Scarcity and the Science of Economics

Chapter 1

Imagine…A girl and her boyfriend get shipwrecked on a deserted island. After surveying the island they are pleased to find that it is full of plenty of fruits, nuts, small slow dumb animals and even wild corn. There are no animals or plants present that can threaten their health. They have an axe, a needle, and even some fish hooks.

What is Economics in General? Economics is the science of scarcity and

choices. Scarcity: the condition that results from

society not having enough resources to produce all the things people would like to have

Since we are unable to have everything we desire, we must make choices on how we will use our resources.

In economics we will study the choices of individuals, firms, and governments.

The Economic Problem Scarcity… What is it?

Limited resources but unlimited wants Unlimited wants VS Limited Resources

You can’t buy 10 candy bars if the store only has 5 candy bars to sell.Can’t buy 3 burgers if you only have enough money for 1.What are some things that you “want” to have? Do you have the resources to purchase them?

Needs VS WantsWhat are some of your needs…wants

NEEDS vs WANTSNEEDS

Essentials…the basics of life

FoodClothingShelter

NEEDS vs WANTS (cont)

WANTSSimply increase the

quality of living. We would like to have but is not necessary

Goods, Services, and Consumers

Goods are items that are economically useful or satisfy an economic want. They are tangible and can be classified as consumer/capital and durable/nondurable

Services are work performed for someone and are intangible

Consumers use goods and services to satisfy wants and needs.

Types of Goods Tangible: you can touch Intangible: you can’t touch-services Durable Goods-Last more than 3yrs.

EX: jewelry, appliances, cars, ect. Non-Durable Goods-last less than

3yrs.Ex: food, clothing, toothpaste, soap, ect.

Consumer Goods: for self-use, final use by the individual

Capital Goods: used by businesses to produce other products.

Value, Utility and Wealth Value is worth expressed in dollars

and cents. Scarcity by itself is not enough to create value. For something to have value, it must also have utility.

Paradox of Value Example: diamonds & water

Utility is a good’s or service’s capacity to provide satisfaction, which varies with the needs and wants of each person.

Wealth is the accumulation of goods that are tangible, scarce, useful, and transferable to another person. Wealth does not include services.

There is No Such Thing as a Free Lunch

Because resources are scarce, trade-offs must be made.

Opportunity Cost: The highest valued alternative that must be sacrificed when choosing an option

Even if it is free to you, it is not free to society

There is No Such Thing as a Free Lunch

With every choice you risk the life you would have had; with every decision, you lose it.” – Richard Bach

3 Basic Economic Questions What to produce?

With limited resources, deciding what is needed the most is often a factor in determining what will be produced. What is the need or want of this product?

What is the point of making a product that no one is going to buy. Businesses need to make money…so they choose products that people want.

3 Basic Questions (Cont) How should it be produced?

Technology, labor, capital, etc. getting the lowest cost to make

the product.Are we going to make the

product from scratch or will a machine be making the product. What will each option cost?

Will having new technology allow us to lower our expenses?

3 Basic Questions (Cont) Whom should it be produced for?

Who is going to use this product?Did Apple market the ipod to the

large population of elderly people in the U.S. or the youth? Why?

Most goods and services are distributed to individuals through a price system.

If you want it and can afford to buy it…you will.

Products can also be distributed through other means; force, first come, lottery, majority, ect.

The Scope of Economics

Economics deals with the description of economic activity—Gross Domestic Product, unemployment rate, government spending, tax rates, etc.

Analysis looks at the “why” and “how” of economic activity—why prices go up and down, for example, or how taxes affect savings.

The Scope of Economics (cont)

Explanation refers to how economists communicate knowledge of the economy and its activities to the society’s population.

Prediction refers to how yesterday’s and today’s economic activities advise us of potential future activity.

Factors of Production Land = All natural resources that are

used to produce goods and services. Anything that comes from “mother nature.” (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.)

Labor = Any effort a person devotes to a task for which that person is paid. (manual laborers, lawyers, doctors, teachers, waiters, etc.)

Factors of Production(cont)Two Types of Capital:

1. Physical Capital- Any human-made resource that is used to create other goods and services (tools, tractors, machinery, buildings, factories, etc.)

2. Human Capital- Any skills or knowledge gained by a worker through education and experience (college degrees, vocational training, etc.)

Factors of Production (cont) Entrepreneurship= ambitious leaders that

combine the other factors of production to create goods and services.

Examples-Henry Ford, Bill Gates, Steven Jobs, Inventors, Store Owners, etc.

Entrepreneurs:1.Take The Initiative2.Innovate3.Take the Risk of Failure

Profit= Revenue - Costs

Classify the Factors of Production in the following scenario:

You decide to order a pizza to satisfy the munchies. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk.

The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Classify the different Factors of Production in the following

scenario You decide to order a pizza to satisfy the munchies. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk. The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

The Production Possibilities Model

Every decision has an opportunity cost – the cost in foregone opportunities.

A production possibility curve is used to illustrate opportunity cost.

The production possibilities curve shows the trade-offs among choices we make.

A production possibility curve measures the maximum combination of outputs that can be achieved from a given number of inputs.

It slopes downward from left to right.

Therefore, all the combinations on the curve meet these assumptions

Combinations that lie inside (below) the curve represent an inefficient use of resources

Combinations that lie outside (above) the curve represent production impossibilities, giving existing technologies

Production Possibilities (cont.)

Considering different ways to fully employ its resources allows an economy to analyze the combination of goods and services that leads to maximum output.

An economy pays a high cost if any of it resources are idle. It cannot produce on its frontier and it will fail to reach its full production potential.

Economic growth made possible by more resources, a larger labor force, or increased productivity causes a new frontier for the economy.

Production Possibilities (cont.)

Production Possibilities (cont.)

Trade-offs and Opportunity Cost

ALL decisions involve trade-offs. Trade-offs are all the alternatives that we give

up whenever we choose one course of action over others.

(Examples: going to the movies or going to a game

The most desirable alternative given up as a result of a decision is known as opportunity

cost.What are trade-offs of deciding to go to

college? What is the opportunity cost of going to

college?

Consumer RightsIn 1960, President John F. Kennedy told

Congress that consumers were entitled to four kinds of protections:

1. The right to safety: to be protected against the marketing of goods that are hazardous to health or life.

2. The right to be informed: to be protected against fraudulent, deceitful, or grossly misleading information, advertising, labeling, or other practices, and to be given the facts to make an informed choice.

3. The right to choose: to be assured, wherever possible, access to a variety of products and services at competitive prices.

Consumer Right (cont)4. The right to be heard: to be assured that consumer interests will receive full and sympathetic consideration in the formulation of government policy, and fair and expeditious treatment in its administrative tribunals.President Nixon added the fifth consumer right:5. The right to redress- to receive adequate payment from producers if they are harmed by their products.

The Consumer Bill

of Rights

• Nations that invest in the health, education, & training of their people will have a more valuable workforce that produces more goods & services.

• People that have training are more likely to contribute to technological advances, which leads to finding better uses of natural resources & producing more goods.

• Economic growth in a country is measured by the country’s Gross Domestic Product (GDP) in one year.o It measures only what has been produced within

the country--this doesn’t include products that are imported. It is much better for the economy of a country to produce its own goods and services (this increases the country’s GDP).

Economic Growth (cont)

To encourage economic growth and raise the living standards of its citizens, there must be investment in human capital and capital goods.

Human capital refers to the knowledge and acquired skills a person has that increase his or her ability to conduct activities with economic value

Workers add to their stock of human capital throughout their lives, especially via education and job experience

Specialization Attempting to produce everything

you want to consume yourself limits both your production and consumption possibilities.

To specialize, you must figure out what you “do best.” Economists define “best” as that which you produce at the lowest opportunity cost.

“Trading for the rest” by “selling” the goods or services you can produce at low opportunity costs and then “buying” things you would produce at a high opportunity cost requires division of labor.

Specialization and trading goods and services with others can help everyone.

Specialization (cont)

Division of labor is the breaking down of a job into separate, smaller tasks performed by different workers.

It is a form of specialization, making use of differences in skills.

Because of specialization, the American economy displays a high degree of economic interdependence.

• We rely on others, and others rely on us, to provide the goods and services we consume.

• As a result, events in one part of the world can have an economic impact on other parts of the world.

The Circular Flow of Economic Activity

Markets are locations/mechanisms for buyers and sellers to trade. They are classified as local, regional, national, global, and cyberspace.

A factor market is where people earn their incomes. Factor markets center on the four factors of production: land, capital, labor, and entrepreneurs.

A product market is where people use their income to buy from producers. Product markets center on goods and services.

The Circular Flow of Economic Activity (cont.)

Economists* Economists use models to simplify reality in order to improve our understanding of the world. * As simplifications of reality, models need assumptions.* Cost-benefit analysis helps economists evaluate alternatives by looking at each choice’s cost and benefit.* Taking small, incremental steps in implementing an economic decision helps economists test whether the estimated cost of the decision was correct.

Why Study Economics?1.Studying economics will help us know

how the economy works on a daily basis.2. It helps us understand a free enterprise

economy, where people and privately owned businesses rather than the government make the majority of the economic decisions.

3. The study of economics helps us to become better decision makers.

4. The world of economics is complex and dynamic, as is our society.