1. What is Economics?

2. SCARCITY AND THE FACTORS OF PRODUCTION Section 1

3. Economics Economics- The study of how people seek to satisfy their needs and wants by making choices. For example: You must choose how to spend your time. Businesses must choose how many people to hire.

4. Condition of Scarcity People cannot have EVERYTHING they need and want. Needs: Air, Food, Shelter, etc. Wants: New Shoes, New Clothes, Ipods, Iphones, etc. Something is scarce if it has more than one valuable use. Consider your time. Our resources are limited…but our desires for goods and services are NOT.

5. Choices Scarcity forces us to make choices. Choosing an action means we sacrifice doing something else.

6. Scarcity Goods – Physical objects such as shoes and shirts. Services – Actions or activities that one person performs for another, such as haircuts, tutoring Scarcity – Implies limited quantities of resources to meet unlimited wants. (items are limited AND desired) Although you may be able to buy hundreds of basketballs or pencils, no one can have an endless supply of everything. Sooner or later a limit is always reached.

7. Scarcity – Occurs when there are limited quantities of resources to meet unlimited needs or desires. Shortages – Occur when producers will not or cannot offer goods or services at current prices. (too many people want the item) VS.

8. Economists call the resources that are used to make all goods and services the factors of production.

9. Land All natural resources used to produce goods and services.

10. Labor The effort that a person devotes to a task for which that person is paid.

11. Capital Any human-made resource that is used to produce other goods and services. Physical Capital – human-made objects used to create other goods and services. i.e. buildings and tools Human Capital – the knowledge and skills a worker gains through education and experience.

12. Entrepreneurs Ambitious leaders who decide how to combine land, labor, and capital resources to create new goods and services. Develop original ideas, start businesses, create new industries, and fuel economic growth

13. Scarce Resources All goods and services are scarce because the land, labor, and capital used to create them are scarce.

14. OPPORTUNITY COST Section 2

15. As a result of scarcity, choices have to be made.

16. Trade-Offs Trade-Offs – All the alternatives that we give up whenever we choose one course of action over another.

17. Trade-Offs Individuals If you choose to spend more time at work, you give up watching a movie or going to a baseball game. Businesses A farmer who decides to plant broccoli cannot use the same land at the same time to grow cauliflower Society “Guns or Butter” A country decides to produce more military goods “guns” it has fewer resources to devote to consumer goods “butter”.

18. Opportunity Cost Opportunity Cost – the most desirable alternative given up as a result of a decision. In life, every choice we make comes at a cost, since we forgo other possible alternatives in the process; this cost – whether it’s money, time, education, health, etc. – is known as an opportunity cost. What is the opportunity cost of investing $500 in a new stereo system? What is the opportunity cost of going to college?

19. Opportunity Costs Which alternative would you choose? Sleep late or wake up early for a ski trip? Sleep late or wake up early to eat your breakfast? Sleep late or wake up early to study for a test?

20. When we use resources to produce one good or service, the opportunity cost is that we cannot produce another good or service. When we make chairs, we cannot use the same resources to make shower stalls.

21. Thinking at the Margin As opposed to the “all or nothing” approach in decision- making, you can decide just how much more or less you want to do. You could decide to get up one, two, or three hours earlier to study or to sleep instead. Making a decision about each extra hour would mean that you were thinking at the margin

22. Thinking at the Margin Comparing opportunity costs and benefits at the margin could help someone decide How much money to spend on a car How many hours to work How much time to spend watching TV How many extra workers to hire If a government program should include more of a particular benefit

23. Decision-Making at the Margin OptionsBenefitOpportunity Cost 1 st hour of extra study time Grade C on testOne hour of sleep 2 nd hour of extra study time Grade B on test2 hours of sleep 3 rd hour of extra study time Grade B+ on test3 hours of sleep

24. Opportunity Cost Example

25. PRODUCTION POSSIBILITIES CURVE Section 3

26. In continuing the discussion on opportunity costs and trade-offs, we are now going to describe tools that economists use to analyze these concepts.

27. Production Possibilities Curve Production Possibilities Curve – Shows alternative ways to use an economy’s productive resources. The axes of the graph can be used to show categories or goods and services. The axes can also be used to show any pair of specific goods or services, such as watermelon and shoes.

28. Production Possibilities Curve The country can produce 21 million tons of Watermelons OR 15 million pairs of Shoes.

29. If the citizens of our country wanted to produce BOTH watermelons and shoes, there are several different ways we can use our resources.

30. Production Possibilities Frontier

31. The production possibilities frontier is the line that shows the maximum possible output for that economy.

32. Production Possibilities Frontier Each point represents a trade-off. To produce more shoes you produce less watermelons. WHY? Scarcity! Using the factors of production to make one product means that fewer resources are left to make something else.

33. Efficiency Efficiency – Using resources in such a way as to maximize the production or output of goods and services. What happens if the economy operates inefficiently? Any point inside the line represents underutilization of resources. Using fewer resources than the economy is capable of. Shoes (millions of pairs) 25 20 15 10 5 0 252015105 Watermelons (millions of tons) Production Possibilities Graph g (5,8) A point of underutilization c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S

34. Growth If the quantity or quality of available land, labor, or capital changes, then the curve will move. For example, if immigrants pour into a country, then more labor becomes available. Shoes (millions of pairs) 25 20 15 10 5 0 252015105 Watermelons (millions of tons) Production Possibilities Graph T Future production Possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S

35. Cost Cost is the alternative we give up when we choose one option over the other. A switch from shoes to watermelons comes at an increasing cost. Each time we grow more watermelons, the sacrifice in terms of shoes increases.

36. Law of Increasing Costs As production switches from one item to another, more and more resources are necessary to increase production of the second item. Therefore, opportunity cost increases. WHY DOES COST INCREASE? Some resources are better suited for use in farming, while others are more appropriate for manufacturing.

38. Resources and Technology The production possibilities curve is going to be dependent on what resources, and what technology the country has.