What is Economics? Chapter 1, Section 1

Economics Economics is the study of how people seek to satisfy their needs and wants. Economics is the study of how people seek to satisfy their needs and wants. Microeconomics Microeconomics –Study of individuals or small economic units –Individuals, consumers…what do you buy? Macroeconomics Macroeconomics –Study of large economic units (state or national economy)

Needs and Wants People can not have everything they need or want (this is the basis for economic study). People can not have everything they need or want (this is the basis for economic study). –People and economies are forced to make decisions Needs...necessary for survival Needs...necessary for survival –Air, food, shelter Want...an item desired but is not essential to survival. Want...an item desired but is not essential to survival. –Cars, stereos, cell phones etc...

Goods and Services Goods...physical objects. Goods...physical objects. –Shirts, shoes, tables, computers Services...actions or activities that one performs for another. Services...actions or activities that one performs for another. –Shoe repair, table making, computer repair or programming –All goods and services are scarce!  Limited quantities to meet unlimited needs/wants

Scarcity There are limited supplies of goods and services to fill unlimited wants and needs. There are limited supplies of goods and services to fill unlimited wants and needs. Scarcity always exists because our needs and wants are always greater than our resource supply (we always want more). Scarcity gives value and forces decisions. Scarcity always exists because our needs and wants are always greater than our resource supply (we always want more). Scarcity gives value and forces decisions.

Shortage Shortage...different from scarcity. Shortage is a situation in which a good or service is unavailable at a particular time. Shortage...different from scarcity. Shortage is a situation in which a good or service is unavailable at a particular time. –Occurs when producers cannot or will not offer goods at current prices –Temporary or long term –Holiday season, war time, drought

Factors of Production The resources used to make all goods and services The resources used to make all goods and services –Land –Labor –Capital

Land All the natural resources that are used to produce goods and services All the natural resources that are used to produce goods and services –Fertile land  Farming –Coal –Forests –Water

Labor The effort that a person devotes to a task. The effort that a person devotes to a task. –Farming the land –Tightening a clamp –Medical aid by a doctor

Capital Human made resources used to produce other goods and services Human made resources used to produce other goods and services –Gas –Lumber –Machinery There are two types of capital There are two types of capital –Physical –Human

Physical and Human Capital Physical...Actual physical goods used to produce goods and services Physical...Actual physical goods used to produce goods and services –Factories –Tools –Physical capital leads to greater productivity Human...investing in self Human...investing in self –Knowledge and skills gained through education and experience –Human and physical capital work together to become productive –Producers will invest in both physical and human capital

Factors of Popcorn Production LandLaborCapital Popcorn: Used from corn that is planted Human effort to pop the corn Popcorn popper Human effort to take notes in class

Entrepreneurs Entrepreneurs pull the factors of production (land, labor, capital) together to create goods and services. Entrepreneurs pull the factors of production (land, labor, capital) together to create goods and services. –Individuals who take risks in order to develop original ideas into businesses

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. 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

Opportunity Cost Chapter 1, Section 2

Trade Offs All individuals make decisions that involve trade offs. All individuals make decisions that involve trade offs. Trade offs are all the alternatives that we give up whenever we make a decision Trade offs are all the alternatives that we give up whenever we make a decision Economists use “guns or butter” to explain the decisions that countries make Economists use “guns or butter” to explain the decisions that countries make –Do we spend more money on military goods or consumer goods?  Health Care vs. F22?

Opportunity Costs The most desirable trade off of all decisions is known as the Opportunity Cost The most desirable trade off of all decisions is known as the Opportunity Cost –By coming to class today, you made a decision and therefore, you feel an opportunity cost A decision making grid helps to make decisions A decision making grid helps to make decisions

Decision Making Grid I need to study for a test and I am tired. Sleep Late Wake up Early & Study Decision You decided to sleep late You decided to wake up early Benefits Opportunity Cost Trade offs

Thinking at the Margin Not an all or nothing approach Not an all or nothing approach Thinking at the margin asks the benefits of adding an extra unit Thinking at the margin asks the benefits of adding an extra unit –Sleep 1 hour longer, 2 hours longer etc... –Buy that car or maybe buy a cheaper one –How many employees do we hire?

Production Possibilities Chapter 1, Section 3

Production Possibilities Economists often use graphs to analyze the choices or trade offs that people make. Economists often use graphs to analyze the choices or trade offs that people make. This is called a production possibilities graph. This is called a production possibilities graph. –Shows the alternative ways that an economy can use its resources.

Production Possibilities Frontier A production possibilities frontier is the curve drawn that shows the combination of goods that an economy can produce. A production possibilities frontier is the curve drawn that shows the combination of goods that an economy can produce.

Efficiency, Growth, Cost Production possibilities graphs can show the efficiency of an economy, the growth of an economy, and the opportunity costs of an economy. Production possibilities graphs can show the efficiency of an economy, the growth of an economy, and the opportunity costs of an economy.

Efficiency Production possibilities curves represent the economy working at its most efficient levels (maximizing resources). Production possibilities curves represent the economy working at its most efficient levels (maximizing resources). Any point lying within the frontier (under the curve) is known as underutilization (using fewer resources than the economy is capable of)...the economy is not running efficiently Any point lying within the frontier (under the curve) is known as underutilization (using fewer resources than the economy is capable of)...the economy is not running efficiently

Growth A production possibilities graph represents the economy’s current production (assuming its resources will not change). A production possibilities graph represents the economy’s current production (assuming its resources will not change). When growth occurs, the production possibilities curve will shift (to the right) When growth occurs, the production possibilities curve will shift (to the right)

Cost The production possibilities graph represents cost (every time the curve moves on one axis, there is a cost on the other axis (good)). The production possibilities graph represents cost (every time the curve moves on one axis, there is a cost on the other axis (good)). Law of increasing costs...as we shift the factors of production from making one good or service to another, the cost becomes greater Law of increasing costs...as we shift the factors of production from making one good or service to another, the cost becomes greater