2 Chapter 1: What Is Economics? ScarcityFactors of ProductionDecision MakingOpportunity CostProduction Possibilities CurvesEvery day, you make choices that involve trade-offs --you choose one thing over another.
3 Chapter 1: What Is Economics? ScarcityFactors of ProductionDecision MakingOpportunity CostProduction Possibilities CurvesEvery day, you make choices that involve trade-offs --you choose one thing over another.
4 Section 1: Scarcity & Factors of Production People make choicesHow to spend time & moneyNeedsThings necessary for survivalAir, food, shelterWantsThings desired, but not essential to survivalPeople cannot have everything they need & want, so they have to make choices.People make choices for themselves & others (family, business, gov’t).Businesses make choices – how many people to employ & how much to produce.Gov’t makes similar choices -- how to raise money & what to spend it on.Gov’t chooses (make laws) how to divide scarce resources.Economics is study of how people seek to satisfy needs & wants by making choices.
5 Section 1: Scarcity & Factors of Production Scarcity requires people to make choicesResources are limitedmoney and timegoods and servicesEconomicsThe study of how people seek to satisfy their needs & wants by making choicesIf there was enough of everything for everyone all the time, there would be no scarcity.Time – personally spent & people in providing services.Goods: physical objects such as clothes or shoes.Services: actions or activities that one person performs for another.haircuts, dental services, tutoring
6 Section 1: Scarcity & Factors of Production Limited quantities of resources to meet unlimited wantsSupply and demandScarcities always existEconomics is about solving the problem of scarcityScarcity is the reason people have to make choices.If there was enough of everything for everyone all the time, there would be no scarcity.Scarcities always exist because needs and wants are always greater than resource supplies.
7 Section 1: Scarcity & Factors of Production Scarcity and shortage are not the sameShortageWhen a good or a service is unavailableBecause producers cannot or will not offer them at current pricesCan be temporary or long-termWars and droughts can also create shortages for many years.Goods and services are scarce because they are all made from resources that are scarce.
8 Section 1: Scarcity & Factors of Production Resources that are used to make all goods and servicesLandAll natural resources used to produce goods and servicesLaborEffort that people devote to a task for which they are paidCapitalAny human-made resource that is used to create other goods and servicesNatural resources are materials found in nature.They include fertile land for farming& products found in or on the land – coal, water, forests, etc.Labor includes medical aid provided by doctor,tightening of a clamp by an assembly line worker,artist’s creation of painting, or repair of TV.Factors of production are the “inputs” used to create all goods & services.Land, labor, & capital are “essential ingredients” for creating all good & services.All resources are scarce.Labor is a scarce resource because its availability is limited by thesize, time, age, and energy of a population.
9 Section 1: Scarcity & Factors of Production 2 Categories of capitalPhysical capitalHuman capital
10 Section 1: Scarcity & Factors of Production 2 Categories of capital1) Physical capitalHuman-made goods that are used to produce other goods or servicesSuch as tools, machinery, and buildingsImportant factor of production because it can save time and money (for people and businesses)Typical benefits: extra time, more knowledge, more productivitySometimes referred to as Capital GoodsA building helps workers do their work by providing protection and space.Tools = tractors, conveyor belts, pencilsWhen we create or buy physical capital to accomplish a job, we usually become more productive.
11 Section 1: Scarcity & Factors of Production 2 Categories of capital2) Human capitalSkills and knowledge gained by a worker through education and experiencePeople can invest in themselves.An economy requires both physical and human capital to produce goods & services.
12 Section 1: Scarcity & Factors of Production EntrepreneursAmbitious leaders who combine land, labor, and capital (factors of production) to create and market new goods and servicesFuel economic growthTake risksThey bring the factors of production together.They decide how to combine the factors of production.They take risks to develop original ideas,start businesses, create new industries.Fuel = increase, energize, stimulate, promote, encourage
13 Chapter 1: What Is Economics? Section 1 ReviewScarcityFactors of Production
14 Chapter 1, Section 1 Review: What is the difference between a shortage and scarcity?(a) A shortage can be temporary or long-term, but scarcity always exists.(b) A shortage results from rising prices; a scarcity results from falling prices.(c) A shortage is a lack of all goods and services; a scarcity concerns a single item.(d) There is no real difference between a shortage and a scarcity.(a)
15 Chapter 1, Section 1 Review: Which of the following is an example of using physical capital to save time and money?(a) hiring more workers to do a job(b) building extra space in a factory to simplify production(c) switching from oil to coal to make production cheaper(d) lowering workers’ wages to increase profits(b)
16 Chapter 1: What Is Economics? Section 1 ReviewScarcityFactors of ProductionAssignmentChapter 1, Section 1 – ReviewReview Chap 1 Section 1 (Word doc)
18 Chapter 1: What Is Economics? ScarcityFactors of ProductionDecision MakingOpportunity CostProduction Possibilities CurvesEvery day, you make choices that involve trade-offs --you choose one thing over another.
19 Section 2: Opportunity Cost People make choicesHow to spend time & moneyWhen we decide on one alternative, we gain one thing but lose something elseDecisions involve trade-offs
20 Section 2: Opportunity Cost Trade-offsAlternatives that we sacrifice when we make decisionsIndividualBusinessSocietyGovernmentTrade-offs are all the alternatives that we give up whenever we choose one course of action over another.Individual = working late vs. a movie; playing a sport vs. part-time jobBusiness = use of equip for bldg one product instead of another;how land, labor, and capital resources are used.Government – countries make decisions that involve trade-offs
21 Section 2: Opportunity Cost Trade-offsGovernmentGuns or butterA phrase that refers to trade-offs that nations face when choosing whether to produce more or less military or consumer goodsWhen a country produces more military goods, it has few resources for consumer goods.Ex: U.S. factories during WWIIWhen steel is used to make a tank, there’s less available for bridges or blgds.
22 Section 2: Opportunity Cost The most desirable alternative given up as the result of a decisionYour “2nd choice” is given up for your 1st choiceWhich would you choose?Sleep late or wake up early to study for a test?Sleep late or wake up early to eat breakfast before school?Sleep late or wake up early to leave for your dream vacation?Every ordinary decision that we make every day involves an opportunity cost.See Page 9 cartoon: Two choices for dinner – take it or leave it.You probably didn’t choose “sleep late” for all 3 decisions –your decision depended on the specific opportunity cost.If you chose to wake up early to study, would you have made the same decision on a Saturday?Different situations or “variables” can affect your decision.When we select an alternative (make a decision), we sacrifice at least one alternative and forgo its benefits.By recognizing what we are sacrificing, we can decide whether the decision is worth it.
23 Section 2: Opportunity Cost BenefitsEnjoy more sleepHave more energy during the dayBetter grade on testTeacher and parental approvalPersonal satisfactionDecisionSleep lateWake up early to study for testOpportunity costExtra study timeExtra sleep timeBenefits forgoneWake up early to studyAlternativesDecision-making GridSometimes a decision’s opportunity cost may be unclear or complicated.Using a Decision-Making Grid can help you determine whether you’re willing to accept the opportunity cost of a choice you’re about to make – the grid helps you to see what you may gain or lose when you have to choose between alternatives.Because of scarcity, you cannot do both – the time can only be occupied in one way.Page 10, Figure 1.2
24 Section 2: Opportunity Cost Thinking at the marginDeciding whether to do or use one additional unit of some resourceDeciding how much more or less to doIn the decision-making grid, we used the “all or nothing” approach.But decisions are rarely that simple.Think of margins (top, bottom, sides) on a piece of paper –smaller margins provides more room for writing on a page.
25 Section 2: Opportunity Cost Thinking at the MarginOptions1st hour of extra study time2nd hour of extra study time3rd hour of extra study timeBenefitGrade of C on testGrade of B on testGrade of B+ on testOpportunity Cost1 hour of sleep2 hours of sleep3 hours of sleepPage 11, Figure 1.3Need to consider the opportunity cost of each additional unit andcompare it to the benefit.At what point does paying an added cost generate little extra benefit?
26 Section 2: Opportunity Cost Cost and benefit at the marginCompare opportunity costs and benefits at the margin when making decisionsWhat will you sacrifice? What will you gain?Once the opportunity cost outweighs the benefits, no more units should be addedThe decision-making process is sometimes called cost/benefit analysisHow much time do you have (or are willing) to spend watching TV.How much money are you able or willing to spend on a car?How many people do you need to hire to get a job done?Legislators think at the margin:Who will receive a benefit … and how much?Formula for paying taxes, receiving unemployment, Pell Grants.
27 Chapter 1: What Is Economics? Section 2 ReviewDecision MakingOpportunity Cost
28 Chapter 1, Section 2 Review: 1. Opportunity cost is(a) any alternative we sacrifice when we make a decision.(b) all of the alternatives we sacrifice when we make a decision.(c) the most desirable alternative given up as a result of a decision.(d) the least desirable alternative given up as a result of a decision.(c)
29 Chapter 1, Section 2 Review: 2. Economists use the phrase “guns or butter” to describe the fact that(a) a person can spend extra money either on sports equipment or food.(b) a person must decide whether to manufacture guns or butter.(c) a nation must decide whether to produce more or less military or consumer goods.(d) a government can buy unlimited military and civilian goods if it is rich enough.(c)
30 Chapter 1: What Is Economics? Section 2 ReviewDecision MakingOpportunity CostAssignmentsEconomic Cartoons, pg. 12 of Unit 1 bookTextbook pg. 11, Applying Economic Concepts, #7 decision-making grid
32 Chapter 1: What Is Economics? ScarcityFactors of ProductionDecision MakingOpportunity CostProduction Possibilities CurvesEvery day, you make choices that involve trade-offs --you choose one thing over another.
33 Section 3: Production Possibilities Curves Economists use tools to analyze opportunity costs and trade-offsGraphs easily help us to see how one value relates to another valueProduction possibilities curveA graph that shows alternative ways to use an economy’s resourcesShow efficiency, growth, and costIndividuals, businesses, societies (countries’ governments)Book example: U.S. entered WWII – had to produce weapons and equipment to win war.Govt agencies switched output of America’s factories, farms, and minesfrom consumer products to military products-- changed from producing automobiles to military vehiclesWhether at war or not, nations must choose what to produce
34 Section 3: Production Possibilities Curves Drawing a Production Possibilities CurveDecide which goods or services to examineHorizontal and vertical axesPlot points on a graph indicating possible production choicesDraw a line connecting the plotted pointsProduction possibilities frontierThe line on a production possibilities graph that shows the maximum possible outputGoods or services = farm goods, factory goodsSee textbook example on pg. 14
35 Shoes (millions of pairs) Watermelons (millions of tons) 252015105Watermelons (millions of tons)Production Possibilities GraphSee Figure 1.4: Graph A and Graph B in textbook on pg. 14Graph A = no watermelons can be produced if all resources are usedto produce shoesGraph B = no shoes will be produced if all resources are used toproduct watermelonsSee Figure 1.5 on textbook pg 15
36 Section 3: Production Possibilities Curves Production possibilities frontierThe line on a production possibilities graph that shows the maximum possible outputAn economy working at its most efficient production levelsAny spot on the line represents a point where all resources are being used to produce a maximum combination of the two productsFigure 1.5 in textbook on pg. 15Combinations of production of both products
37 Section 3: Production Possibilities Curves Production possibilities frontierThe line on a production possibilities graph that shows the maximum possible outputAny spot on the line represents a point where all resources are being used to produce a maximum combination of the two productsEach point reflects a trade-offBecause land, labor, and capital are scarceUsing the factors of production to make one product means that fewer resources are left to make something elseFigure 1.5 in textbook on pg. 15
38 Section 3: Production Possibilities Curves Production possibility graphs:Efficiency, Growth, and CostIllustrate how efficiently an economy is workingIndicate whether an economy has grown or shrunkShow the opportunity cost of a decision to produce more of one good or service
39 Section 3: Production Possibilities Curves Production possibilities frontierRepresents an economy working at its most efficient level of productionEfficiency: Using resources in such a way as to maximize the production or output of goods and servicesAn economy producing output levels on the production possibilities frontier is operating efficiently
40 Section 3: Production Possibilities Curves Sometimes economies operate inefficientlyWhen workers are laid off, fewer goods are producedThis trade-off is represented by plotting a point inside the production possibilities frontierUnderutilizationWhat would happen if some farmers and factory workers were laid off?The farms & factories where they worked would produce fewer goods.Figure 1.6 in textbook on pg. 16
41 Section 3: Production Possibilities Curves UnderutilizationUsing fewer resources than an economy is capable of usingLess than the maximum possible productionUnderutilization = point G in Figure 1.6 in textbook on pg. 16
42 Section 3: Production Possibilities Curves Production possibility graphs(efficiency, growth, and cost)Reflect current production possibilities based on unchanging resourcesQuantity of resources constantly changes
43 Section 3: Production Possibilities Curves Production possibility graphs(efficiency, growth, and cost)If quantity or quality of available land, labor, or capital changes, then the curve movesIncrease or decrease in workersNew inventionsIncrease or decrease in landIf immigrants pour into a country, then more labor becomes available;so the maximum amount of goods a nation can produce increases.Aging or less healthy population (retirees/deaths) reduces available work force.Less education can reduce supply of labor & human capital.New inventions can allow workers to produce more goods at lower costs.Land (& labor & capital) can be lost when a country goes to war.Land & capital can be lost due to natural disasters (flooding).
44 Section 3: Production Possibilities Curves Production possibility graphs(efficiency, growth, and cost)When an economy grows or increases, the production possibilities curve “shifts to the right”When an economy shrinks or decreases, the production possibilities curve “shifts to the left”Current production possibilities frontier versusfuture production possibilities frontier if amount of land, labor, or capital resources changesFigure 1.6 in textbook on pg. 16
45 Section 3: Production Possibilities Curves Production possibility graphs(efficiency, growth, and cost)Cost: The alternative that is given up because of a decision“Cost” always means “opportunity cost”Law of increasing costsAs factors of production switch from one item to another, more and more resources are necessary to increase production of the second itemOpportunity cost increasesCost is not necessarily money.Figure 1.7 in textbook on pg. 17As we move along the curve, we trade off more & more to get less & lessadditional output – resources may not be optimally usedIt’s what is given up when one option is chosen over another.
46 Section 3: Production Possibilities Curves Production possibility graphs:Resources and technologyA country’s resources include its land and natural resources, its work force, and its physical and human capitalA country’s production possibilities depend on both the resources it has available and its level of technologyEach production method uses different technology, or know-how, to create productsTechnology = know-how (includes machinery & methods/process)
47 Chapter 1: What Is Economics? Section 3 ReviewProduction Possibilities Curves
48 Chapter 1, Section 3 Review: 1. A production possibilities frontier shows(a) farm goods and factory goods produced by an economy.(b) the maximum possible output of an economy.(c) the minimum possible output of an economy.(d) underutilization of resources.(b)
49 Chapter 1, Section 3 Review: 2. An economy that is using its resources to produce the maximum number of goods and services is described as(a) efficient.(b) underutilized.(c) growing.(d) trading off.(a)
50 Chapter 1, Section 3 Review: 3. Which of the following happens to a production possibilities curve when economic growth occurs?(a) The curve shifts to the left.(b) The curve becomes a straight line.(c) The curve shifts to the right.(d) The curve does not change at all.(c)
51 Chapter 1: What Is Economics? Section 3 ReviewProduction Possibilities CurvesAssignmentsTextbook pg. 21, Skills for Life, #’s 17-21Vocabulary Practice crossword puzzle, pg. 9 of Unit 1 book