledge and skillsworkers with more human capital are more productive
15 The Factors of Production Factor 4: EntrepreneurshipEntrepreneurship — vision, skill, ingenuity, willingness to take risksEntrepreneurs anticipate consumer wants, satisfy these in new waysdevelop new products, methods of production, marketing or distributingrisk time, energy, creativity, money to make a profit
16 Label the 4 Factors f Production PracticeLabel 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 waysUtility — benefit or satisfaction gained from using a good or serviceChoices vary between individuals based on what is best for him / her
18 Making Economic Choices Factor 1: Motivations for ChoicePeople motivated by incentives, expected utility, desire to economizeThey weigh costs against benefits to make purposeful choicesMotivated by self-interest
19 Making Economic Choices Factor 2: No Free LunchAll choices have a costchoosing one thing means giving up another, or paying a costcost 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 choiceusually means giving up some, not all, of a thing to get more of another
21 Trade-Offs and Opportunity Cost Example of a Trade OffJessica wants to earn college credit over summersemester-long university course offers more creditssix-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 upnot the value of all possible alternativesExample of Opportunity CostDan chooses to work for six months so he can travel for six monthsopportunity cost = six months of salary
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 choicesone of most useful tools for evaluating relative worth of economic choices
26 Analyzing Economic Choices Marginal Costs and BenefitsMarginal costadditional cost of using one more unit of a good or serviceMarginal benefitadditional benefit of using one more unit of a good or service
27 Analyzing Production Possibilities KEY CONCEPTSProduction possibilities curve (PPC) is one model (graph)PPC shows the maximum goods or services that can be produced from limited resourcesalso called production possibilities frontierPPCPPC based on assumptions:resources are fixedall resources are fully employedonly two things can be producedtechnology is fixed
28 Graphing the Possibilities Production Possibilities CurvePPC runs between extremes of producing only one item or the otherData is plotted on a graph; lines joining points is PPCshows maximum number of one item relative to other itemPPC shows opportunity cost of each choicemore of one product means less of the other
29 What We Learn from PPCsEfficiency — producing the maximum amount of goods and services possibleUnderutilization — 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 productReasons for increasing cost of making more of one productneed new resources, machines, factoriesmust retrain workersCosts paid by making less and less of other product
32 Changing Production Possibilities A country’s supply of resources changes over timeExample: U.S. in 1800s grew, gained resources, workers, new technologynew resources mean new production possibilities beyond frontierIncreased production shown on PPC as shift of curve outwardIncrease 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.
36 Microeconomics and Macroeconomics Microeconomics examines specific, individual elements in an economyprices, costs, profits, competition, consumer and producer behaviorSome Topics of Interest: business organization, labor markets, environmental issues
37 Microeconomics and Macroeconomics Macroeconomics studies sectors — combination of all individual unitsIncludes consumer, business, public or government sectorsMacroeconomics 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 RiseWorld Trade Organization MeetsShipbuilder Wins Navy ContractCab Drivers on Strike!Gasoline Prices Jump 25 Cents
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