Chapter 1: What is Economics? Section 1

Slide 2 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Objectives 1.Explain why scarcity and choice are the basis of economics. 2.Describe what entrepreneurs do. 3.Define the three factors of production and the differences between physical and human capital. 4.Explain how scarcity affects the factors of production.

Slide 3 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Key Terms need: something essential for survival want: something that people desire but that is not necessary for survival goods: the physical objects that someone produces services: the actions or activities that one person performs for another scarcity: the principle that limited amounts of goods and services are available to meet unlimited wants

Slide 4 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Key Terms, cont. economics: the study of how people seek to satisfy their needs and wants by making choices shortage: a situation in which consumers want more of a good or service than producers are willing to make available at particular prices entrepreneur: a person who decides how to combine resources to create goods and services factors of production: the resources that are used to make goods and services

Slide 5 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Key Terms, cont. 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: the human-made objects used to create other goods and services human capital: the knowledge and skills a worker gains through education and experience

Slide 6 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Introduction How does scarcity force people to make economic choices? –Scarcity forces all of us to make choices by making us decide which options are most important to us. –The principle of scarcity states that there are limited goods and services for unlimited wants. Thus, people need to make choices in order to satisfy the wants that are most important to them.

Slide 7 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Scarcity and Choice People satisfy their needs and wants with goods and services. –People’s needs and wants are unlimited, yet goods and services are limited.

Slide 8 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Scarcity and Choice, cont. Economics begins with the idea that people cannot have everything they need and want. –The fact that limited amounts of goods and services are available to meet unlimited wants is called scarcity. Scarcity forces people to make choices but it is not the same as a shortage. Shortages are temporary while scarcity always exists.

Slide 9 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Shortage Which of the following would be an example of a shortage? a)Water cannot be used to irrigate one crop because it is used for another b)Star fruit are not available because few people want to buy them in the US c)A type of doll is not available because a limited number were made d)Workers are not available because they have other jobs

Slide 10 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Entrepreneurs Entrepreneurs play a key role in turning scarce resources into goods and services. Entrepreneurs are willing to take risks in order to make a profit. They: –Develop original ideas –Start businesses –Create new industries –Fuel economic growth

Slide 11 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Entrepreneurs, cont An entrepreneur’s first task is to assemble the factors of production: land, labor, and capital.

Slide 12 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Factors of Production: Land Land refers to all natural resources used to produce goods and services. These resources include: –Fertile land for farming –Oil –Coal –Iron –Water –Forests

Slide 13 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Factors of Production: Labor Labor is the effort people devote to tasks for which they are paid. Labor includes: –The medical care provided by a doctor –The classroom instruction provided by a teacher –The tightening of a bolt by an assembly-line worker –The creation of a painting by an artist –The repair of a television by a technician

Slide 14 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Factors of Production: Capital Capital refers to any human-made resource that is used to produce other goods and services. An economy requires both physical and human capital to produce goods and services. –Physical capital includes: Buildings Equipment Tools –Human capital includes: A college education Training Job experience

Slide 15 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Benefits of Capital Capital is a key factor of production because people and companies can use it to save a great deal of time and money. The benefits of capital include: –Increased efficiency –Increased knowledge –Better time management –Increased productivity

Slide 16 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Scarce Resources Checkpoint: Why are goods and services scarce? –All goods and services are scarce because the resources used to produce them are scarce. –There are only so many natural resources available to produce particular goods.

Slide 17 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Scarce Resources, cont. The amount of labor available to produce goods and services can be limited. Physical capital is also limited for many industries. Each resource may also have alternative uses. Individuals, businesses, and governments have to choose which alternative they want most.

Chapter 1: What is Economics? Section 2

Slide 19 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Objectives 1.Explain why every decision involves trade-offs. 2.Summarize the concept of opportunity cost. 3.Describe how people make decisions by thinking at the margin.

Slide 20 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Key Terms trade-off: the alternatives that we give up when we choose one course of action over another “guns or butter”: a phrase expressing the idea that a country that decides to produce more military goods (“guns”) has fewer resources to produce consumer goods (“butter”) and vice versa opportunity cost: the most desirable alternative given up as the result of a decision

Slide 21 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Key Terms, cont. thinking at the margin: the process of deciding how much more or less to do cost/benefit analysis: a decision-making process in which you compare what you will sacrifice and gain by a specific action marginal cost: the extra cost of adding a unit marginal benefit: the extra benefit of adding a unit

Slide 22 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Introduction How does opportunity cost affect decision making? –Every time we choose to do something, like sleep in late, we are given up the opportunity to do something less, like study an extra hour for a big test. –When we make decisions about how to spend our scarce resources, like money or time, we are giving up the chance to spend that money or time on something else.

Slide 23 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Opportunity Cost You bought 2 new CDs with the last $20 in your checking account, and your next payday is on Monday. What is the opportunity cost of these CDs? a)The difference between the cost to produce the CDs and the price you paid for them b)The $20 check you wrote for the CDs c)The night out with you friends that you miss because you can’t afford it now d)The satisfaction of knowing that you are the fist of your friends to have the CD

Slide 24 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Trade-offs All individuals, businesses, and large groups of people make decisions that involve trade-offs. Trade-offs involve things that can be easily measured such as money, property, and time or things that cannot be easily measured, like enjoyment or job satisfaction.

Slide 25 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Businesses and Governments Businesses make trade-offs when they decide how to use their factors of production. –A farmer who uses his or her land to plant broccoli, for example, cannot use that same land to plant squash. Governments also make trade-offs when they decide to spend their money on military needs instead of domestic ones, and vice versa.

Slide 26 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Opportunity Costs In most trade-offs, one of the rejected alternatives is more desirable than the rest. The most desirable alternative somebody gives up as a result of a decision is the opportunity cost.

Slide 27 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Decision-Making Grids Checkpoint: Why does every choice involve an opportunity cost? –We always face an opportunity cost. When we select one alternative, we must sacrifice another. Using a decision-making grid can help you decide if you are willing to accept the opportunity cost of a choice you are about to make.

Slide 28 Copyright © Pearson Education, Inc.Chapter 1, Section 1

Slide 29 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Thinking on the Margin When you decide how much more or less to do, you are thinking on the margin. –Deciding by thinking on the margin involves comparing the opportunity costs and benefits. –This decision-making process is called a cost/benefit analysis. –

Slide 30 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Cost/Benefit Analysis The cost/benefit analysis below shows the opportunity costs and benefits of extra hours of sleep against extra house of study time. –What is the opportunity cost of one extra hour of sleep? What is the benefit? –

Slide 31 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Marginal Costs and Benefits To make good decisions on the margin, you must weigh marginal costs against marginal benefits. –The marginal cost is the extra cost of adding one unit such as sleeping an extra hour or building one extra house. –The marginal benefit is the extra benefit of adding the same unit. –Therefore, to make a decision at the margin, the information needed is the cost to produce each unit Once the marginal costs outweigh the marginal benefit, no more units can be added.

Slide 32 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Decision-Making on the Margin Like opportunity cost, thinking at the margin applies not just to individuals, but to businesses and governments as well. –Employers think at the margin when they decide how many workers to hire. –Legislators think at the margin when they decide how much to increase government spending on a particular project.

Chapter 1: What is Economics? Section 3

Slide 34 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Objectives 1.Interpret a production possibilities curve. 2.Explain how production possibilities curves show efficiency, growth, and cost. 3.Explain why a country’s production possibilities depend on its resources and technology.

Slide 35 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Key Terms production possibilities curve: a graph that shows alternative ways to use an economy’s productive resources production possibilities frontier: a line on a production possibilities curve that shows the maximum possible output an economy can produce efficiency: the use of resources in such a way as to maximize the output of goods and services

Slide 36 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Key Terms, cont. underutilization: the use of fewer resources than an economy is capable of using law of increasing costs: an economic principle which states that as production shifts from making one good or service to another, more and more resources are needed to increase production of the second good or service

Slide 37 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Introduction How does a nation decide what and how to produce? –To decide what and how to produce, economists use a tool known as a production possibilities curve. This curve helps a nation’s economists determine the alternative ways of using that nation’s resources.

Slide 38 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Production Possibilities Economists often use graphs to analyze the choices and trade-offs that people make. A production possibilities curve is a graph that shows alternative ways to use an economy’s productive resources. –To draw a production possibilities curve, an economist begins by deciding which goods or services to examine.

Slide 39 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Production Possibilities Curve The table below shows six different combinations of watermelons and shoes that Capeland could produce using all of its factor resources. –How many watermelons can Capeland produce if they are making 9 million pairs of shoes?

Slide 40 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Production Possibilities Frontier The line on a production possibilities curve that shows the maximum possible output an economy can produce is called the production possibilities frontier. –Each point on the production possibilities frontier reflects a trade-off. These trade-offs are necessary because factors of production are scarce. –Using land, labor, and capital to make one product means that fewer resources are left to make something else.

Slide 41 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Efficiency A production possibilities frontier represents an economy working at its most efficient level. Sometimes an economy works inefficiently and it uses fewer resources than it is capable of using. This is known as underutilization. –Remember, people are resources too. When workers get laid off, that is an example of underutilization

Slide 42 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Growth A production possibilities curve can also show growth. –When an economy grows, the curve shifts to the right. –However, when an economy’s production capacity decreases, the economy slows and the curve shifts to the left.

Slide 43 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Cost Production possibilities curves can be used to determine the opportunity costs involved in make an economic decision. –Cost increases as production shifts from making one item to another. –The law of increasing costs helps explain the production possibilities curve. As we move along the curve, we trade off more and more for less and less output.

Slide 44 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Law of Increasing Costs

Slide 45 Copyright © Pearson Education, Inc.Chapter 1, Section 1 Technology and Education Technology can increase a nation’s efficiency. Many governments spend money investing in new technology, education, and training for the workforce.