Unit 1: Foundations of Economics What comes to your mind when you hear the word SCARCE?

What is Economics? “A science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants.” – Addison-Wesley

What is Economics? So then the big two concepts are that: Resources are scarce! Society has unlimited needs and wants! Economics decides the “best” way of providing one to the other

VOCABULARY: Need Want Economics Goods Services

Scarcity Definition A situation in which the amount of something actually available would not be sufficient to satisfy the desire for it, if it were provided free of charge.

… MORE VOCABULARY Shortage Factors of Production Land Labor Capital Entrepreneurship Physical Capital Human Capital

Factors of Production There are 4 factors that must all be used to produce anything Natural Resources (also referred to as “land”)

Factors of Production There are 4 factors that must all be used to produce anything Labor – effort of a person for which they are paid

Factors of Production There are 4 factors that must all be used to produce anything Capital – human-made resources used to create other goods

Factors of Production 3 Kinds of Capital Physical Capital – Also called Capital Goods, objects that are used to produce other goods

Factors of Production 3 Kinds of Capital Human Capital – knowledge or skills workers get from education and experience

Factors of Production There are 4 factors that must all be used to produce anything Entrepreneurship – person who takes a risk in combining the other 3 factors to create a new good

VOCABULARY CONTINUED… Entrepreneurs

Making Economic Decisions Every decision we make involves trade-offs – alternatives that we must give up when we make a choice Example – “I could stay up for 3 hours playing Halo, study, or sleep.”

FIVE appealing VACATION Destinations… Section 1.2 – Opportunity Cost FIVE appealing VACATION Destinations… Hawaii Paris Dunns River Falls, Jamaica Volunteer: What is your first choice? What is your second choice? Ireland Alaska

Making Economic Decisions The most desirable of the options you pass up is called the Opportunity Cost Rank sleep, studying, and playing video games 1st, 2nd, and 3rd on a list for what you value the most

Making Economic Decisions 1st Place is what you would choose to do 2nd Place is your opportunity cost (you give it up to do option 1)

Making Economic Decisions What other option do you have other than using 3 hours for one task? You could split your time among multiple activities! Thinking at the Margin – decision involving adding one unit and subtracting one unit, rather than all or nothing

Making Economic Decisions Options Benefit Opportunity Cost 0 hours studying, 3 hours sleeping F on Test None 1 hours studying, 2 hours sleeping C on Test 1 hour of sleep 2 hours studying, 1 hour sleeping B on Test 2 hours of sleep 3 hours studying B+ on Test 3 hours of sleep

Example If a person who wants to buy a compact disc (CD) has just enough money to buy one, and chooses CD A instead of CD B, then CD B is the a. trade-off b. opportunity cost c. decision at the margin d. opportunity at the margin

Production Possibilities Production Possibilities Graph – shows alternatives to what an economy can produce Let’s say we can produce 2 things: Guns and Butter

Production Possibilities

Production Possibilities Production Possibilities Graph – shows alternatives to what an economy can produce The outer red line shows the maximum possible output with any given combination This is the Production Possibilities Frontier (or Curve)

Production Possibilities To move from one point to another, the economy must make trade-offs

Production Possibilities Any point along the line shows the economy operating at maximum efficiency Any point below the line is underutilization – they are not getting all that they could Any point above the line is presently impossible, until new resources are available

Production Possibilities Why does the graph curve instead of making a straight line? Law of Increasing Costs – as production increases for one item, more and more resources are necessary to increase production of the second item! The OPPORTUNITY COST increases…

Production Possibilities Every resource is best suited for certain types of goods Farmland and cows make butter Metals and factories make guns and many times you hear about butter vs. guns due to military spending on weaponry using resources … To convert butter production to guns, you must sell the cows and build new factories on the land

An economy that is efficient is … producing the maximum amount of goods and services .. now that’s efficient!