CHAPTER 1: WHAT IS ECONOMICS?

ECONOMIC DECISIONS & RESOURCES SECTION 1

WHAT IS ECONOMICS?  Economics is the study of the choices that people make to satisfy their needs and wants. The study of economics is divided into 2 categories: microeconomics and macroeconomics.  Microeconomics is the study of choices made by economic actors such as individuals, household, companies.  Macroeconomics examines the behavior of entire economies.

ECONOMIC DECISIONS  Individuals make decisions. The two types of decision makers are producers and consumers.  Producers are groups or individuals that make goods or services. Consumers buy the goods or services. Consumers choose what to buy and producers choose what to provide.  You make decisions based on needs and wants.  A need is anything that is necessary for survival, such as food, clothing, and shelter.  Wants are goods and services that people consume beyond what is necessary for survival.  Goods are physical objects that can be purchased, and services are actions or activities performed for a fee.

ECONOMICS RESOURCES  Economic decisions involve resources.  A resource is anything that can be used to satisfy a consumer’s want or need. Resources that can be used to produce goods and services are known as factors of production. Land: Natural Resources Labor: Human Resources Capital Resources Entrepreneurship Factors of Production

FACTORS OF PRODUCTION  Natural Resources: Items provided by nature. Considered a resource when it is scarce and payment is necessary.  ex. land, water, oil, air  Human Resources: Human effort exerted during production. Can be physical or intellectual.  ex. factory workers, preachers, bankers  Capital Resources: Manufactured materials used to create products. Includes capital goods and the money used to create them. Capital goods are buildings, structures, machinery, and tools (factories, dams, stores, computers, hammers). The finished product that people buy is called a consumer good.  Entrepreneurship: The organizational abilities and risk-taking involved in starting new business or introducing a new product. An example of a successful entrepreneur: Michael Dell, founder of Dell Corporation (Dell Computers). The company’s revenue is more than $25 billion a year.

SCARCITY AND CHOICE SECTION 2

SCARCITY  All resources are limited. People’s wants are unlimited. The combination of limited economic resources and unlimited wants results in a condition known as scarcity.  Scarcity is the most basic problem with economics because it forces people to make decisions about how to use resources effectively.  To determine how to best distribute their resources, a society must answer three basic economic questions: What to produce; how to produce; for whom to produce.

ECONOMIC QUESTIONS  What to produce?  Needs and wants can never be fully met. Therefore economic systems must determine the urgency of those needs and wants. Ex. Large population of school-age children move to town. Should a new school be built or the existing schools be expanded?  How to produce?  Society chooses to allocate resources in many different ways. Ex. Construction of the new school. What contractor will you use? How will it be funded? What materials will be used?  For whom to produce?  A society must determine how to distribute the goods and services that it produces. Ex. Who will go to the new school? Will it be a traditional public school with zoning? Will it be a school targeted for students with special abilities?

PRODUCTIVITY  After choosing what, how and for whom, a society must carry out those decisions to make sure those resources are used effectively.  The problem of scarcity forces people to find ways to use resources effectively. This is determined by productivity, the level of output that results from a given level of input. Are you working to maximum capacity?  Companies always try to find ways to increase efficiency, which is the use of the smallest amount of resources to produce the greatest amount of output. TIME IS MONEY.  One option is for a company to use division of labor: assigning a small number of tasks to each worker. Because tasks are performed repeatedly, workers gain expertise in their assigned tasks known as specialization. This allows them to work faster and to produce more.  Another option is technology. Workers are replaced by machines that work faster and longer. This lowers the cost of the product and the need for workers.

TRADE-OFFS & OPPORTUNITY COSTS SECTION 3

TRADE OFFS & OPPORTUNITY COSTS  Choosing among alternative uses for available resources forces individuals to make decisions. If a resource is used to produce or consume one good, that same resource cannot be used to produce or consume something else. One good is sacrificed for another. This sacrifice is called a trade-off.  The cost of the trade-off is called the opportunity cost. Opportunity cost is the value of the next best alternative that is given up to obtain the preferred item.

EXAMPLE People face trade-offs and opportunity costs every day.  You have 2 events you want to attend in the same week: a concert and a baseball game.  The tickets cost about the same but you only have enough money for one ticket.  You must make a trade-off because you can’t afford both tickets.  If you spend money on a ticket to the concert, the alternative choice-the ticket to the baseball game-is the opportunity cost of buying the concert ticket. The opportunity cost is the next best alternative.

ANOTHER EXAMPLE  Most choices however involve more trade-offs. Although many trade-offs may be possible within a set of choices, only one of these-the next best choice-is considered the opportunity cost.  Example: Deciding how you will spend your summer afternoon. You can choose a trip to the beach, a trip to an amusement park, or go to the mall.  After some thought, you decide that you are not interested in the amusement park, and although the mall sounds fun (making this your second choice), you choose to go to the beach.  The opportunity cost to the beach is your second best choice: the mall.

DECISION MAKING GRID OptionsBenefitOpportunity Cost 1 st hour of extra study timeGrade of C on test1 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 B+ on test3 hours of sleep When you choose one course of action over another, the next-best choice is the opportunity cost of your decision. There will always be a cost, but you can minimize it by making your decision at the margin. 1.What is the opportunity cost of choosing 1 hour of extra study time? 2.Why is 2 hours of extra study time the best decision?

PRODUCTION POSSIBILITIES

SCARCITY, TRADE-OFFS, & OPPORTUNITY COSTS  Businesses face the same economic decisions that we do on a much larger scale.  Money is their scarce resource. They must decide how to use that resource to generate the most profit.  This decision involves discussing trade-offs and opportunity costs. What product can they make that will get them the most profit off of their existing resources?  This is illustrated by a production possibilities frontier.

PRODUCTION POSSIBILITIES FRONTIER