SCARCITY Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have.

ECONOMICS Economics is the study of how people try to satisfy what appears to seemingly unlimited and competing wants through the careful use of relatively scarce resources.

MACROECONOMICS Macroeconomics involves problems encountered by the nation as a whole.

MICROECONOMICS Microeconomics is concerned with the economic problems faced by individual units within the overall economy.

POSITIVE VERSUS NORMATIVE ECONOMICS Positive economics is based on the scientific method. Normative economics involves value judgments.

Ceteris Paribus All other things remaining unchanged

THREE BASIC QUESTIONS What to Produce How to Produce For Whom to Produce

FACTORS OF PRODUCTION Land Labor Capital Entrepreneurs

Opportunity Cost The amount of one good that must be sacrificed to obtain an alternative good.

PRODUCTION POSSIBILITIES FRONTIER A Production Possibilities Frontier/Curve (PPF or PPC) is a diagram representing maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed.

GUNS and BUTTER Guns: Weapons of War Butter: Domestic Goods

HYPOTHETICAL PRODUCTION POSSIBILITIES POINTGUNSBUTTER A030 B325 C620 D915 E1210 F155 G180

OPPORTUNITY COSTS Opportunity cost of guns = change in butter production / change in gun production = 5/3 = 1.67 pounds butter Opportunity cost of butter = change in gun production / change in butter production = 3/5 = 0.6 guns

PRODUCTION POSSIBILITIES FRONTIER

HYPOTHETICAL PRODUCTION POSSIBILITIES WITH INCREASING COSTS POINTGUNSBUTTER A025 B323 C620 D915 E128 F150

HYPOTHETICAL PRODUCTION POSSIBILITIES WITH INCREASING COSTS

PRODUCTION POSSIBILITIES CURVE PPC Any point inside of the PPC means that resources are not being effectively utilized. Any point outside of the curve is an impossibility with current resources. Any point on the curve is an efficient use of resources.

PPC cont. If the curve moves to the right, this is an increase in productive capability. If the curve moves to the left, this is a decrease in productive capability.

PPC INCREASE

PPC cont. What is required to shift the PPC to the right?  An increase in productive resources  Greater productivity  Technology

PPC cont. What would cause the PPC to shift to the left?  A decrease in productive resources  A decrease in productivity

LAW OF INCREASING OPPORTUNITY COSTS Law that states that when more of a product is initially being produced, the higher the opportunity cost will be to produce still more

THE LAW OF INCREASING OPORTUNITY COSTS The Production Possibilities Curve is bowed outward because of the Law of increasing Opportunity costs? Why? Some resources are more adept at the production of one good than another.

ABSOLUTE ADVANTAGE A country has the absolute advantage when it can produce a product more efficiently than another country.  A country produces a product more efficiently when it can produce more than another country given the same or similar resources or  When the country can produce the same product with fewer inputs.

COMPARATIVE ADVANTAGE Comparative advantage means that a nation can produce the good with a lower opportunity cost. The country (or individual firm) that has the lowest opportunity cost has the comparative advantage, and should specialize in the production of that good or service.

HYPOTHETICAL EXAMPLE OF PRODUCTION COSTS (Output Model) Total number of units that can be produced with identical or similar resources. CountryWheatCloth Portugal63 England31

CALCULATIONS OF OPPORTUNITY COSTS Portugal Opportunity cost of wheat = 3/6 = ½ cloth Opportunity cost of cloth = 6/3 = 2 wheat England Opportunity cost of wheat = 1/3 = 1/3 cloth Opportunity cost of cloth = 3/1 = 3 wheat

OPPORTUNITY COST OUTPUT MODEL OC of Good Produced = Forgone Good/Good Produced or:

Portugal England PRODUCTION POSSIBILITIES FRONTIER

A HYPOTHETICAL EXAMPLE OF PRODUCTION COSTS (Input Model) Labor Hours Needed to Produce a Unit of: CountryWheatCloth Portugal1020 England2060

CALCULATIONS OF OPPORTUNITY COSTS Portugal Opportunity cost of wheat = 10/20 = ½ cloth Opportunity cost of cloth = 20/10 = 2 wheat England Opportunity cost of wheat = 20/60 = 1/3 cloth Opportunity cost of cloth = 60/20 = wheat

OPPORTUNITY COSTS INPUT MODEL OC of Good Produced = Good Produced / Forgone Good

PRODUCTION POSSIBILITIES FRONTIER An increase in productivity that affects only one product

The CIRCULAR FLOW OF ECONOMIC ACTIVITY The circular flow diagram shows the high degree of economic interdependence in our economy. In this diagram, the factors of production and the products made from them flow in one direction. The payment for the factors, which consumers spend on goods and services, flow in the opposite direction.

CIRCULAR FLOW DIAGRAM