Fundamental Problem of Scarcity Unlimited Wants and Limited Resources creates Scarcity. Scarcity : is the condition that exists when society cannot produce all the things it wants because of limited resources. This fact leads to choices. When there are limited resources, choices must be made about how to best use the limited resources available: These are the three decisions that must be made: What to produce, How to produce, and For Whom to produce

WHAT to produce. Since society cannot have everything it wants WHAT to produce? Since society cannot have everything it wants..because of limited resources: then the question of what to produce is the first question to be answered. So, if for example a society decides to produce housing, then what sort of housing should it be? low income? middle or upper income? HOW to produce? The next question is the how. Mass production uses lots of equipment to produce goods. The equipment is expensive at first, but it produces things fairly quickly, and keeps costs down (you don’t pay robots and machines), so the cost of the products also cost less. Labor (workers) cost more. People are paid either hourly or salary ( a yearly fixed wage). This means the finished goods cost more. The benefit of using labor is that you give people jobs which keeps people employed.

FOR WHOM to produce: Once society decides what and how to produce, the next thing is figure out for whom are these goods or services being produced. There isn’t enough resources for everyone, so who receives the goods is an important decision. Where is the greatest need, or who will benefit the most from the goods or services? Of course there are other factors, like making a profit (money) which also goes into making this decision.

Factors of Production In order for goods and services to be produced, there are four factors that must be present: Land: land refers to all natural resources not created by man. These are the “gifts of nature.” These include physical landforms as well as animals. Economists consider land to be a limited supply as there isn’t enough of any of these resources at any one time to satisfy all of society’s wants. Capital: is the tools and equipment, factories and machinery used in the production of goods and services. These items are called Capital Goods to distinguish them from Financial Capital, which is the money used to buy the tools and equipment. Capital is unique in that it is also the result of production: Computers, for example, are capital goods…but they too were originally made (produced) in an earlier production…as are all other capital goods.

Factors of Production 3. Labor: People are labor…all the abilities, skills and effort of people create labor…work. All people except for entrepreneurs are part of this category. This factor has variables: war, changes in population, disease, immigration affect labor. 4. Entrepreneurs: The last factor are entrepreneurs. Entrepreneurs are people who are risk takers in that they endeavor to start new businesses and create new things. While they do this for profit, they are the primary reason in economies like ours, that new goods and services come to be.

Production Finally, once you have all the factors needed: land, capital, labor and entrepreneurs, production can take place…the process of actually creating the goods and services. Think about San Fernando High School: the desks, whiteboards, smartboards, LCD projectors, the physical buildings, textbooks, supplies…everything…are capital goods. The labor is in the form of the teachers, administrators, clerical and custodial staff, other support staff. Land in this case would be the materials used to make all of the capital goods…timber and plastics for the desks, stone for the buildings, etc. Finally, entrepreneurs, in this case they would be members of the school board would have organized all these factors to make the school function.

There Is No Such Thing As A Free Lunch Nothing is truly “free” or “discounted.” (think of “buy one get one free.”) Everything had to be produced…that costs money $$ The machinery used costs money The labor (workers) cost money…their wages So, while you may receive something for “free” it really isn’t. So, where does the money for those “free” or “discounted” items come from? Answer = taxes and increased costs for other items. So, at some point we all pay for these items.

Four Elements of Economics Economics is the study of how humans go about satisfying their many different and often competing wants, with the limited resources available. It is a social science in that it involves studying human behavior, as they solve this basic problem. There are four elements: description, analysis, explanation, prediction. Description: description tells us what the world around us looks like. An example of this can be found in the idea of: Gross Domestic Product…or GDP. This is a dollar value of all the goods and services a country produces within one year. GDP is important because it tells economists how healthy a nation’s economy is. Description also includes looking at things like: unemployment, inflation (the rise in price of goods and services), the relationship between business and labor, trade, and government spending and taxes.

Analysis: this element is about figuring out things like: why are prices high for some goods, but lower for others? Why do some people earn more money than other people? How do taxes (having to pay them) affect our desire to work and save? By being able to analyze and answer how and why things work, we can then perhaps deal with problems better as they occur. Explanation: is about communicating this information to others. Economists attempt to explain this so that fixing problems with the economy will be easier if people have a better understanding why things happen as they do. Prediction: allows people to make better decisions regarding the resources available. For example, it can help a city decide whether to raise taxes on local homeowners, or on local businesses instead. Each has consequences.