1. Key Vocabulary Scarcity Shortage Trade-offs
Opportunity Cost Factors of Production
Production Possibilities Curves
Production Possibilities Frontier
Underutilization Efficiency

2. Welcome….
to the Land of Tinstafl

3. Decisions Decisions Decisions
There Is No
Such
Thing
As a
Free
Lunch
Everything “costs” something!!

4. Thinking Economically…
Wants are unlimited-people will always want more…
Resources ARE limited- it’s because of this that scarcity exists…
Scarcity- is the situation that exists when there are not enough resources to satisfy human wants.
It IS an ongoing tension confronting individuals/businesses/governments/societies
If the limitations of resources is temporary than we call this a shortage

5. Water for example…
By 2025, two-thirds of the world’s population could be living under water stressed conditions.

6. Scarcity leads to three questions… -As an individual, you’ve probably faced the question, “Is it worth the money?” Entire societies must also face scarcity and decide… 1)What will be produced? 2)How will it be produced? 3)For whom will it be produced?

7. Question 1:What will be produced?
Societies decide which goods and services to produce by…
- using the natural resources they possess.
- Market Economy-letting consumers decide which goods and services to produce
- Command Economy-letting the government decide which to produce
Societies must also decide HOW MUCH of a good or service to produce

8. Question #2: How will it be produced?
How can the goods be made? Or services provided?
Societies usually look at the most efficient way to use resources to satisfy wants and needs.
For example- when growing crops, a country with a relatively unskilled workforce may adopt labor-intensive farming methods. (More workers, less machines)
However, a country with a highly skilled workforce may use capital-intensive methods, that increase output to maximize efficiency (Using more machines, less workers)
Each society/country will decide how best to approach this question based on their circumstances.

9. Question #3: For whom will it be produced?
This involves asking two more questions!
How much should each person get?
Will everyone get the same amount? Or will it be based on how much someone is willing to pay?
How will it be delivered to them?
Once people decide how to distribute, they can decide how to deliver…railroads? Seaports? Airports? Computer networks?

10. Factors of Production…
Land
Includes all the natural resources found on or under the ground. Water, forests, wildlife, buried deposits like: minerals, gas, oil.
Labor
All of the human time, effort, and talent that go into the making of products.
Capital
All the resources made and used in production of good and services
Entrepreneurship
Combination of vision, skills, and risk-taking needed to create and run a business.
In order to answer the first two basic questions, what to produce and how to produce , economists must identify the factors of production.

11. Trade-Offs Every decision made has trade-offs
Because all resources are scarce……..
We have to make a decision about how we will use our resources…….
All decisions include giving up an alternative
All the alternatives we give up are called “trade-offs”
Example: You have a choice, should you sleep in or wake up early to read your econ book?
Choice 1 – sleep in = don’t study = bad grade
Choice 2 – wake up = don’t sleep = tired
Trade-Offs
Every decision made has trade-offs

12. Trade-Offs Three types of trade-offs
Individual – like the example we just saw
Business – owners of a business have to decide how best to use their limited resources in order to make the greatest profit. Example: should Apple keep making 1st generation iPhones if they have iPhone 4?
Society – these decisions are usually made by government with people voting. Example: Should California build a high speed train?
- economists use the phrase “guns or butter”

13. Guns or Butter
If a country decides to produce military goods “guns” than it has fewer resources to develop consumer goods “butter”

14. Trade-Offs and Opportunity Cost
What is an opportunity cost?
Defined: It is the value of next-best alternative a person gives up
not the value of all possible alternatives
Example: Counting the Opportunity Cost
Dan has just graduated and has decided to take off a year before going to college.
He’s been offered a full time-job for the whole year.
Dan chooses to work for six months so he can travel for six months with his friends.
What is Dan’s Opportunity Cost?
His opportunity cost is the money he’d earn working for those six months

15. Opportunity Cost
Not all decisions are easy to make, nor are the trade-offs and opportunity cost easy to see.
To help make decisions economists use decision-making grids
Choice 1
Choice 2
Benefits
Decision
Opportunity Cost
Trade-Offs

16. Decision-Making Grids
Choices
Sleep Late
Wake up early to study
Benefits
enjoy more sleep
have more energy during the day
better grade on test
teacher and parent approval
Personal satisfaction
Decision
Sleep late
Trade-Offs
Opportunity Cost
Extra study time
Extra sleep time

17. Decision-Making at the Margin
Instead of the “all or nothing” approach we often consider several options among the two choices.
For Example:
What if I woke up 30 minutes earlier and studied
What if I woke up 40 minutes earlier and studied
Considering options between the two choices is called thinking at the margin
Most decisions are made while thinking at the margin
The next decision-making grid will look at the same example of sleep or study but will think at the margin

18. Decision-Making at the Margin
Options
Benefit
Opportunity Cost
1st Hour of extra study time
Grade of C on Test
One hour of sleep
2nd hour of extra study time
Grade of B on Test
2 hours of sleep
3rd hour of extra study time
Grade of B+ on Test
3 hours of sleep
This is an example of comparing costs and benefits at the marginal level
This is called a “cost benefit analysis”

19. Production Possibilities Curve

20. What is a PPC?
* Defined: a graph that shows alternative ways to us an economy’s resources.
A. They reveal if goods/resources are being used to their full efficiency
B. They reveal if goods are not being used in best way possible
C. PPC’s can change
-Anytime there are additional resources, new labor, changes in technology, etc, can cause shifts in the PPC

21. Information Learned from PPCs
Ability to determine opportunity costs
As you move along the curve, it shows that as more of one product is produced, less of the other product is being produced.
The opportunity cost of producing more of the 1st product is the amount of the 2nd product that cannot be produced.
Concepts revealed by PPC:
Efficiency
Producing the maximum amount of goods and services possible
If production is efficient, the point will be on the PPC itself
Underutilization
Producing fewer goods and services than possible
If there is an underutilization of production, the point will be inside the PPC

22. Production Impossibility
Information Learned from PPCs
Example: Efficiency and Underutilization
Each point on the PPC represents efficiency
Points inside the curve mean underutilization
Points outside the curve cannot be met or production is impossible
Production
Impossibility
Underutilization 22

23. Production Possibility Frontiers
Assume a country can produce two types of goods with its resources – loaves of bread and bran muffins
If it reallocates its resources (moving round the PPF from A to B) it can produce more bran muffins (from 0 to about 72) but only at the expense of fewer loaves of bread (from 12 to 8).
If it devotes all resources to loaves of bread, it could produce a maximum of 12 loaves of bread.
If it devotes all its resources to bran muffins, it could produce a maximum of 100 bran muffins.
If the country is at point A on the PPF, it is producing the maximum amount of loaves of bread possible given the country’s limited resources A 12 10 B 8
Loaves of Bread 6
These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) 4 2 20 40 60 80
100
Bran Muffins