Chapter 1: What is Economics?

Section 1: Scarcity and Factors of Production

What is Economics?

The study of scarcity and choices Scarcity- limited resources for unlimited wants “There is no such thing as a free lunch”

Choices People need to decide how to use limited resources – Need: necessary for survival – Want: desirable but not essential

Goods and Services Goods: physical objects that are produced Services: actions performed

Factors of Production Land Labor Capital (Physical & Human)

Land Natural resources used to produce goods. – Oil, Trees, Iron-Ore

Labor Effort of people to create a product. – Manufacturers, managers, engineers, etc.

Capital Human made resources used to produce other goods. – Physical Capital – Human Capital

Physical Capital Human-made goods used to produce other goods.

Human Capital Skills and knowledge of a worker acquired through education and experience.

Entrepreneurship: The 4 th Factor of Production Entrepreneur: someone who combines land, labor, and capital to creates and services

In groups… Choose an object What was necessary for its creation? – Land? – Labor? – Capital (Physical and Human)? – Report back to class

Section 2: Opportunity Cost Because of scarcity: we need to make decisions about how to manage resources.

Economics: Science of Decision Making Trade-offs are alternatives given up when making a decision

Guns or Butter? Countries need to decide how they will use their resources If a country chooses to produce more military goods (“guns”) they will have less consumer goods (“butter”)

Opportunity Cost Opportunity cost is the most desirable alternative given up in a decision. DecisionBenefitOpportunity Cost Go to CollegeEducation, increased job opportunity Money earned/saved from working Work after High SchoolMoney earned/savedEducation, increased job opportunity

Thinking at the Margin Black and White decisions in economies are rare, thinking at the margin considers compromises and multiple scenarios.

Decisions at the Margin OptionsBenefitOpportunity Cost 1 st hour of extra study timeGrade of C on testOne hour of sleep 2 nd hour of extra study timeGrade of B on test2 hours of sleep 3 rd hour of extra study timeGrade of A on test3 hours of sleep

Decisions at the Margin OptionsBenefitOpportunity Cost Work for 1 hour$10One hour of studying Work for 2 hours$20Two hours of studying Work for 3 hours$30Three hours of studying

Section 3: Production Possibilities Curves Watermelons (millions of tons)Shoes (millions of pairs) Production possibilities curves plot decision making on a graph, or curve

Production Possibilities Curve Watermelon s (millions of tons) Shoes (millions of pairs)

Frontier The Frontier represents maximum efficiency: the full production capability of the economy

Underutilization Underutilization: economy is not producing at capability – WHY?

Future Production Possibilities Curve Sometimes the entire curve shifts outward WHY?

Examples of trade-offs: Soviet Union The former Soviet Union prioritized military development at the expense of consumer goods and development.