What is Economics? Chapter 1

Scarcity and the Factors of Production, 1.1 I. Scarcity and choice A. Need B. Want C. Economics is the study of how people seek satisfy their needs and wants by making choices

II. Scarcity A. Goods B. Services C. Dealing with scarcity 1. Scarcity a. Why are all goods and services scarce? 1. An example of scarcity is not having enough workers to finish two jobs because there’s a limited supply of workers 2. Another example would be a person wants an endless supply of everything but cannot have it. 3. Another would be, you have spent your last penny and payday is a week away.

E. Scarcity versus shortages 1. An example of a shortage is limited amounts of food available because the trucks carrying it are on strike. BECAUSE

III. Land A. Land is considered iron ore, natural gas, fertile soil, water B. The resources used to make all goods and services are the factors of production.

IV. Labor

V. Capital A. Physical capital 1. Any resources that are made by humans and used to create other goods and services are called capital a. A factory building would be an example of physical capital b. The physical capital used by a woodworker to make furniture would include saws and drills.

B. Human capital 1. Human capital includes a taxi driver’s knowledge of the city streets.

VI. Entrepreneurs A. Running a service that hires people to install sprinkler systems in lawns is an example of entrepreneurship B. Another example of an entrepreneur is an artist who runs a business painting murals in office buildings and restaurants.

VII. Scarce resources All resources are scarce!

Opportunity Cost, 1.2 I. Trade-offs A. Individuals and trade-offs B. Businesses and trade-offs C. Society and trade-offs Everyone must make choices!

1. Guns or butter a. An example of guns or butter would be a government of a country making a decision between increasing military spending and subsidizing wheat farmers OR

Guns or Butter b. Another example would be a government of a country making a decision between spending money on a hospital or spending the same amount on border security c. Another example is a country deciding whether to use its steel to build new fighter jets or new sports cars. OR

II. Opportunity costs A. The opportunity cost of a decision is the most desirable alternative given up for the decision  1. You bought two new CDs with the last $30 in your checking account, and your next payday is on Monday. The opportunity costs is you cannot have dinner and a movie with your friends this Saturday night OR

Decision-Making Grids B. Using a decision-making grid 1. A decision-making grid can show you every possible consequence of your decision C. Making a decision

III. Thinking at the margin A. Making a decision at the margin 1. Whether to grow beans or corn on a large farm, whether or not to hire 100 new workers, whether to leave early in the morning or late in the day for a trip is an example of making a decision at the margin

Thinking at the Margin 2. Another example of a decision that can be made at the margin whether or not to hire new workers 3. Another example of thinking at the margin is deciding whether the benefit of working two extra hours per day is worth the sacrifice of study time

Production Possibility Curve, 1.3 A. The purpose of a production possibilities graph is to show alternative ways to use an economy’s resources. 1. All of the following are shown on a production possibilities curve a. The efficiency of an economy b. Whether an economy has grown or shrunk c. The opportunity cost of a decision to produce more of one good or service

B. Drawing a production possibilities curve 1. The opportunity cost of a decision can be examined by using a production possibilities graph. 2. Production possibilities frontiers curve when they are charted on a graph because they show the increasing costs resulting in increasingly less output.

Watermelons (millions of tons) Shoes (millions of pairs) Production Possibilities Graph Watermelons (millions of tons) 0 a (0,15) b (8,14) A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) Production Possibilities  A production possibilities graph shows alternative ways that an economy can use its resources.  The production possibilities frontier is the line that shows the maximum possible output for that economy.

Shoes (millions of pairs) Watermelons (millions of tons) Production Possibilities Graph g (5,8) A point of underutilization c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) SEfficiency  Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.

Shoes (millions of pairs) Watermelons (millions of tons) Production Possibilities Graph T Future production Possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) SGrowth  Growth If more resources become available, or if technology improves, an economy can increase its level of output and growth. When this happens, the entire production possibilities curve “shifts to the right.”

Watermelons (millions of tons) Shoes (millions of pairs) Production Possibilities Graph Watermelons (millions of tons) c (14,12) d (18,9) Cost  Cost A production possibilities graph shows the cost of producing more of one item. To move from point “c” to point “d” on this graph has a cost of 3 million pairs of shoes.

Production Possibilities Frontier 3. The production possibilities frontier show the maximum amount that an economy can produce 4. A nation that loses land after being defeated in a war could cause a production possibilities curve to move down and to the left. 5. A new invention that lowers the cost of production can cause a production possibilities curve to move to the right C. Trade-offs

II. Efficiency, growth, and costs A. Efficiency 1. An efficient economy is one that has very few people who do not work for a living 2. An economy that uses its resources to make the greatest possible number of goods and services is considered efficient 3. A company that makes baseball caps is underutilized when the company is producing fewer caps than it could be.

B. Growth 1. When a country’s production possibilities increase because the available workers become more skilled at using a computer this is an example of growth caused by technology

Growth 2. Another example of growth caused by technology, is a nation’s automakers install new robotic machinery to build cars. Now, cars take only a day to make, and the factories can produce many more cars than before is also an example of growth caused by technology.

The Law of Increasing Costs 3. A community that traditionally produces a large number of tires and a small amount of kiwi fruit decides kiwis are becoming increasingly popular, and has decided to expand kiwi cultivation and decrease tire manufacturing. This is an example the law of increasing costs. OR

C. Cost 1. The law of increasing costs means that when an economy increases the production of one item the opportunity cost goes up.