2 ECONOMICS & SCARCITYChapter 18 & Chapter 19.1 – Objective – Explain how scarcity forces us to make choices. Compare trade-offs & opportunity costs. Describe the basic factors of production & their impact on economic activities.
3 Vocabulary Economics Scarcity Needs Wants Resources Study of how decisions are made when resources are limitedScarcityNot enough resources to satisfy all of our desiresNeedsThings required for survivalWantsThings we would like to have but don’t need for survivalResourcesThings used in making goods & providing services
4 SCARCITY IS THE FUNDAMENTAL ECONOMIC PROBLEM Because of Scarcity we must answer 3 questions in economicsWhat to Produce?How to Produce?Whom to produce for?What to produce – examples public services or defense (guns or butter) Ex: North Korea more weapons than foodHow to produce – what type of industry? Or pollution vs manufacturing, or oil vs wildlifeWhom to produce for? – how will the goods be distributed and at what cost? – Price determines who it goes to
5 Economic Models Economy All activity that affects production, distribution & use of goods & servicesEconomists use economic models to study the economyThey study past and present to predict the futureBased on assumptionsBusinesses & government make decisions based on modelsJust like science they use examples.What is wrong with this? Can’t predict the future.
6 What is the fundamental economic problem? MoneyTimeScarcityEconomics
7 Trade Offs & Opportunity Costs Trade Off – Decision that must be made when choosing between itemsOpportunity Cost – Value of the next best alternative that was given up when an economic choice was made (Think Cost = $)Can be time or money as wellYou always lose when faced with a trade offProduction Possibilities: The combinations of goods and services that can be produced from a fixed amount of resources. (Guns vs. Butter or Computers vs. Food).Examples – talk to your neighbor giving each other examples
8 Assessment Activity: Good Price Gum $ . 50 Soda $1.oo Movie Ticket All economic questions and problems arise from scarcity. Economics assumes people do not have the resources do satisfy all of their wants. Therefore, we must make choices about how to allocate those resources. We make decisions about how to spend our money and use our time. This activity will focus on the central idea of economics- every choice involves a cost.Let's say you have five dollars. What would you like to spend it on? There are a million things you would love to spend five bucks on, but let's imagine there are only three things out there you really want to buy: gum, soda, and movie tickets. Look at the price chart to the right and answer the questions.GoodPriceGum$ . 50Soda$1.ooMovie Ticket$5.00
9 Questions: How many sodas can you buy instead of one movie ticket? How many pieces of gum can you buy instead of one soda?If buy 4 pieces of gum, how many sodas could you have bought?For example, if you go to the movies you have to give up a certain amount of gum and soda. If you are a sodaholic, you have to give up five sodas. If you are gum fanatic, you surrender ten packs of gum. But, the opportunity cost of a movie is not five sodas and ten packs of gum. It is five sodas or ten packs of gum.
10 Which of the following best describes scarcity? Not enough goods for everyoneNot enough resources to provide every desireLack of desire to produce enough resourcesThe amount that people want
11 What is the opportunity cost of passing the Health Care Bill? More people will have health care coverage.Grandparents will be put to sleep because of Death Panels.Obama will become the Devil and the Four Horseman will arrive.The government will have less money to spend on other services like the military.
12 Production Possibilities Curve Curve shows the different rates of production for individual or 2-good country.Points on the curve are efficient.Outside curve not possible due to lack of resources.Inside the curve inefficient (2-good world could produce more)Increase in food, decrease in computers
13 Production Possibilities Curve Shows opportunity cost of producing 1 item and not the other.As we produce more of one item, the opportunity cost becomes greater because we are using resources not suited for making that item. – Must find a middle.
14 When individuals make decisions, the items they do not choose become: opportunity costshuman capitalgoods & servicesneeds
16 All of the following are questions we must ask because of scarcity except: When to produce?How to produce?What to produce?Whom to produce for?
17 Vocabulary Goods – Anything manufactured Capital Goods = Factor Goods – businesses use them to produce other goods or servicesConsumer Goods = Final Goods – goods used by a consumer and not used to produce other goods to be soldService – Something someone does for someone elseResources – anything used to make a good or provide a service – Same as Capital GoodsNatural Resource – anything from the earth used to make a good or provide a service
18 4 Factors of Production Capital Natural Resources (also known as Land) Money/resources used to start & continue a businessCan include Capital GoodsNatural Resources (also known as Land)Things that come from the earthIncludes land & energyLaborHired workers to help in productionEarn money which they use to buy goods & servicesDivision of Labor – separating big jobs into small onesEntrepreneurshipPeople willing to take risk in business (Decision Makers)Plan & supervise productionGive examples for each oneDivision of labor – assembly line – Henry Ford – give examplesEntrepreneurs – people who make the decisions
20 A sewing machine to make Nike shirts would be placed in which factors of production? LandLaborEntrepreneurshipCapital
21 Business Costs Fixed Costs Variable Costs Expense is the same no matter how much is producedExample - RentVariable CostsExpense changes with number produced changingFixed Costs + Variable Costs = Total CostMarginal Costextra cost of producing one additional unit of outputMarginal Benefit /Revenueadditional benefit after all costs are accounted for producing one more unitCost Benefit Analysiseconomic model used to compare marginal costs & benefits of a decisionCost Benefit analysis graph pg 508 – businesses use cost-benefit analysis to compare the marginal benefit to the marginal cost to make an economic decision.
22 Which economic term best explains a consumer’s choice of buying a new car or opening a savings account:trade-offscarcityopportunity costcomparative advantage
23 Considerations for Businesses ProductivityMeasure of the amount of output produced by a given amount of inputs in a specific period of timeSpecializationTakes place when people, businesses, regions & countries concentrate on goods or services that they can produce better than anyone elseExamples – China and electronicsHuman CapitalSum of the skills, abilities & motivations of people
24 ProductivityGoes up when more output can be produced when scarce resources are used efficientlyUsually labor and human capitalIncreases when businesses invest in human capitalIncreases with specialization
25 What is an example of a fixed cost of doing business? WagesCost of fuelPrice of materialsRent on a building