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Chapter 1: What Is Economics?. Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost –Production Possibilities.

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Presentation on theme: "Chapter 1: What Is Economics?. Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost –Production Possibilities."— Presentation transcript:

1 Chapter 1: What Is Economics?

2 Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost –Production Possibilities Curves

3 Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost –Production Possibilities Curves

4 Section 1: Scarcity & Factors of Production People make choices –How to spend time & money Needs –Things necessary for survival Air, food, shelter Wants –Things desired, but not essential to survival

5 Section 1: Scarcity & Factors of Production Scarcity requires people to make choices –Resources are limited money and time goods and services Economics –The study of how people seek to satisfy their needs & wants by making choices

6 Section 1: Scarcity & Factors of Production Scarcity –Limited quantities of resources to meet unlimited wants Supply and demand Scarcities always exist Economics is about solving the problem of scarcity

7 Section 1: Scarcity & Factors of Production Scarcity and shortage are not the same Shortage –When a good or a service is unavailable Because producers cannot or will not offer them at current prices Can be temporary or long-term

8 Section 1: Scarcity & Factors of Production Factors of production –Resources that are used to make all goods and services Land –All natural resources used to produce goods and services Labor –Effort that people devote to a task for which they are paid Capital –Any human-made resource that is used to create other goods and services

9 Section 1: Scarcity & Factors of Production 2 Categories of capital –Physical capital –Human capital

10 Section 1: Scarcity & Factors of Production 2 Categories of capital 1) Physical capital Human-made goods that are used to produce other goods or services –Such as tools, machinery, and buildings –Important factor of production because it can save time and money (for people and businesses) »Typical benefits: extra time, more knowledge, more productivity –Sometimes referred to as Capital Goods

11 Section 1: Scarcity & Factors of Production 2 Categories of capital 2) Human capital Skills and knowledge gained by a worker through education and experience

12 Section 1: Scarcity & Factors of Production Entrepreneurs –Ambitious leaders who combine land, labor, and capital (factors of production) to create and market new goods and services Fuel economic growth Take risks

13 Chapter 1: What Is Economics? Section 1 Review –Scarcity –Factors of Production

14 Chapter 1, Section 1 Review: 1.What is the difference between a shortage and scarcity? (a) A shortage can be temporary or long-term, but scarcity always exists. (b) A shortage results from rising prices; a scarcity results from falling prices. (c) A shortage is a lack of all goods and services; a scarcity concerns a single item. (d) There is no real difference between a shortage and a scarcity.

15 Chapter 1, Section 1 Review: 2.Which of the following is an example of using physical capital to save time and money? (a) hiring more workers to do a job (b) building extra space in a factory to simplify production (c) switching from oil to coal to make production cheaper (d) lowering workers wages to increase profits

16 Chapter 1: What Is Economics? Section 1 Review –Scarcity –Factors of Production Assignment –Chapter 1, Section 1 – Review

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18 Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost –Production Possibilities Curves

19 Section 2: Opportunity Cost People make choices –How to spend time & money When we decide on one alternative, we gain one thing but lose something else –Decisions involve trade-offs

20 Section 2: Opportunity Cost Trade-offs –Alternatives that we sacrifice when we make decisions Individual Business Society –Government

21 Section 2: Opportunity Cost Trade-offs –Government Guns or butter –A phrase that refers to trade-offs that nations face when choosing whether to produce more or less military or consumer goods

22 Section 2: Opportunity Cost Opportunity cost –The most desirable alternative given up as the result of a decision Your 2 nd choice is given up for your 1 st choice Which would you choose? –Sleep late or wake up early to study for a test? –Sleep late or wake up early to eat breakfast before school? –Sleep late or wake up early to leave for your dream vacation?

23 Section 2: Opportunity Cost Benefits Enjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction Decision Sleep lateWake up early to study for test Opportunity cost Extra study timeExtra sleep time Benefits forgone Better grade on test Teacher and parental approval Personal satisfaction Enjoy more sleep Have more energy during the day Sleep lateWake up early to study Alternatives Decision-making Grid

24 Section 2: Opportunity Cost Thinking at the margin –Deciding whether to do or use one additional unit of some resource Deciding how much more or less to do

25 Section 2: Opportunity Cost Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours of sleep 3 hours of sleep Thinking at the Margin

26 Section 2: Opportunity Cost Cost and benefit at the margin –Compare opportunity costs and benefits at the margin when making decisions –What will you sacrifice? What will you gain? –Once the opportunity cost outweighs the benefits, no more units should be added –The decision-making process is sometimes called cost/benefit analysis

27 Chapter 1: What Is Economics? Section 2 Review –Decision Making –Opportunity Cost

28 Chapter 1, Section 2 Review: 1. Opportunity cost is (a) any alternative we sacrifice when we make a decision. (b) all of the alternatives we sacrifice when we make a decision. (c) the most desirable alternative given up as a result of a decision. (d) the least desirable alternative given up as a result of a decision.

29 Chapter 1, Section 2 Review: 2. Economists use the phrase guns or butter to describe the fact that (a) a person can spend extra money either on sports equipment or food. (b) a person must decide whether to manufacture guns or butter. (c) a nation must decide whether to produce more or less military or consumer goods. (d) a government can buy unlimited military and civilian goods if it is rich enough.

30 Chapter 1: What Is Economics? Section 2 Review –Decision Making –Opportunity Cost Assignments –Economic Cartoons, pg. 12 of Unit 1 book –Textbook pg. 11, Applying Economic Concepts, #7 decision-making grid

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32 Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost –Production Possibilities Curves

33 Section 3: Production Possibilities Curves Economists use tools to analyze opportunity costs and trade-offs Graphs easily help us to see how one value relates to another value Production possibilities curve –A graph that shows alternative ways to use an economys resources Show efficiency, growth, and cost

34 Section 3: Production Possibilities Curves Drawing a Production Possibilities Curve –Decide which goods or services to examine Horizontal and vertical axes –Plot points on a graph indicating possible production choices –Draw a line connecting the plotted points Production possibilities frontier –The line on a production possibilities graph that shows the maximum possible output

35 Shoes (millions of pairs) Watermelons (millions of tons) Production Possibilities Graph

36 Section 3: Production Possibilities Curves Production possibilities frontier –The line on a production possibilities graph that shows the maximum possible output An economy working at its most efficient production levels Any spot on the line represents a point where all resources are being used to produce a maximum combination of the two products

37 Section 3: Production Possibilities Curves Production possibilities frontier –The line on a production possibilities graph that shows the maximum possible output Any spot on the line represents a point where all resources are being used to produce a maximum combination of the two products Each point reflects a trade-off –Because land, labor, and capital are scarce –Using the factors of production to make one product means that fewer resources are left to make something else

38 Section 3: Production Possibilities Curves Production possibility graphs: Efficiency, Growth, and Cost Illustrate how efficiently an economy is working Indicate whether an economy has grown or shrunk Show the opportunity cost of a decision to produce more of one good or service

39 Section 3: Production Possibilities Curves Production possibilities frontier –Represents an economy working at its most efficient level of production Efficiency: Using resources in such a way as to maximize the production or output of goods and services –An economy producing output levels on the production possibilities frontier is operating efficiently

40 Section 3: Production Possibilities Curves Sometimes economies operate inefficiently When workers are laid off, fewer goods are produced –This trade-off is represented by plotting a point inside the production possibilities frontier Underutilization

41 Section 3: Production Possibilities Curves Underutilization –Using fewer resources than an economy is capable of using Less than the maximum possible production

42 Section 3: Production Possibilities Curves Production possibility graphs (efficiency, growth, and cost) Reflect current production possibilities based on unchanging resources –Quantity of resources constantly changes

43 Section 3: Production Possibilities Curves Production possibility graphs (efficiency, growth, and cost) If quantity or quality of available land, labor, or capital changes, then the curve moves –Increase or decrease in workers –New inventions –Increase or decrease in land

44 Section 3: Production Possibilities Curves Production possibility graphs (efficiency, growth, and cost) When an economy grows or increases, the production possibilities curve shifts to the right When an economy shrinks or decreases, the production possibilities curve shifts to the left Current production possibilities frontier versus future production possibilities frontier if amount of land, labor, or capital resources changes

45 Section 3: Production Possibilities Curves Production possibility graphs (efficiency, growth, and cost) Cost: The alternative that is given up because of a decision –Cost always means opportunity cost Law of increasing costs –As factors of production switch from one item to another, more and more resources are necessary to increase production of the second item »Opportunity cost increases

46 Section 3: Production Possibilities Curves Production possibility graphs: Resources and technology –A countrys resources include its land and natural resources, its work force, and its physical and human capital –A countrys production possibilities depend on both the resources it has available and its level of technology Each production method uses different technology, or know-how, to create products

47 Chapter 1: What Is Economics? Section 3 Review –Production Possibilities Curves

48 Chapter 1, Section 3 Review: 1. A production possibilities frontier shows (a) farm goods and factory goods produced by an economy. (b) the maximum possible output of an economy. (c) the minimum possible output of an economy. (d) underutilization of resources.

49 Chapter 1, Section 3 Review: 2. An economy that is using its resources to produce the maximum number of goods and services is described as (a) efficient. (b) underutilized. (c) growing. (d) trading off.

50 Chapter 1, Section 3 Review: 3. Which of the following happens to a production possibilities curve when economic growth occurs? (a) The curve shifts to the left. (b) The curve becomes a straight line. (c) The curve shifts to the right. (d) The curve does not change at all.

51 Chapter 1: What Is Economics? Section 3 Review –Production Possibilities Curves Assignments –Textbook pg. 21, Skills for Life, #s –Vocabulary Practice crossword puzzle, pg. 9 of Unit 1 book


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