Unit 1: Foundations of Economics

Economics Economics- study of how people seek to satisfy their needs and wants by making choices Economics- study of how people seek to satisfy their needs and wants by making choices Needs- necessary for survival (air, food or shelter) Needs- necessary for survival (air, food or shelter) Want- an item that is desirable but not needed for survival (new shoes, phone, etc. Want- an item that is desirable but not needed for survival (new shoes, phone, etc.

What is Economics? The two big concepts are: The two big concepts are: Society has unlimited needs and wants! Society has unlimited needs and wants! Resources are scarce! Resources are scarce! Scarce- limited quantities of resources to meet unlimited wants Scarce- limited quantities of resources to meet unlimited wants Economics decides the “best” way of providing one to the other

4 Factors of Production Land or Natural Resources Materials found in nature coal, water, forest

Factors of Production 2. Labor – effort of a person for which they are paid

Factors of Production 3. 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 3 Kinds of Capital Financial Capital – money needed to begin production of a good or service

Factors of Production 4. Entrepreneurship – person who takes a risk in combining the other 3 factors to create a new good

Opportunity Cost

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

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

Making Economic Decisions 1 st Place is what you would choose to do 1 st Place is what you would choose to do 2 nd Place is your opportunity cost (you give it up to do option 1) 2 nd 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? What other option do you have other than using 3 hours for one task? You could split your time among multiple activities! 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 Thinking at the Margin – decision involving adding one unit and subtracting one unit, rather than all or nothing

Making Economic Decisions OptionsBenefit Opportunity Cost 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

Making Economic Decisions There is a point at which you are paying the same increase in cost, but seeing lower benefits There is a point at which you are paying the same increase in cost, but seeing lower benefits You must make the decision as to whether the cost is worth it You must make the decision as to whether the cost is worth it This same process is used by businesses and consumers to make decisions This same process is used by businesses and consumers to make decisions

Production Possibilities Production Possibilities

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

Production Possibilities

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

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 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 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 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? Why does the graph curve instead of making a straight line? Law of Increasing Costs – as production increases for one item, amount needed as tradeoff increases as well Law of Increasing Costs – as production increases for one item, amount needed as tradeoff increases as well

Production Possibilities Every resource is best suited for certain types of goods Every resource is best suited for certain types of goods Farmland and cows make butter Farmland and cows make butter Metals and factories make guns Metals and factories make guns To convert butter production to guns, you must sell the cows and build new factories on the land To convert butter production to guns, you must sell the cows and build new factories on the land