Chapter 1: What Is Economics?

Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost Production Possibilities Curves Every day, you make choices that involve trade-offs -- you choose one thing over another.

Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost Production Possibilities Curves Every day, you make choices that involve trade-offs -- you choose one thing over another.

Section 1: Scarcity & Factors of Production People make choices How to spend time & money Needs Things necessary for survival Air, food, shelter Wants Things desired, but not essential to survival People cannot have everything they need & want, so they have to make choices. People make choices for themselves & others (family, business, gov’t). Businesses make choices – how many people to employ & how much to produce. Gov’t makes similar choices -- how to raise money & what to spend it on. Gov’t chooses (make laws) how to divide scarce resources. Economics is study of how people seek to satisfy needs & wants by making choices.

Section 1: Scarcity & Factors of Production Scarcity requires people to make choices Resources are limited money and time goods and services Economics The study of how people seek to satisfy their needs & wants by making choices If there was enough of everything for everyone all the time, there would be no scarcity. Time – personally spent & people in providing services. Goods: physical objects such as clothes or shoes. Services: actions or activities that one person performs for another. haircuts, dental services, tutoring

Section 1: Scarcity & Factors of Production Limited quantities of resources to meet unlimited wants Supply and demand Scarcities always exist Economics is about solving the problem of scarcity Scarcity is the reason people have to make choices. If there was enough of everything for everyone all the time, there would be no scarcity. Scarcities always exist because needs and wants are always greater than resource supplies.

Section 1: Scarcity & Factors of Production Scarcity and shortage are not the same Shortage When a good or a service is unavailable Because producers cannot or will not offer them at current prices Can be temporary or long-term Wars and droughts can also create shortages for many years. Goods and services are scarce because they are all made from resources that are scarce.

Section 1: Scarcity & Factors of Production Resources that are used to make all goods and services Land All natural resources used to produce goods and services Labor Effort that people devote to a task for which they are paid Capital Any human-made resource that is used to create other goods and services Natural resources are materials found in nature. They include fertile land for farming & products found in or on the land – coal, water, forests, etc. Labor includes medical aid provided by doctor, tightening of a clamp by an assembly line worker, artist’s creation of painting, or repair of TV. Factors of production are the “inputs” used to create all goods & services. Land, labor, & capital are “essential ingredients” for creating all good & services. All resources are scarce. Labor is a scarce resource because its availability is limited by the size, time, age, and energy of a population.

Section 1: Scarcity & Factors of Production 2 Categories of capital Physical capital Human capital

Section 1: Scarcity & Factors of Production 2 Categories of capital 1) Physical capital Human-made goods that are used to produce other goods or services Such as tools, machinery, and buildings Important factor of production because it can save time and money (for people and businesses) Typical benefits: extra time, more knowledge, more productivity Sometimes referred to as Capital Goods A building helps workers do their work by providing protection and space. Tools = tractors, conveyor belts, pencils When we create or buy physical capital to accomplish a job, we usually become more productive.

Section 1: Scarcity & Factors of Production 2 Categories of capital 2) Human capital Skills and knowledge gained by a worker through education and experience People can invest in themselves. An economy requires both physical and human capital to produce goods & services.

Section 1: Scarcity & Factors of Production Entrepreneurs Ambitious leaders who combine land, labor, and capital (factors of production) to create and market new goods and services Fuel economic growth Take risks They bring the factors of production together. They decide how to combine the factors of production. They take risks to develop original ideas, start businesses, create new industries. Fuel = increase, energize, stimulate, promote, encourage

Chapter 1: What Is Economics? Section 1 Review Scarcity Factors of Production

Chapter 1, Section 1 Review: 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. (a)

Chapter 1, Section 1 Review: 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 (b)

Chapter 1: What Is Economics? Section 1 Review Scarcity Factors of Production Assignment Chapter 1, Section 1 – Review Review Chap 1 Section 1 (Word doc)

Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost Production Possibilities Curves Every day, you make choices that involve trade-offs -- you choose one thing over another.

Section 2: Opportunity Cost People make choices How to spend time & money When we decide on one alternative, we gain one thing but lose something else Decisions involve trade-offs

Section 2: Opportunity Cost Trade-offs Alternatives that we sacrifice when we make decisions Individual Business Society Government Trade-offs are all the alternatives that we give up whenever we choose one course of action over another. Individual = working late vs. a movie; playing a sport vs. part-time job Business = use of equip for bldg one product instead of another; how land, labor, and capital resources are used. Government – countries make decisions that involve trade-offs

Section 2: Opportunity Cost Trade-offs Government Guns or butter A phrase that refers to trade-offs that nations face when choosing whether to produce more or less military or consumer goods When a country produces more military goods, it has few resources for consumer goods. Ex: U.S. factories during WWII When steel is used to make a tank, there’s less available for bridges or blgds.

Section 2: Opportunity Cost The most desirable alternative given up as the result of a decision Your “2nd choice” is given up for your 1st choice Which would you choose? Sleep late or wake up early to study for a test? Sleep late or wake up early to eat breakfast before school? Sleep late or wake up early to leave for your dream vacation? Every ordinary decision that we make every day involves an opportunity cost. See Page 9 cartoon: Two choices for dinner – take it or leave it. You probably didn’t choose “sleep late” for all 3 decisions – your decision depended on the specific opportunity cost. If you chose to wake up early to study, would you have made the same decision on a Saturday? Different situations or “variables” can affect your decision. When we select an alternative (make a decision), we sacrifice at least one alternative and forgo its benefits. By recognizing what we are sacrificing, we can decide whether the decision is worth it.

Section 2: Opportunity Cost Benefits Enjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction Decision Sleep late Wake up early to study for test Opportunity cost Extra study time Extra sleep time Benefits forgone Wake up early to study Alternatives Decision-making Grid Sometimes a decision’s opportunity cost may be unclear or complicated. Using a Decision-Making Grid can help you determine whether you’re willing to accept the opportunity cost of a choice you’re about to make – the grid helps you to see what you may gain or lose when you have to choose between alternatives. Because of scarcity, you cannot do both – the time can only be occupied in one way. Page 10, Figure 1.2

Section 2: Opportunity Cost Thinking at the margin Deciding whether to do or use one additional unit of some resource Deciding how much more or less to do In the decision-making grid, we used the “all or nothing” approach. But decisions are rarely that simple. Think of margins (top, bottom, sides) on a piece of paper – smaller margins provides more room for writing on a page.

Section 2: Opportunity Cost Thinking at the Margin Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours of sleep 3 hours of sleep Page 11, Figure 1.3 Need to consider the opportunity cost of each additional unit and compare it to the benefit. At what point does paying an added cost generate little extra benefit?

Section 2: Opportunity Cost Cost and benefit at the margin Compare opportunity costs and benefits at the margin when making decisions What will you sacrifice? What will you gain? Once the opportunity cost outweighs the benefits, no more units should be added The decision-making process is sometimes called cost/benefit analysis How much time do you have (or are willing) to spend watching TV. How much money are you able or willing to spend on a car? How many people do you need to hire to get a job done? Legislators think at the margin: Who will receive a benefit … and how much? Formula for paying taxes, receiving unemployment, Pell Grants.

Chapter 1: What Is Economics? Section 2 Review Decision Making Opportunity Cost

Chapter 1, Section 2 Review: 1. Opportunity cost is (a) any alternative we sacrifice when we make a decision. (b) all of the alternatives we sacrifice when we make a decision. (c) the most desirable alternative given up as a result of a decision. (d) the least desirable alternative given up as a result of a decision. (c)

Chapter 1, Section 2 Review: 2. Economists use the phrase “guns or butter” to describe the fact that (a) a person can spend extra money either on sports equipment or food. (b) a person must decide whether to manufacture guns or butter. (c) a nation must decide whether to produce more or less military or consumer goods. (d) a government can buy unlimited military and civilian goods if it is rich enough. (c)

Chapter 1: What Is Economics? Section 2 Review Decision Making Opportunity Cost Assignments Economic Cartoons, pg. 12 of Unit 1 book Textbook pg. 11, Applying Economic Concepts, #7 decision-making grid

Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost Production Possibilities Curves Every day, you make choices that involve trade-offs -- you choose one thing over another.

Section 3: Production Possibilities Curves Economists use tools to analyze opportunity costs and trade-offs Graphs easily help us to see how one value relates to another value Production possibilities curve A graph that shows alternative ways to use an economy’s resources Show efficiency, growth, and cost Individuals, businesses, societies (countries’ governments) Book example: 1941 U.S. entered WWII – had to produce weapons and equipment to win war. Govt agencies switched output of America’s factories, farms, and mines from consumer products to military products -- changed from producing automobiles to military vehicles Whether at war or not, nations must choose what to produce

Section 3: Production Possibilities Curves Drawing a Production Possibilities Curve Decide which goods or services to examine Horizontal and vertical axes Plot points on a graph indicating possible production choices Draw a line connecting the plotted points Production possibilities frontier The line on a production possibilities graph that shows the maximum possible output Goods or services = farm goods, factory goods See textbook example on pg. 14

Shoes (millions of pairs) Watermelons (millions of tons) 25 20 15 10 5 Watermelons (millions of tons) Production Possibilities Graph See Figure 1.4: Graph A and Graph B in textbook on pg. 14 Graph A = no watermelons can be produced if all resources are used to produce shoes Graph B = no shoes will be produced if all resources are used to product watermelons See Figure 1.5 on textbook pg 15

Section 3: Production Possibilities Curves Production possibilities frontier The line on a production possibilities graph that shows the maximum possible output An economy working at its most efficient production levels Any spot on the line represents a point where all resources are being used to produce a maximum combination of the two products Figure 1.5 in textbook on pg. 15 Combinations of production of both products

Section 3: Production Possibilities Curves Production possibilities frontier The line on a production possibilities graph that shows the maximum possible output Any spot on the line represents a point where all resources are being used to produce a maximum combination of the two products Each point reflects a trade-off Because land, labor, and capital are scarce Using the factors of production to make one product means that fewer resources are left to make something else Figure 1.5 in textbook on pg. 15

Section 3: Production Possibilities Curves Production possibility graphs: Efficiency, Growth, and Cost Illustrate how efficiently an economy is working Indicate whether an economy has grown or shrunk Show the opportunity cost of a decision to produce more of one good or service

Section 3: Production Possibilities Curves Production possibilities frontier Represents an economy working at its most efficient level of production Efficiency: Using resources in such a way as to maximize the production or output of goods and services An economy producing output levels on the production possibilities frontier is operating efficiently

Section 3: Production Possibilities Curves Sometimes economies operate inefficiently When workers are laid off, fewer goods are produced This trade-off is represented by plotting a point inside the production possibilities frontier Underutilization What would happen if some farmers and factory workers were laid off? The farms & factories where they worked would produce fewer goods. Figure 1.6 in textbook on pg. 16

Section 3: Production Possibilities Curves Underutilization Using fewer resources than an economy is capable of using Less than the maximum possible production Underutilization = point G in Figure 1.6 in textbook on pg. 16

Section 3: Production Possibilities Curves Production possibility graphs (efficiency, growth, and cost) Reflect current production possibilities based on unchanging resources Quantity of resources constantly changes

Section 3: Production Possibilities Curves Production possibility graphs (efficiency, growth, and cost) If quantity or quality of available land, labor, or capital changes, then the curve moves Increase or decrease in workers New inventions Increase or decrease in land If immigrants pour into a country, then more labor becomes available; so the maximum amount of goods a nation can produce increases. Aging or less healthy population (retirees/deaths) reduces available work force. Less education can reduce supply of labor & human capital. New inventions can allow workers to produce more goods at lower costs. Land (& labor & capital) can be lost when a country goes to war. Land & capital can be lost due to natural disasters (flooding).

Section 3: Production Possibilities Curves Production possibility graphs (efficiency, growth, and cost) When an economy grows or increases, the production possibilities curve “shifts to the right” When an economy shrinks or decreases, the production possibilities curve “shifts to the left” Current production possibilities frontier versus future production possibilities frontier if amount of land, labor, or capital resources changes Figure 1.6 in textbook on pg. 16

Section 3: Production Possibilities Curves Production possibility graphs (efficiency, growth, and cost) Cost: The alternative that is given up because of a decision “Cost” always means “opportunity cost” Law of increasing costs As factors of production switch from one item to another, more and more resources are necessary to increase production of the second item Opportunity cost increases Cost is not necessarily money. Figure 1.7 in textbook on pg. 17 As we move along the curve, we trade off more & more to get less & less additional output – resources may not be optimally used It’s what is given up when one option is chosen over another.

Section 3: Production Possibilities Curves Production possibility graphs: Resources and technology A country’s resources include its land and natural resources, its work force, and its physical and human capital A country’s production possibilities depend on both the resources it has available and its level of technology Each production method uses different technology, or know-how, to create products Technology = know-how (includes machinery & methods/process)

Chapter 1: What Is Economics? Section 3 Review Production Possibilities Curves

Chapter 1, Section 3 Review: 1. A production possibilities frontier shows (a) farm goods and factory goods produced by an economy. (b) the maximum possible output of an economy. (c) the minimum possible output of an economy. (d) underutilization of resources. (b)

Chapter 1, Section 3 Review: 2. An economy that is using its resources to produce the maximum number of goods and services is described as (a) efficient. (b) underutilized. (c) growing. (d) trading off. (a)

Chapter 1, Section 3 Review: 3. Which of the following happens to a production possibilities curve when economic growth occurs? (a) The curve shifts to the left. (b) The curve becomes a straight line. (c) The curve shifts to the right. (d) The curve does not change at all. (c)

Chapter 1: What Is Economics? Section 3 Review Production Possibilities Curves Assignments Textbook pg. 21, Skills for Life, #’s 17-21 Vocabulary Practice crossword puzzle, pg. 9 of Unit 1 book