1. Introduction to Economics and Scarcity

2. What is Economics?
The study of how individuals and nations make choices about how to use scarce resources to fulfill their wants.
Keys to understanding Economics:
know the meanings of choices (decisions), scarcity, and resource

3. Choice
In Economics, Choices are the decisions we (people, businesses, and governments) have to make with the resources we have.

4. Resources
Anything that people can use to make or obtain what they want.
Includes:
Money, tools, skill, knowledge, time, etc…

5. Scarcity
The universal problem that faces all societies because there are not enough resources to produce everything that people want.
Scarcity requires that people make choices about the goods and services they use.
Unlimited Wants v. Limited Resources

6. Unlimited Wants
There are three reasons why wants and needs are virtually unlimited:
Goods eventually wear out and need to be replaced.
New or improved products become available.
People get fed up with what they already own.

7. Limited Resources All resources are limited. Examples: Oil Time Money
Fresh Water

8. Economics: The Factors of Production

9. Factors of Production Land
Labor
Capital
Entrepreneurship
Resources that can be used to produce goods and services.
Goods are the items that people buy.
Services are the activities done for others for a fee.

10. Land
Natural Resources
Trees
Water
Oil
Land

11. Labor The Work that People do. Teacher Student Factory Worker Doctor
Lawyer
Truck Driver

12. Capital The (man-made) property used to make other Goods and Services.
Tools
Money
Factory
Hammer
Trucks

13. Entrepreneurship The Ability of Individuals to Start New Businesses.
Small Business Owner
CEO
Businessman
Self-Employed

14. Economics: Trade-Offs and Choice

15. What is a trade-off?
Trade-Off - Exchanging one thing for the use of another.
Opportunity Costs - the value of the next best alternative that had to be given up for the alternative that was chosen.

16. Opportunity Cost
The opportunity cost principle states the cost of one good in terms of the next best alternative.
For example, a farmer decides to grow carrots on his allotment. The opportunity cost of his carrot harvest is the alternative crop that might have been grown instead (example - potatoes).

17. Opportunity Cost (cont.)
Here are some other examples :
Group
Decision
Individual
Should I buy a CD or go to the movies?
School
Should we build a music facility or tennis courts?
Country
Should we increase police pay or improve roads?

18. Opportunity Cost (cont.)
With your neighbor or partner, create a list of all the opportunity costs that you will occur when you attend college.

19. Opportunity Cost (cont.)
The cost of tuition, books, and supplies (the costs of room and board only appear if these costs differ from the levels that would have been paid in your next-best alternative)
Foregone income (this is usually the largest cost associated with college attendance)
Psychic costs (the stress, anxiety, etc. associated with studying, worrying about grades, etc.)

20. Economic Models

21. What is an economic model?
A simplified representation of the real world.

22. Purpose of Models
Creating- a model is good if it provides useful material for analyzing the way the real world works.
Testing- Testing is done by using a hypotheses, educated guess, or prediction.

23. Circular Flow Model

24. Circular Flow Model (cont.)
Notice that goods & services and resources flow around the economy in one direction, while money flows around the economy in the opposite direction. This is because money is normally exchanged for goods & services, or for resources.

25. Circular Flow Model (cont.)
Households (people), in the circular flow, own all the labor, land and capital.
In the Factor Market, households sell the services of labor, land and capital to firms in exchange for wages, rent and profits.

26. Circular Flow Model (cont.)
In the Product Market, households spend their income on products that are produced by firms.

27. Production Possibilities
All the combinations of goods and services that can be produced from a fixed amount of resources in a given period of time.

28. Production Possibility (Cont.)
Production Possibilities Curve

29. Production Possibility Curve
The Production Possibility Curve is a graph that depicts the opportunity cost between any two items produced. It shows the maximum obtainable amount of one commodity for any given amount of another commodity.