1. Unit 1: Foundations of Economics What comes to your mind when you hear the word SCARCE?

2. What is Economics?
“A science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants.” – Addison-Wesley

4. What is Economics? So then the big two concepts are that:
Resources are scarce!
Society has unlimited needs and wants!
Economics decides the “best” way of providing one to the other

5. VOCABULARY:
Need
Want
Economics
Goods
Services

6. Scarcity
Definition
A situation in which the amount of something actually available would not be sufficient to satisfy the desire for it, if it were provided free of charge.

7. … MORE VOCABULARY Shortage Factors of Production Land Labor Capital
Entrepreneurship
Physical Capital
Human Capital

8. Factors of Production
There are 4 factors that must all be used to produce anything
Natural Resources (also referred to as “land”)

9. Factors of Production
There are 4 factors that must all be used to produce anything
Labor – effort of a person for which they are paid

10. Factors of Production
There are 4 factors that must all be used to produce anything
Capital – human-made resources used to create other goods

11. Factors of Production 3 Kinds of Capital
Physical Capital – Also called Capital Goods, objects that are used to produce other goods

12. Factors of Production 3 Kinds of Capital
Human Capital – knowledge or skills workers get from education and experience

13. Factors of Production
There are 4 factors that must all be used to produce anything
Entrepreneurship – person who takes a risk in combining the other 3 factors to create a new good

14. VOCABULARY CONTINUED…
Entrepreneurs

15. Making Economic Decisions
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.”

16. FIVE appealing VACATION Destinations…
Section 1.2 – Opportunity Cost
FIVE appealing VACATION Destinations…
Hawaii
Paris
Dunns River Falls, Jamaica
Volunteer: What is your first choice? What is your second choice?
Ireland
Alaska

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

18. Making Economic Decisions
1st Place is what you would choose to do
2nd Place is your opportunity cost (you give it up to do option 1)

19. Making Economic Decisions
What other option do you have other than using 3 hours for one task?
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

20. Making Economic Decisions
Options
Benefit
Opportunity Cost
0 hours studying, 3 hours sleeping
F on Test
None
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

21. Example
If a person who wants to buy a compact disc (CD) has just enough money to buy one, and chooses CD A instead of CD B, then CD B is the
a. trade-off
b. opportunity cost
c. decision at the margin
d. opportunity at the margin

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

23. Production Possibilities

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

25. Production Possibilities
To move from one point to another, the economy must make trade-offs

26. Production Possibilities
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 above the line is presently impossible, until new resources are available

27. Production Possibilities
Why does the graph curve instead of making a straight line?
Law of Increasing Costs – as production increases for one item, more and more resources are necessary to increase production of the second item! The OPPORTUNITY COST increases…

28. Production Possibilities
Every resource is best suited for certain types of goods
Farmland and cows make butter
Metals and factories make guns and many times you hear about butter vs. guns due to military spending on weaponry using resources …
To convert butter production to guns, you must sell the cows and build new factories on the land

29. An economy that is efficient is …
producing the maximum amount of goods and services .. now that’s efficient!