Chapter 1Scarcity and the Factors of Production

In this lesson, students will be able to define the following key concepts: Scarcity Economics The Factors of Production Entrepreneur

In a magical world, there is no need forEconomics but we live in a world of Scarcity. We need Economics.

Economics is the study of how individuals, families, businesses, and societies use limited resources to fulfill

their unlimited wants.All economies must answer 3 basic questions:

1. What goods and services should be produced?2. How they should be produced?

3. Who should share in what is produced?

Wants Versus NeedsPeople use the terms needs and wants interchangeably. In economic terms, wants are anything other than what is needed for basic survival. Needs are things required for basic survival: food, clothing shelter.Needs are few and basic, wants are unlimited.

Scarcity

• Scarcity is the realization that our wants and desires are unlimited but the world’s natural resources are limited.

• In other words, we always want more than we have.• We cannot wave a magic wand to get everything we

desire.

Wouldn’t it be nice if we couldjust wave the magic wand and multiply our dollars?

Economics

• Due to scarcity, we cannot have everything we want or need. Therefore, we have to make choices. • Economics is the study of the choices

we make.

Which will you choose in a world of limited resources?

Scarcity should not be confused with a shortage.Scarcity is the condition of not being able to have all of the goods and services one wants, because wants exceed what can be made from all available resources at any given time.

The Factors of Production

• Whenever we make a good (an object) or a service (an action performed), we need the Factors of Production.

• The Factors of Production are: Land ( Natural Resources) Labor (Paid Workers) Capital (Money and Machines)

Entrepreneur

• An entrepreneur is a person who puts together land, labor, and capital to make new businesses.

• If your mother opened her own business, she is an entrepreneur.

• Bill Gates is also an entrepreneur.

E. Napp

Questions for Reflection:

• Define scarcity.• Explain how scarcity affects your daily life.• What is Economics?• Why does Economics exist?• Describe the Factors of Production.• Do you want to be an entrepreneur? Explain

your answer.

Section 2-Opportunity Cost

Trade-offs Opportunity Cost Guns or Butter Thinking at the Margin

Scarcity exists. We have endless desires but limited resources. In Economics, we must choose.

Trade-off

• A trade-off occurs when we choose one course of action over another.

• In Economics, we can never have everything we want or need.• We must make choices.• A woman spends ten dollars buying her lunch at a local

restaurant. She cannot use the same ten dollars to buy a book. A trade-off has occurred.

Sometimes a society is more concernedwith economic growth than environmentalquality.

It’s All About Scarcity!

• Scarcity exists. Our wants and desires are limitless but our natural resources are limited.

• We can always want more than we have. As such, we are constantly choosing one course of action over another.

• We cannot spend ten dollars on a movie ticket and the same ten dollars on a restaurant meal.

Opportunity Cost• Whenever we make a decision, we receive

one thing but give other things up.• If I chose to study tonight for the examination,

I cannot go to the party or the movies or walk the dog.

• The most desirable alternative given up for the decision is the opportunity cost.

• Think of the opportunity cost as the best course of action of all those things you didn’t get.

Scarcity and opportunity costs affectindividuals, businesses, and governments.

Guns or Butter

• Government officials also must choose where to spend tax dollars.

• When a government spends more money on the military, it must invariably spend less money on consumer goods like roads and schools.

• Economists refer to government trade-offs as Guns or Butter.

Thinking at the Margin

• Sometimes a decision involves whether to add or subtract one additional unit of a resource.

• After studying many hours, a student might ask herself: “Should I study one more hour?”

• This question is a question at the margin.• Deciding whether to add or subtract one additional unit occurs

at the margin.

Should we study one more hour? That is thinking at the margin.

Questions for Reflection

• Provide examples of trade-offs.• Why do trade-offs exist?• What is the opportunity cost?• Provide an example of an opportunity cost?• What is thinking at the margin?• Provide an example of thinking at the margin.

Section 3-Production Possibilities Graphs

• In this lesson, we will examine the various options available to producers.

• Students will be able to define the following terms:Production Possibilities Graph

EfficiencyUnderutilization

Production Possibilities Frontier

Producers have options. Should afarmer grow corn or broccoli?

A Production Possibilities Graph

• A Production Possibilities Graph shows alternative ways of using a country’s or producer’s resources.

• If a farmer uses more of his land to grow corn, he has less land for broccoli.

• Every decision has its cost.

Efficiency

• An economy is efficient when it uses resources in such a way as to maximize production.

• Why is it important to be efficient?

Look at the graph. Where is efficiencyoccurring?

Underutilization

• Underutilization is the opposite of efficiency.

• Underutilization occurs when an economy uses fewer resources than it is capable of using.

• Why do producers avoid the underutilization of resources?

Look at the graph. Where isunderutilization occurring?

The Production Possibilities Frontier

• The line on the graph that shows the maximum possible production is called the production possibilities frontier.

• At the frontier, efficiency is occurring.

• However, new technology can shift the frontier. Think about it!

Don’t Forget Scarcity!

• A producer cannot produce everything.

• A producer must make choices.

• Remember: It’s all about scarcity. Our resources are limited but our wants and desires are unlimited.

It’s all about corn or broccoli.We can’t have it all.

Questions for Reflection:

• What does a production possibilities graph show?• Define efficiency.• Why is it important to be efficient?• Define underutilization.• What problems are created by underutilization?• What is the production possibilities frontier?