Economics: The Economic Way of Thinking

. KEY CONCEPT Scarcity is the situation that exists because wants are unlimited and resources are limited.

Scarcity: The Basic Economic Problem A. KEY CONCEPTS 1. Wants — desires that can be met by consuming products 2. Needs — things necessary for survival 3. Scarcity — lack of resources available to meet all human wants not a temporary shortage 4. Economics — study of how people use resources to satisfy wants a. examines how individuals and societies choose to use resources b. organizes, analyzes, interprets data about economic behaviors c. develops theories, economic laws to explain economy, predict future

I. What Is Scarcity? A. Principle 1: People Have Wants 1.People make choices about all their needs and wants 2. Wants are unlimited, ever changing B. Principle 2: Scarcity Affects Everyone Scarcity affects which goods and services are provided 1. Goods — physical objects that can be bought 2. Services — work one person does for another for pay 3. Consumer — person who buys good or service for personal use 4. Producer — person who makes a good or provides a service

II. Scarcity Leads to Three Economic Questions A. Scarcity affects society and producers as well as individuals B. Society must answer three basic economic questions: 1. what will be produced? 2. how will it be produced? 3. for whom will it be produced?

III. The Factors of Production Factors of production — resources needed to produce goods and services include land, labor, capital, entrepreneurship supply is limited

Visual Creations Select one of the following subjects: Economic Needs/Wants, Scarcity, or the Factors of Production and create a visual aid designed for teaching the concept. Grades will be based on CREATIVITY and EFFORT.

Economic Choice Today: Opportunity Cost Section 2

I. Making Choices A. KEY CONCEPTS Economic choices shaped by Incentives — benefits that encourage people to act in certain ways Utility — benefit or satisfaction gained from using a good or service To make choices, people economize: make decisions according to best combination of costs and benefits

Factor 1: Motivations for Choice People motivated by incentives, expected utility, desire to economize They weigh costs against benefits to make purposeful choices motivated by self-interest: look for ways to maximize utility Factor 2: No Free Lunch All choices have a cost choosing one thing means giving up another, or paying a cost cost can take form of money, time, other thing of value

Trade-Offs and Opportunity Cost Trade-off is alternative people give up when they make a choice usually means giving up some, not all, of a thing to get more of another Opportunity cost is value of next-best alternative a person gives up not the value of all possible alternatives

The Global Economy The Amazon’s River basin in Brazil's the world’s largest rainforest. About 5,000 soccer fields are being destroyed everyday. What is the future trade off?

"Lungs of our Planet" More than 20 percent of the world oxygen is produced in the Amazon Rainforest. The U.S. National Cancer Institute has identified 3000 plants that are active against cancer cells. Twenty-five percent of the active ingredients in today's cancer-fighting drugs come from organisms found only in the rainforest. Scientists estimate nearly 80 to 90 percent of tropical rainforest ecosystems will be destroyed by the year 2020.

Analyzing Choices Cost-benefit analysis — examination of costs, expected benefits of choices one of most useful tools for evaluating relative worth of economic choices

Analyzing Choices Marginal cost Marginal benefit additional cost of using one more unit of a good or service Marginal benefit additional benefit of using one more unit of a good or service

Analyzing Production Possibilities

Graphing the Possibilities Economic models — simplified representations of economic forces Production possibilities curve (PPC) is one model maximum goods or services that can be produced from limited resources also called production possibilities frontier

Graphing the Possibilities PPC based on assumptions that simplify economic interactions resources are fixed all resources are fully employed only two things can be produced technology is fixed

Production Possibilities Curve PPC runs between extremes of producing only one item or the other Data is plotted on a graph; lines joining points is PPC shows maximum number of one item relative to other item PPC shows opportunity cost of each choice more of one product means less of the other

Concepts revealed by PPC: Efficiency — producing the maximum amount of goods and services possible Underutilization — producing fewer goods and services than possible

What We Learn from PPCs Example: Efficiency and Underutilization Each point on PPC represents efficiency points inside curve mean underutilization; outside curve cannot be met Law of increasing opportunity costs as production switches from one product to another, more resources needed to increase production of second product

Example: Increasing Opportunity Costs Increase in opportunity cost — each new unit costs more than last one Reasons for increasing cost of making more of one product need new resources, machines, factories must retrain workers Costs paid by making less and less of other product

Changing Production Possibilities A Shift in the PPC A country’s supply of resources changes over time Example: U.S. in 1800s grew, gained resources, workers, new technology new resources mean new production possibilities beyond frontier Increased production shown on PPC as shift of curve outward Increase in total output called economic growth

The Economists Toolbox

Working with Data Using Economic Models Using Charts and Tables Statistics — numerical data or information show patterns of human behavior Using Economic Models Using Charts and Tables Using Graphs

Microeconomics and Macroeconomics Microeconomics — studies behavior of individual players in an economy includes individuals, families, businesses Macroeconomics — studies behavior of economy as a whole topics include inflation, unemployment, aggregate demand and aggregate supply

Positive Economics and Normative Economics Positive economics describes and explains economic behavior as it is uses verifiable facts; does not make judgments Normative economics studies what economic behavior should be makes value judgments to recommend future actions