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The Economic Way of Thinking

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Presentation on theme: "The Economic Way of Thinking"— Presentation transcript:

1 The Economic Way of Thinking

2 Chapter 1: The Economic Way of Thinking
Scarcity is the situation that exists because wants are unlimited and resources are limited.

3 Scarcity: The Basic Economic Problem
What Is Scarcity? Wants — desires that can be met by consuming products Needs — things necessary for survival Scarcity — lack of resources available to meet all human wants not a temporary shortage Economics — study of how people use resources to satisfy wants examines how individuals and societies choose to use resources organizes, analyzes, interprets data about economic behaviors develops theories, economic laws to explain economy, predict future Shortage – a situation when suppliers decide to cut production of a good

4 People Have Wants People make choices about all their needs and wants
Wants are unlimited, ever changing

5 Scarcity Affects Everyone
Scarcity affects which goods & services are provided Goods — physical objects that can be bought Services — work one person does for another for pay Consumer — person who buys good or service for personal use Producer — person who makes a good or provides a service

6 Scarcity leads to 3 economic questions every society must answer:
what will be produced? how will it be produced? for whom will it be produced?

7 Question 1: What Will Be Produced?
Societies must decide on mix of goods to produce depends in part on their natural resources Some countries allow producers and consumers to decide In other countries, governments decide Must also decide how much to produce; choice depends on societies’ wants

8 Question 2: How Will It Be Produced?
Decisions on production methods involve using resources efficiently decisions influenced by a society’s natural resources Societies adopt different approaches with unskilled labor force, might use labor-intensive methods with skilled labor force, might use capital-intensive methods

9 Question 3: For Whom Will It Be Produced?
How goods and services are distributed involves: how should each person’s share be determined? how will goods & services be delivered to people?

10 The Factors of Production
Factors of production — resources needed to produce goods and services include land, labor, capital, entrepreneurship supply of these factors is limited

11 Factor 1: Land Land means all natural resources on or under the ground
includes water, forests, wildlife, mineral deposits

12 Factor 2: Labor Labor is all the human time, effort, talent used to make products physical and mental effort used to make a good or provide a service

13 Factor 3: Capital Capital is a producer’s physical resources
includes tools, machines, offices, stores, roads, vehicles sometimes called physical capital or real capital Workers invest in human capital — knowledge and skills workers with more human capital are more productive

14 Factor 4: Entrepreneurship
Entrepreneurship — vision, skill, ingenuity, willingness to take risks Entrepreneurs anticipate consumer wants, satisfy these in new ways develop new products, methods of production, marketing or distributing risk time, energy, creativity, money to make a profit

15 Practice With a partner, decide on a good or service you would like to produce (of course it’s appropriate for class and legal). Tell me in your notes: 1. the good or service 2. each of the 4 factors of production -tell me the land you need to produce -tell me the labor you need to produce etc. We will share out when everyone is finished.

16 Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs: wants and scarcity consumer and producer factors of production and entrepreneurship

17 Economic Choice Today: Opportunity Cost
Making Choices Economic choices shaped by Incentives — benefits that encourage people to act in certain ways Utility — benefit or satisfaction gained from using a good or service To make choices, people economize: make decisions according to best combination of costs and benefits

18 There’s No Such Thing as a Free Lunch
All choices have a cost choosing one thing means giving up another, or paying a cost cost can take form of money, time, other thing of value

19 Trade-Offs and Opportunity Cost
Trade-off is alternative people give up when they make a choice Your most desired Trade-off is your OPPORTUNITY COST

20 Analyzing Choices Cost-benefit analysis — examination of costs, expected benefits of choices one of most useful tools for evaluating relative worth of economic choices

21 Analyzing Choices Example: Max’s Decision-Making Grid (text pg. 15)
Decision-making grid shows what one gets, gives up with each choice Max’s grid shows all possible choices for his free hours each week lists choices, benefits and opportunity cost of each choice With time, costs and benefits change; also goals and circumstances Changes influence decisions, make people alter original choices

22 Marginal Costs and Benefits
additional cost of using one more unit of a good or service Marginal benefit additional benefit of using one more unit of a good or service

23 Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs: incentive and utility trade-off and opportunity cost marginal cost and marginal benefit

24 Graphing the Possibilities
Analyzing Production Possibilities Graphing the Possibilities Economic models — simplified representations of economic forces Production possibilities curve (PPC) is one model maximum goods or services that can be produced from limited resources also called production possibilities frontier

25 Production Possibilities Curve
PPC based on assumptions that simplify economic interactions resources are fixed all resources are fully employed only two things can be produced technology is fixed

26 Production Possibilities Curve
PPC runs between extremes of producing only one item or the other Data is plotted on a graph; lines joining points is PPC shows maximum number of one item relative to other item PPC shows opportunity cost of each choice more of one product means less of the other

27 What We Learn from PPCs Each point on PPC represents efficiency (producing the maximum amount of goods and services possible); points inside curve mean underutilization (producing fewer goods and services than possible); outside curve cannot be met (unattainable)

28 Increasing Opportunity Costs
Law of increasing opportunity costs as production switches from one product to another, more resources are needed to increase production of second product anotherwords, each new unit costs more than last one Reasons for increasing cost of making more of one product need new resources, machines, factories must retrain workers Costs paid by making less and less of other product

29 Shifting the Production Possibilities
A country’s supply of resources changes over time Example: U.S. in 1800s grew, gained resources, workers, new technology new resources mean new production possibilities beyond frontier Increased production shown on PPC as shift of curve outward Increase in total output called economic growth

30 Reviewing Key Concepts
Explain how each term is illustrated by the production possibilities curve: underutilization efficiency

31 Case Study: The Real Cost of Expanding O’Hare Airport
Background Chicago’s O’Hare Airport is one of the busiest airports in the United States. Delays at O’Hare are commonplace. Considerable debate over the best solution to improve efficiency. What’s the Issue What are the real costs involved in airport expansion? Study these sources to determine the costs tied to the expansion of O’Hare airport.

32 Case Study: The Real Cost of Expanding O’Hare Airport {continued}
Thinking Economically Explain the real cost of expanding O’Hare Airport. Use information presented in the documents to support your answer. Who are the most likely winners and losers as a result of the O’Hare expansion? Explain your answer. How might supporters of expansion use a production possibilities model to strengthen their case?

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