FUNDAMENTALS OF ECONOMICS (TOPIC 1)LEARNING OBJECTIVES Explain why scarcity & choice are the basis of economics in every society Describe the 3 economic factors of production Identify why every decision involves trade-offs Explain the concept of opportunity cost Describe how people make decisions by thinking at the margin UNLIMITED WANTS, LIMITED RESOURCES Wants=something we desire Needs=something essential for survival People satisfy theirs wants & needs with goods and services Goods=physical objects that someone produces Services= actions or activities that one performs for another SCARCITY Economics: The study of how individuals, businesses, & governments seek to satisfy their needs & wants by making choices. Wants v. Needs On a sheet of paper, work with a partner and create a collage with wants on one side, & needs on the other SCARCITY MEANS MAKING CHOICES Unlimited wants, limited resources Scarcity does NOT mean shortage Shortage is when consumers want more of a GorS than producers are willing to make available at a particular price Scarcity is a naturally occurring limitation Entrepreneurs : people who decided how to combine resources to create new goods & services Factors of Production Land Labor Capital Physical Human Capital is any human-made resource used to create other G&S Human Capital Physical Capital Land Labor Land, Labor, Human Capital, Physical capital Human Capital Physical Capital Land Labor TRADE-OFF Act of giving up one benefit in order to gain another, greater benefit Football or school play? Part time job or volunteer work? Vacation or new car? College or job? Grow broccoli or squash? Make chairs or tables? New roads or education? GUNS OR BUTTER Guns (military goods) Butter (consumer goods) Govts face trade-offs GUNS OR BUTTER 1.2 OPPORTUNITY COST & TRADE-OFFS In most trade-off situations, one of the rejected alternatives is more desirable than the rest. The most desirable alternative somebody gives up as the result of a decisions is the opportunity cost. OPPORTUNITY COST The most desirable alternative somebody gives up as the result of a decision OPPORTUNITY COST Its Friday night. You decide to Study Econ, go to bed early, watch some Netflix (Making a Murderer or Walking Dead), go on a date with your significant other, or go to a party with friends Your opportunity cost is m Deciding how much more or less to do THINKING AT THE MARGIN When making decisions, economists look at opportunity cost & thinking at the margin. Marginal = Additional When you add one more additional unit, how much benefit will you get? MARGINAL COST/MARGINAL BENEFIT To make a sensible decision, weigh the marginal cost vs. the marginal benefit If MB is > MC, then go for it Extra cost of adding one additional unit Extra benefit of adding the same unit Look at the marginal cost of each extra hour of studying & compare it to the marginal benefit. Make your own Decision Making at the Margin chart In economics you need to decide how to use resources most efficiently The OC of using scarce resources for one thing instead of something else is often represented as a graph known as a Production Possibilities Curve (PPC) A farmer needs to decide what to grow & how much. PRODUCTION POSSIBILITIES CURVE To decide what and how much to produce, economists use a PPC The line, Production Possibilities Frontier, shows the different combinations possible Any spot on the line represents an economy working at its most efficient level The line, Production Possibilities Frontier, shows the different combinations possible Any spot on the line represents an economy working at its most efficient level Underutilization: the use of fewer resources than the economy is capable of using Any spot on the line represents an economy working at its most efficient level OPPORTUNITY COST A-B: 20 B-C: 60 C-D: 100 D Law of Increasing Opportunity Costs : Trade-offs get more & more expensive A-B: 250 B-C: 250 GROWTH A PPC is a snapshot In the real world, resources are constantly changing If quantity or quality of land, labor, or capital changes, the curve will move GROWTH A PPC is a snapshot In the real world, resources are constantly changing If quantity or quality of land, labor, or capital changes, the curve will move Growth examples: more immigration, new natural resources found, better technology Curve shifts left when production capacity decreases. Decrease in supplies, loss of land during war, natural disaster GROWTH If there is an increase in resources available for one product, then the PPF may shift at just one end.