What is. Chapter 1 For Example –You must choose how to spend your time –Businesses must choose...

What isWhat is

Chapter 1

For Example

– You must choose how to spend your time

– Businesses must choose how many people to hire

•The study of how things are made, The study of how things are made, bought, sold and usedbought, sold and used

•The study of how people make choices The study of how people make choices to satify their wantsto satify their wants

It is

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The study of ECONOMICS begins with the idea that people cannot have everything the need and want

NEED

• Something like air, food, shelter that is necessary for survival

WANT

• An item that we desire but is not essential to survival

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• To look at the world economically we can focus on the decisions people make.

• Because people cannot have everything they need or want, they must consider their options and decide which choice will fill their needs best.

• Why must people make choices?

•Scarcity• Living in America – a relatively wealthy country, many

citizens find this hard to understand because store shelves brim with goods.

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Goods• Anything that can be grown or manufactured

–Food

–Clothing

–Cars

–Tools

–Jewelry

–Televisions

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Services

• Actions or activities people do for others in exchange for money or something else of value

• Barbers, doctors, waiters, and entertainers all provide services

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Resources

• Factors of production that are used in the promotion of goods and services

• Types

–Natural

–Human

–Capital

–entrepreneurship

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• A country with many resources is capable of satisfying its people’s wants and needs better than a country with few resources

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• No country has all the resources it needs

• Scarcity is a problem all countries must face.

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Scarcity

• The inability to satisfy all wants at the same time

• All resources and goods are limited

• This requires that choices be made

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Scarcity

• Economics is about solving the problem of scarcity

• Scarcity affects the economic decisions a country and its people will make concerning what and how much to produce, how goods and services will be produced and who will get what is produced

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Choice

• Selecting an item or action from a set of possible alternatives

• individuals must choose/make decisions about desired goods and services because these are limited

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Scarcity vs. Shortages• Scarcity occurs when

there are limited quantities of resources to meet unlimited needs or desires

• Always exists because our needs and wants are always greater than our resources

• Goods and services are scarce because they are made from resources that are scarce.

• Shortages occur when producers will not or cannot offer goods or services at current prices

• Can be temporary or long term

• Example:

–Christmas demand

–Wars & droughts

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The Factors of Production – resources that are used to make all goods and services

• Land All natural resources (materials found in nature) that are used to produce goods and services. Includes fertile land for farming, and products that are in the or on the land such as coal, water and forests.

• Labor Any effort a person devotes to a task for which that person is paid. Includes medical aid, artist’s creation, repair of a product, installation of a product.

• Capital Any human-made resource that is used to create other goods and services. Two kinds:

– Physical capital

– Human capital

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Physical Capital• Human-made objects used to create other goods and

services

• Includes buildings and tools

• Important factor of production

• Can save people and companies a great deal of time and money

• When we create or buy physical capital we usually become more productive

• Typical benefits–Extra time–More knowledge–More productivity

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Human Capital• People can invest in themselves

• Knowledge and skills a worker gains through education and experience

• Economy requires both human and physical to produce goods and services

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Entrepreneurs• The ambitious leaders who

decide how to combine land, labor and capital resources to create new goods and services

• Individuals who take risks to develop original ideas, start businesses, create new industries and fuel economic growth

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Scarce Resources• Economists say all goods and services

are scarce because the land, labor, and capital used to create them are scarce.

• The combining of human, natural, capital, and entrepreneurship resources to make goods or provide services

• Resources available and consumer preferences determine what is produced.

• Supplies of land, labor and capital are all limited and have many alternative uses.

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The Factors of Popcorn Production

Land

Popping Corn

Vegetable Oil

Labor

The human effort needed to pop the corn

Capital

Corn-PoppingDevice

Chapter 1

Section 1 Assessment1. 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.

2. 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

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Activity!!

Think About it:

• Land, labor and capital, also known as factors of production, are the ‘inputs’ or resources, used to create all goods and services.

• What role do entrepreneurs play in producing goods and services?

Do it:

• Create your own diagram or chart that demonstrates what entrepreneurs do.

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Section 2 - Opportunity Cost• Does every decision you make involve trade-offs?

• How can a decision-making grid help you identify the opportunity cost of a decision?

• How will thinking at the margin affect decisions you make?

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Trade-offs and Opportunity Cost• Trade-offs are all the alternatives that we give up whenever we

choose one course of action over others.

– An alternative that we sacrifice when we make a decision

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

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All individuals, businesses and large groups of people make decisions that involve trade-offs.

• If a you choose to spend time at work, you give up watching a movie or going to a baseball game.

• Choosing to play soccer might prevent you from working on the yearbook or from having a part-time job.

• Farmers who want to plant broccoli cannot use the same land at the same time to grow cauliflower.

• A manufacturer who uses all their equipment to build chairs eliminates the possibility of building tables or desks at the same time.

• A country that decides to produce more military goods (“guns”) has fewer resources to devote to consumer goods (“butter”) and vice versa.

•Phrase that refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods

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Opportunity Cost

• What is given up when a choice is made-the highest valued alternative forgone

• Individuals, businesses or governments must consider the value of what is given up when making a choice

• The most desirable alternative given up as a result of a decision is called opportunity cost.

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Even ordinary decisions that we make every day have an opportunity cost!

• Sleep late or wake up early for a ski trip?

• Sleep late or wake up early to eat your breakfast?

• Sleep late or wake up early to study for a test?

• Most likely you would not choose sleep late for all 3 decisions. Your decision would depend on the opportunity cost – whatever you were willing to sacrifice!

What would you do???

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The Decision-Making Grid• Economists encourage us to consider the benefits and costs of our decisions.

• The grid can help you determine whether you are willing to accept the opportunity cost of a choice you are about to make.

• Karen is trying to decide whether to sleep late or get up early to study for a test. Obviously, she cannot do both.

Benefits • Enjoy more sleep• Have more energy during the day

• Better grade on test• Teacher and parental approval• Personal satisfaction

Decision • Sleep late • Wake up early to study for test

Opportunity cost • Extra study time • Extra sleep time

Benefits forgone • Better grade on test• Teacher and parental approval• Personal satisfaction

• Enjoy more sleep• Have more energy during the day

Sleep late Wake up early to study

Alternatives

Karen’s Decision-making Grid

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Thinking at the Margin• When you decide how much more or less to do, you are thinking

at the margin.

• Example, each additional hour of study would yield a higher test score.

• Cost/Benefit Analysis – comparing opportunity costs and benefits at the margin to enable you to make a decision, comparing what you will sacrifice to what you will gain.

– Once opportunity cost outweighs the benefits, no more units should be added

Options

1st hour of extra study time

2nd hour of extra study time

3rd hour of extra study time

Benefit

Grade of C on test

Grade of B on test

Grade of B+ on test

Opportunity Cost

1 hour of sleep

2 hours ofsleep

3 hours of sleep

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Section 2 Assessment1. 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.

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.

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Section 3 - Production Possibilities Graphs

• What is a production possibilities graph?

• How do production possibilities graphs show efficiency, growth, and cost?

• Why are production possibilities frontiers curved lines?

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Watermelons (millions of tons)

Shoes(millions of pairs)

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Production Possibilities Graph


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A productionpossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

Production Possibilities• A production possibilities graph shows alternative ways that an

economy can use its productive resources.

• The production possibilities frontier is the line that shows the maximum possible output for that economy.

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c (14,12)

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Production Possibilities• Axes can show and compare categories of goods. (farm v factory)

• Axes can display any pair of specific goods or services.

(watermelons v shoes)

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c (14,12)

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f (21,0)

Production Possibilities• Economists begin by deciding which goods or services to examine

(farm v factory – again).

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c (14,12)

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Production Possibilities• The graph also helps economists determine if they can produce BOTH

goods (shoes AND watermelons).

• Using made-up data (like below), points can be plotted and connected to draw a line that shows combinations of production of these goods or the PRODUCTION POSSIBILITIES FRONTIER.

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c (14,12)

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Production Possibilities• Any point on the line represents a point in which all resources are being

used to maximize a combination of the two products.

• Opportunity Cost on the FRONTIER – look at any point on the curve and compare it to another and compare production of the goods to each other. What is the opportunity cost of producing the combination of goods at Point C instead of at Point D?

•3 million pairs of shoes

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Trade-Offs

• Each point on the graph represents a trade-off

• The more shoes produced meant fewer watermelons were grown.

• Why? Because the factors of production are limited.

• Land, labor & capital are all scarce.

• Using the factors of production to make one product means that fewer resources are left to make something else.

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Efficiency, Growth, & Cost• Production possibilities graphs can show us how

efficient an economy is, whether an economy has grown or shrunk, and the opportunity cost of a decision to produce more of one good or service.

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g (5,8)

A point of underutilization

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

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Efficiency• Efficiency means using resources in

such a way as to maximize the production or output of goods and services.

• An economy producing output levels on the production possibilities frontier is operating efficiently.

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g (5,8)

A point of underutilization

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

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Underutilization• IF the economy weakens and leads to lay-offs,

farms and factories will produce fewer goods.

• This would be represented by a point INSIDE the line.

• Any point inside the line indicates underutilization- using fewer resources than the economy is capable of using; much less than the maximum possible production.

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Future productionPossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

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Growth

• If more resources become available, or if technology improves, an economy can increase its level of output and grow.

• When this happens, the entire production possibilities curve “shifts to the right,” indicating growth

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Future productionPossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S

Growth

• By contrast, if a country’s production capacity decreases the curve shifts to the left.

• Possible reasons:

– Country goes to war

– Land is lost

– Population ages, becomes less healthy, less educated labor supply resulting in decreased human capital

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c (14,12)

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Cost• Cost - the alternative we give up when we choose one option

over another (to an economist cost = opportunity cost)

• Increasing cost – each time we increase the production of a particular good, the sacrifice in terms of the goods given up increases

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Watermelons (millions of

tons)


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c (14,12)

d (18,9)

Law of Increasing Costs• States that as we shift factors of production from making one good or service

to another, the cost of producing the second item increases.

• Reasons? Some resources may be suited better for farming than for manufacturing

• Explains why production possibilities frontiers curve – as we move along the curve, we trade off more and more to get less and less output

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Resource and Technology• In order to create production possibility curves, the

goods and services a country can produce must be determined, given its current resources.

– Land/natural resources

– Work force (labor)

– Physical & human capital

• Physical & Human resources reflect a vital ingredient

– TECHNOLOGY

• A country’s production possibilities depend on both its technological level and the resources it has available.

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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.

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.

Section 3 Assessment

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