INTRODUCTION TO ECONOMICS Chapter 1: What is Economics?

Section 1: Economics Vocabulary  Economics: The study of how people seek to satisfy their needs and wants by making choices  Need: Something essential for survival  Want: Something that people desire but that is not necessary for survival  Both are influenced by culture, age, geographic region, socioeconomic class, etc.  Goods: The physical objects that someone produces  Services: The actions or activities that one person performs for another

How the Economy Works  Scarcity: The principle that limited amounts of goods and services are available to me unlimited wants  Scarcity always exists because resources are scarce Time, money, natural resources, water, etc.  Shortage: A situation in which consumers want more of a good or service than producers are willing to make available at a particular price  Ex: Musical chairs

Entrepreneurs: The 4 th Factor of Production  Entrepreneur: A person who decides how to combine resources to create goods and services  They recognize a need or a want  They must assemble the factors for production necessary to fill the need/want  Venture Capitalists: Business people who provide funding to entrepreneurs to starts new businesses   Zuckerberg: Who took the bigger risk?

Factors of Production  Factors of Production: The resources that are used to make goods and services  Land: All natural resources used to produce goods and services  Labor: The effort people devote to tasks for which they are paid  Capital: Any human-made resource that is used to produce other goods and services Physical Capital: Human-made objects used to create other goods and services Human Capital: The knowledge and skills a worker gains through education and experience Ex: Doctors Benefits of Capital: More time, money and knowledge Ex: Dishwasher

Section 2: Opportunity Cost  Trade-off – an alternative we sacrifice when we make a decision  The act of giving up one benefit in order to gain another, greater benefit  Types of Trade-offs  Individuals – we all make sacrifices to gain something else  Businesses – decisions that impact the manner by which resources are used in production  Society – decisions that impact all in society such as foreign and domestic spending and policy-making

What does it mean? OPPORTUNITYCOST  a chance, especially one that offers some kind of advantage  to require the payment of a particular sum

Opportunity Cost  Opportunity Cost – an alternative given up in exchange for something else  Depends on the individual/business/govt’s priorities  Can include time, money, and experience What do they value and what are they willing to sacrifice? Ex: Sleep or study? (Grid pg. 10)

Guns or Butter?  Guns or butter – a phrase that refers to the trade-off that nations face  The decision between producing military goods (guns) or consumer goods (butter) with one’s limited resources

Guns or butter Graph

What is the Opportunity Cost of…? PersonalSocietal  Childbirth  Stay-at-home mom  Schooling  Home ownership  Vacation  Luxury Goods  College  Marriage  Car  Education  Military  Foreign treaties  Road construction  School testing  Taxes  Healthcare  Marriage  Low-birth rates

Thinking at the Margin  Thinking at the Margin - deciding to do or use one additional unit of some resource  Decision-making becomes the cost/benefit analysis  Not just “all or nothing” but a compromise, the sweet spot, varied degree of cost/benefit Ex: Sacrifice only one hour of sleep to study  Marginal Cost: The extra cost of adding one unit  Marginal Benefit: The extra benefit of adding one unit

What is a Production Possibilities Curve (PPC)?  A graph showing alternative ways to use an economy’s productive resources  Where the axes meet shows the amount of output that axis can create in the given situation

Production Possibilities Frontier  Production Possibilities Frontier – the line on the PPC that shows the maximum, most efficient output of given resources  Can be shown in various combinations to illustrate a varied output of those two products

The Give and Take  There is always a trade-off because of the scarcity of the factors of production  We are seeking the most efficient use of all resources to create the maximum amount of both products

An Example Of Production Possibilities Frontier Your scarcity of resources is one tree

An Example Of Production Possibilities Frontier You can either make 3 boats with the tree

An Example Of Production Possibilities Frontier Or the tree can be used to make 6 chairs.

An Example Of Production Possibilities Frontier To yield a combination of both, the output number of each (boats and chairs) will be compromised from its maximum amount.

Maximum Output of Scarce Resources  3 boats  2 boats  1 boat  0 boats  0 chairs  2 chairs  4 chairs  6 chairs BoatsChairs

Efficiency  Efficiency – using resources in such a way as to maximize the production of goods and services  PPCs can illustrate the opportunity cost of production decisions  Underutilization – using fewer resources than an economy is capable of using  Any point below the frontier would be considered inefficient or underutilization

Efficiency versus Underutilization

Growth  PPC reflects current economic conditions  But resource and technological availability is constantly shifting  When this availability increases, it allows growth in the economy=production capacity increase PPC frontier shifts to the right  When availability of resources decreases, it causes decline in the economy=production capacity decrease PPC frontier shifts to the left  Factors that cause shifts in availability: aging population, technological advances, migration and immigration of people, natural resources, conservation, war and loss of land, etc.

What is Cost? And Does it Always Mean Money?  Cost – is the alternative we give up when we choose one option over another  Law of Increasing Costs –As we shift factors of production from making one good or service to another, the cost of producing the second item increases  But why the increase? Some resources are better suited to certain modes of production than others  Less efficient use of resources for a certain product causes increase in cost Ex: Watermelon vs. Shoes-not enough high quality farm land

Future Entrepreneurs  If you were to start a business, what would it be?  What need or want do you think needs to be filled in society or in Westlake specifically? What demographic are you selling to? Who is your target group? How will you advertise to this group?  What skills do you have that lend well to the business?  What factors of production would you need? Land, labor, physical capital, human capital, etc.  What level of investment do you need? Start-up costs? Kickstarter or venture capitalists?  Write a short business plan addressing all of these questions with your group! Store, product, service, entertainment activity-something you wish existed in Westlake!

Franchises: Is it for you? Subway Radio Shack A&W Restaurants Century 21 Real Estate International House of Pancakes Embassy Suites Hotels Anytime Fitness Hampton by Hilton Jack in the Box Jimmy John’s Denny’s Pizza Hut 7-Eleven Dunkin Donuts Taco Bell McDonald’s  Pick one of these franchises and determine the following for your choices:  The pros and cons of buying into a franchise.  Consider the opportunity costs that are associated with it.  What forms of capital will you need to get started?  What resources do you have at your disposal?  What are your long term gains and loses?