Chapter 1

Economics assumes a few key things about the world around us….1. Societies face scarcity2. Most activity is guided by personal gain3. Societies and the actors within attempt to

maximize utility4. Markets organize trade most efficiently5. Most governments attempt to stabilize

economies through policy6. Predicting economic conditions and

outcomes is difficult

Economics – Study of how societies deal with scarcity

Scarcity – involves limited quantities of resources to meet unlimited wants

Needs – something necessary for survival

Wants – an item desired but not necessary for survival A luxury

How do we satisfy wants? Wants and needs break

down into two simple categories:

Goods – which are tangible, physical objects: NOUNS (ex – car, food, ipod)

Services – actions or activities: VERBS (ex – haircut, waiting tables, housecleaning)

**Notice that these are things we spend our money on day-to-day

Scarcity exists everywhere In the classroom, on the road

or on the playground

What if all the children wanted to play on the swings at the same time?

What about musical chairs?

Shortage results from a company being unable or unwilling to supply at a certain quantity or at a certain price

Scarcity involves the finite resources used to fulfill infinite wants There will ALWAYS be scarcity; it is naturally

occurring Shortages are human created

In an effort to combat limited resources governments and businesses employ a handful of strategies

1. Business may raise prices2. Governments may ration supplies3. Governments may control prices

http://yadayadayadaecon.com/clip/47/

1. List what the boy received from the tree.

(or what the tree gave)

2. Divide these items into wants and needs.

3. What were the “costs” of these gifts? What are

“costs” in general?4. Who benefitted? Why?5. Is the boy wrong, or is it possible for

everyone to benefit from a transaction?

“Is this a sad tale? Well, it is sad in the same way that life is depressing. We are all needy, and, if we are lucky and any good, we grow old using others and getting used up. Tears fall in our lives like leaves from a tree. Our finitude is not something to be regretted or despised, however; it is what makes giving (and receiving) possible. The more you blame the boy, the more you have to fault human existence. The more you blame the tree, the more you have to fault the very idea of parenting. Should the tree's giving be contingent on the boy's gratitude? If it were, if fathers and mothers waited on reciprocity before caring for their young, then we would all be doomed.”

Timothy P. Jackson (Emory University)

Most of the things we use or buy are made from other things

The things we use to make other things are our productive resources

The easiest way to spot the difference between societies is by who owns the factors of production

They can be renewable or nonrenewable

Land – natural resources used to produce goods and services

Labor – effort devoted to a task for which the person is paid (work)

Capital – physical: human made objects to create other objects or human: the knowledge and skills we possess

Entrepreneurship – taking risks, developing ideas, starting businesses, pulling together resources

http://www.youtube.com/user/mjmfoodie#p/search/3/efSttefJiwQhttp://www.youtube.com/watch?v=OS_9A_EA30Mhttp://www.visualeconomics.com/how-the-average-american-uses-energy/

When you make a decision there are always options and alternatives

Trade offs are ALL of the alternatives that we give up whenever we choose something

ex – working part-time to earn money vs. playing sports, sleeping, studying, hanging with friends...

Opportunity Cost – the most desirable alternative given up as the result of a decision OR the cost of anything is what you give up to get it

http://economicsinthemovies.swlearning.com/demo/demo.html

Countries/nations must make decisions just like individuals and businesses

For countries those decisions are based on balancing military (security) vs. consumer needs (domestic)

In economics military needs are called guns and consumer needs are called butter

**Remember scarcity and that no one, not even a country, can have unlimited amounts of everything at the same time—decisions and tradeoffs must be made

“The promises of the Great Society have been shot down on the battlefields of Vietnam”

Vietnam War (Guns) LBJ’s War on Poverty (Butter)

http://www.youtube.com/watch?v=1UDBziEsn0Y

Many decisions are not “all or nothing,” but involve marginal changes – incremental adjustments to an existing plan.

Margin involves adding or subtracting one more unit earning one more $, producing one more stick of

butter, getting one more minute/hour of sleep

One must compare the benefits and costs, what will be sacrificed and what will be gained with the addition or subtraction of one more—that’s “at the MARGIN”

http://www.youtube.com/watch?v=SSZJT4H5cPI

Graph that shows alternate ways to use an economy’s resources or the opportunity cost of any decision

Efficiency – using resources in a way to maximize production of goods and services Less cost, more profit

Underutilization – user fewer resources than one is capable of using (inefficiency) Getting very little after great effort

Growth – with growth – PPC shifts to the right, with decline- PPC shifts to the left Growth involves producing more over time at less

cost Cost – value of anything given up to achieve

a purpose

The Curve, or frontier, itself can shift to the left or right

Rather than just moving along the line by changing the amount of each good we produce

the entire curve can shift left or right by changing the amount of inputs or their costs

Frontier is the line on the graph that

shows the different combinations of production between two items

AGAIN, when the graph’s frontier shifts to the right, signaling growth, an economy has generally become MORE PRODUCTIVE

As an economy switches production from one good or service to another, (ex- guns to butter, watermelons to shoes), more & more resources are necessary to increase the production of the second item Therefore that economy’s

opportunity cost is increasing. Why?

Why do costs increase like this?

Many times the increase is because some resources are better suited for other purposes than increasing the production of another good In the shoes & watermelons example, as we

move along the curve left to right ––> we sacrifice MORE resources to get LESS goods, or output

Thus becoming less efficient, or incurring increasing costs and obtaining less productivity

Is farmland very good for making guns?

The best way to make a rational decision is to follow five simple steps1. Define the Problem2. List the Alternatives (Understand your

options)

3. State the Criteria (What are the priorities?)

4. Evaluate the Alternatives (Determine the tradeoffs and opportunity costs)

5. Make a Rational Decision (Marginal benefits exceed or equal marginal costs)