ECONOMIC PRINCIPLES Unit 1

ECONOMICS & SCARCITY Chapter 18 & Chapter 19.1 – Objective 7.01 7.02 7.03– Explain how scarcity forces us to make choices. Compare trade-offs & opportunity costs. Describe the basic factors of production & their impact on economic activities.

Vocabulary Economics Scarcity Needs Wants Resources Study of how decisions are made when resources are limited Scarcity Not enough resources to satisfy all of our desires Needs Things required for survival Wants Things we would like to have but don’t need for survival Resources Things used in making goods & providing services

SCARCITY IS THE FUNDAMENTAL ECONOMIC PROBLEM Because of Scarcity we must answer 3 questions in economics What to Produce? How to Produce? Whom to produce for? What to produce – examples public services or defense (guns or butter) Ex: North Korea more weapons than food How to produce – what type of industry? Or pollution vs manufacturing, or oil vs wildlife Whom to produce for? – how will the goods be distributed and at what cost? – Price determines who it goes to

Economic Models Economy All activity that affects production, distribution & use of goods & services Economists use economic models to study the economy They study past and present to predict the future Based on assumptions Businesses & government make decisions based on models Just like science they use examples. What is wrong with this? Can’t predict the future.

What is the fundamental economic problem? Money Time Scarcity Economics

Trade Offs & Opportunity Costs Trade Off – Decision that must be made when choosing between items Opportunity Cost – Value of the next best alternative that was given up when an economic choice was made (Think Cost = $) Can be time or money as well You always lose when faced with a trade off Production Possibilities: The combinations of goods and services that can be produced from a fixed amount of resources. (Guns vs. Butter or Computers vs. Food). Examples – talk to your neighbor giving each other examples

Assessment Activity: Good Price Gum $ . 50 Soda $1.oo Movie Ticket All economic questions and problems arise from scarcity. Economics assumes people do not have the resources do satisfy all of their wants. Therefore, we must make choices about how to allocate those resources. We make decisions about how to spend our money and use our time. This activity will focus on the central idea of economics- every choice involves a cost. Let's say you have five dollars. What would you like to spend it on? There are a million things you would love to spend five bucks on, but let's imagine there are only three things out there you really want to buy: gum, soda, and movie tickets. Look at the price chart to the right and answer the questions. Good Price Gum $ . 50 Soda $1.oo Movie Ticket $5.00

Questions: How many sodas can you buy instead of one movie ticket? How many pieces of gum can you buy instead of one soda? If buy 4 pieces of gum, how many sodas could you have bought? For example, if you go to the movies you have to give up a certain amount of gum and soda. If you are a sodaholic, you have to give up five sodas. If you are gum fanatic, you surrender ten packs of gum. But, the opportunity cost of a movie is not five sodas and ten packs of gum. It is five sodas or ten packs of gum.

Which of the following best describes scarcity? Not enough goods for everyone Not enough resources to provide every desire Lack of desire to produce enough resources The amount that people want

What is the opportunity cost of passing the Health Care Bill? More people will have health care coverage. Grandparents will be put to sleep because of Death Panels. Obama will become the Devil and the Four Horseman will arrive. The government will have less money to spend on other services like the military.

Production Possibilities Curve Curve shows the different rates of production for individual or 2-good country. Points on the curve are efficient. Outside curve not possible due to lack of resources. Inside the curve inefficient (2-good world could produce more) Increase in food, decrease in computers

Production Possibilities Curve Shows opportunity cost of producing 1 item and not the other. As we produce more of one item, the opportunity cost becomes greater because we are using resources not suited for making that item. – Must find a middle.

When individuals make decisions, the items they do not choose become: opportunity costs human capital goods & services needs

BUSINESS ECONOMICS Chapter 18 section 2 & Chapter 19 section 1

All of the following are questions we must ask because of scarcity except: When to produce? How to produce? What to produce? Whom to produce for?

Vocabulary Goods – Anything manufactured Capital Goods = Factor Goods – businesses use them to produce other goods or services Consumer Goods = Final Goods – goods used by a consumer and not used to produce other goods to be sold Service – Something someone does for someone else Resources – anything used to make a good or provide a service – Same as Capital Goods Natural Resource – anything from the earth used to make a good or provide a service

4 Factors of Production Capital Natural Resources (also known as Land) Money/resources used to start & continue a business Can include Capital Goods Natural Resources (also known as Land) Things that come from the earth Includes land & energy Labor Hired workers to help in production Earn money which they use to buy goods & services Division of Labor – separating big jobs into small ones Entrepreneurship People willing to take risk in business (Decision Makers) Plan & supervise production Give examples for each one Division of labor – assembly line – Henry Ford – give examples Entrepreneurs – people who make the decisions

All resources come from the earth True False

A sewing machine to make Nike shirts would be placed in which factors of production? Land Labor Entrepreneurship Capital

Business Costs Fixed Costs Variable Costs Expense is the same no matter how much is produced Example - Rent Variable Costs Expense changes with number produced changing Fixed Costs + Variable Costs = Total Cost Marginal Cost extra cost of producing one additional unit of output Marginal Benefit /Revenue additional benefit after all costs are accounted for producing one more unit Cost Benefit Analysis economic model used to compare marginal costs & benefits of a decision Cost Benefit analysis graph pg 508 – businesses use cost-benefit analysis to compare the marginal benefit to the marginal cost to make an economic decision.

Which economic term best explains a consumer’s choice of buying a new car or opening a savings account: trade-off scarcity opportunity cost comparative advantage

Considerations for Businesses Productivity Measure of the amount of output produced by a given amount of inputs in a specific period of time Specialization Takes place when people, businesses, regions & countries concentrate on goods or services that they can produce better than anyone else Examples – China and electronics Human Capital Sum of the skills, abilities & motivations of people

Productivity Goes up when more output can be produced when scarce resources are used efficiently Usually labor and human capital Increases when businesses invest in human capital Increases with specialization

What is an example of a fixed cost of doing business? Wages Cost of fuel Price of materials Rent on a building