What is What is Economics?Economics?

SWBAT:SWBAT:Explain why limited productive Explain why limited productive

resources and unlimited wants results resources and unlimited wants results in scarcity, opportunity costs, and in scarcity, opportunity costs, and

tradeoffs for individuals, businesses, tradeoffs for individuals, businesses, and governments.and governments.

SSEF1-2SSEF1-2

What is Economics?What is Economics?

Economics is the study of how Economics is the study of how people seek to satisfy their needs people seek to satisfy their needs and wants by making choices.and wants by making choices.

Scarcity and Choice, Scarcity and Choice, Section 1Section 1

A “need” is something that is A “need” is something that is necessarynecessary for survival (food, air, for survival (food, air, shelter)shelter)

A “want” is something we desire that A “want” is something we desire that is is notnot essentialessential to survival. to survival.

Goods vs. ServicesGoods vs. Services

Goods are physical objects such as Goods are physical objects such as shoes and shirts.shoes and shirts.

Services are actions or activities that Services are actions or activities that one person performs for another.one person performs for another.

ScarcityScarcity

Scarcity implies limited quantities of Scarcity implies limited quantities of resources to meet unlimited wants.resources to meet unlimited wants.

Economics attempts to solve the Economics attempts to solve the problem of scarcity.problem of scarcity.

What type of scarcity does What type of scarcity does this political cartoon this political cartoon

represent?represent?

Shortage vs. ScarcityShortage vs. Scarcity

A “shortage occurs” when producers A “shortage occurs” when producers will not or cannot offer goods or will not or cannot offer goods or services.services.

Shortages can be temporary or long Shortages can be temporary or long term.term.

““Scarcity” Scarcity” alwaysalways exists because our exists because our needs and wants are always greater needs and wants are always greater than our resource supply. than our resource supply.

What resourcesWhat resources were used to produce the were used to produce the

fruits and vegetables shown fruits and vegetables shown here?here?

Factors of ProductionFactors of Production

Economists call the resources that Economists call the resources that are used to make all goods and are used to make all goods and services the factors of production.services the factors of production.

Factors of production: land, Factors of production: land, labor, and capital (two types: labor, and capital (two types: human and physical).human and physical).

Factors of Production Factors of Production (cont.)(cont.)

LandLand refers to all natural resources refers to all natural resources used to produce goods and services.used to produce goods and services.

LaborLabor is the effort that a person devotes is the effort that a person devotes to a task for which that person is paid.to a task for which that person is paid.

CapitalCapital is any is any human-made resourcehuman-made resource that is used to produce other goods and that is used to produce other goods and services.services.

CapitalCapital

Physical capital includes buildings, Physical capital includes buildings, machinery, tools, etc.machinery, tools, etc.

Human capitalHuman capital is the knowledge and is the knowledge and skills a worker gains through education skills a worker gains through education and experience.and experience.

It assists in saving time and money It assists in saving time and money when producing goods.when producing goods.

Closing ThoughtClosing Thought

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

Can you identify the Can you identify the physical capital and human physical capital and human

capital in this cartoon?capital in this cartoon?

Where did they come Where did they come from????from????

Journey of the French Journey of the French Fry…Fry…

Journey of the French Fry….Journey of the French Fry…. Started as a potato; planted in soil, Started as a potato; planted in soil,

had to be watered, fertilized, had to be watered, fertilized, harvested, processed, frozen, harvested, processed, frozen, transported to a supermarket.transported to a supermarket.

Cooked, sprinkled with salt, and Cooked, sprinkled with salt, and eaten.eaten.

Scarce resources used to Scarce resources used to make the French Fry…make the French Fry…

Land: Small quantity of land for Land: Small quantity of land for agricultureagriculture

Labor: Limited amount of people Labor: Limited amount of people available to plant, harvest, and available to plant, harvest, and process the potato crops.process the potato crops.

Physical Capital: farming equipment Physical Capital: farming equipment

Making Choices…Making Choices…EFFICIENTLYEFFICIENTLY

SWBAT:SWBAT:(SSEF2) Give examples of how rational (SSEF2) Give examples of how rational decision-making entails comparing the decision-making entails comparing the

marginal benefits and the marginal costs of marginal benefits and the marginal costs of an action.an action.

Think about it…Think about it…Fred is a businessman - he sells snack Fred is a businessman - he sells snack foods to students at Mays. He is only foods to students at Mays. He is only able to sell a maximum of 21 bags (per able to sell a maximum of 21 bags (per class period) of Flaming Hots or 15 class period) of Flaming Hots or 15 Capri Sun drinks (per class period). He Capri Sun drinks (per class period). He has found that the best combination of has found that the best combination of sales are: 15 Capri Suns (CS) and 0 sales are: 15 Capri Suns (CS) and 0 Flaming Hots (FH); 8 FH and 14 CS; 14 Flaming Hots (FH); 8 FH and 14 CS; 14 FH and 12 CS; 18 FH and 9 CS; 20 FH FH and 12 CS; 18 FH and 9 CS; 20 FH and 5 CS; 21 FH and 0 CS. However, and 5 CS; 21 FH and 0 CS. However, his cousin suggested he try to sale 10 his cousin suggested he try to sale 10 bags of Flaming Hots and 12 Capri bags of Flaming Hots and 12 Capri Suns. Would following his cousin’s Suns. Would following his cousin’s advice be the most productive?advice be the most productive?

Trade OffsTrade Offs

Trade Offs are Trade Offs are all the alternatives all the alternatives that we give upthat we give up whenever we whenever we choose one course of action over choose one course of action over another.another.

Types of Trade-OffsTypes of Trade-Offs

Individual Trade Offs Individual Trade Offs

Businesses Trade OffsBusinesses Trade Offs

Society Trade Offs: “Guns or Society Trade Offs: “Guns or Butter”Butter” Should we produce more military Should we produce more military

goods (“guns”) or more consumer goods (“guns”) or more consumer goods (“butter”)?goods (“butter”)?

Opportunity CostsOpportunity Costs

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

??????????

If you choose to use your savings to If you choose to use your savings to pay off a credit card bill instead of pay off a credit card bill instead of going on the senior trip, what is your going on the senior trip, what is your opportunity cost?opportunity cost?

What is the opportunity What is the opportunity cost represented in this cost represented in this

cartoon?cartoon?

Marginal Costs vs. Marginal Marginal Costs vs. Marginal BenefitsBenefits

The additional cost incurred from The additional cost incurred from one more unitone more unit

The additional benefit gained from The additional benefit gained from one more unit one more unit

Thinking at the MarginThinking at the Margin

When you’re trying to decide, “how When you’re trying to decide, “how much more, or how much less?”…much more, or how much less?”…you are you are thinking at the marginthinking at the margin

Rational Decisions are made when Rational Decisions are made when the marginal benefits equal or the marginal benefits equal or exceed marginal costsexceed marginal costs

Cost/Benefit Analysis Cost/Benefit Analysis PracticePractice

Fred has decided to increase his Fred has decided to increase his supply of Capri Suns. It will cost supply of Capri Suns. It will cost Fred $75 to purchase an additional Fred $75 to purchase an additional case of drinks. Once sold, this will case of drinks. Once sold, this will result in $100 of additional revenue. result in $100 of additional revenue. Did Fred make a rational decision?Did Fred make a rational decision?

Productions Possibilities Productions Possibilities Curve (PPC)Curve (PPC)

Graphical Graphical representation of representation of how an economy how an economy makes decisions makes decisions

Shows the Shows the choiceschoices an economy can an economy can make with respect make with respect to its to its availableavailable resourcesresources

Interpreting the PPCInterpreting the PPC

All points on the curve represent All points on the curve represent the the efficientefficient production of goods production of goods and services (you are using your and services (you are using your resources well)resources well)

Any point inside the curve Any point inside the curve represents an underutilization of represents an underutilization of resources (you’re wasting resources resources (you’re wasting resources – could be producing more)– could be producing more)

Help Fred make the most Help Fred make the most efficient decision…efficient decision…

Fred is a businessman - he sells snack foods to Fred is a businessman - he sells snack foods to students at Mays. He is only able to sell a students at Mays. He is only able to sell a maximum of 21 bags (per class period) of maximum of 21 bags (per class period) of Flaming Hots or 15 Capri Sun drinks (per Flaming Hots or 15 Capri Sun drinks (per class period). He has found that the best class period). He has found that the best combination of sales are: 15 Capri Suns (CS) combination of sales are: 15 Capri Suns (CS) and 0 Flaming Hots (FH); 8 FH and 14 CS; 14 and 0 Flaming Hots (FH); 8 FH and 14 CS; 14 FH and 12 CS; 18 FH and 9 CS; 20 FH and 5 FH and 12 CS; 18 FH and 9 CS; 20 FH and 5 CS; 21 FH and 0 CS. However, his cousin CS; 21 FH and 0 CS. However, his cousin suggested he try to sale 10 bags of Flaming suggested he try to sale 10 bags of Flaming Hots and 12 Capri Suns. Would following his Hots and 12 Capri Suns. Would following his cousin’s advice be the most productive?cousin’s advice be the most productive?

Make a Production Make a Production Possibilities Chart…Possibilities Chart…CombinatioCombinatio

nnFlaming Flaming

HotsHotsCapri Capri SunsSuns

AA

BB

CC

DD

EE

FF

CombinatCombinationion

FlaminFlaming Hotsg Hots

Capri Capri SunsSuns

Flaming Hots Flaming Hots Opportunity Cost Opportunity Cost

(Capri Suns (Capri Suns foregone)foregone)

AA

BB

CC

DD

EE

FF

Rational and Productive Rational and Productive

Decision-Making RevisitedDecision-Making Revisited

SWBAT: (SSEF2) Give examples of how SWBAT: (SSEF2) Give examples of how rational decision-making entails rational decision-making entails

comparing the marginal benefits and the comparing the marginal benefits and the marginal costs of an action.marginal costs of an action.

Marginal Cost/BenefitMarginal Cost/Benefit

The The additionaladditional costs or benefits costs or benefits associated with a decisionassociated with a decision

Rational DecisionsRational Decisions

Rational decisions are made when Rational decisions are made when the marginal benefit of a decision the marginal benefit of a decision meets or exceeds the marginal cost meets or exceeds the marginal cost of that decisionof that decision

Why are PPCs/PPFs Why are PPCs/PPFs valuable to decision-valuable to decision-

makers?makers? Graphical illustration of opportunity

cost to produce more or one good (or service)

Shows how efficient (or inefficient) an economy is working

Shows growth or reduction

Interpreting the PPC/PPFInterpreting the PPC/PPF

Points on the curvePoints on the curve – efficient – efficient combination of goods/servicescombination of goods/services

Points inside (under) the curvePoints inside (under) the curve – – inefficient use of resourcesinefficient use of resources

Points outside the curvePoints outside the curve – – unattainable points (current unattainable points (current productive resources will not allow productive resources will not allow the economy to produce the economy to produce

Why would the PPC/PPF Why would the PPC/PPF move?move?

When the quantity or quality of land, When the quantity or quality of land, labor, capital, or technology labor, capital, or technology growsgrows, , the ENTIRE PPC will the ENTIRE PPC will shift to the shift to the right right

When the quantity or quality of land, When the quantity or quality of land, labor, and capital labor, and capital shrinksshrinks, the , the ENTIRE PPC will ENTIRE PPC will shift to the leftshift to the left

Think about it…Think about it…

Refer back to our example of Fred Refer back to our example of Fred selling Flaming Hots and Capri selling Flaming Hots and Capri Suns. What circumstances would Suns. What circumstances would cause his PPC/PPF to shift to the cause his PPC/PPF to shift to the right? What circumstances would right? What circumstances would cause his PPC/PPF to shift to the cause his PPC/PPF to shift to the left?left?

Opportunity Costs and the Opportunity Costs and the PPC/PPFPPC/PPF

The PPC/PPF is a The PPC/PPF is a graphical illustration of the opportunity cost involved in producing more of one good (or service)

Increasing Opportunity Increasing Opportunity CostCost

A convex curve A convex curve always indicates always indicates increasing increasing opportunity cost.opportunity cost.

The opportunity cost The opportunity cost of an additional of an additional storage shed (8 to 9) storage shed (8 to 9) is 70 crab puffs. is 70 crab puffs.

Storage shed Storage shed production results in production results in increasing increasing opportunity costs.opportunity costs.

Constant Opportunity Constant Opportunity CostCost

The opportunity cost The opportunity cost of additional sheds of additional sheds does not change. does not change. Each additional unit Each additional unit costs the same costs the same amount of crab amount of crab puffs.puffs.

The opportunity cost The opportunity cost of more butter also of more butter also remains constant.remains constant.

Decreasing Opportunity Decreasing Opportunity CostCost

When the curve is When the curve is concave, there are concave, there are decreasing decreasing opportunity costs.opportunity costs.

The opportunity The opportunity cost of the first the cost of the first the storage shed is storage shed is 250 crab puffs; the 250 crab puffs; the ninth shed is only ninth shed is only 15.15.