Chapter 1: What is Economics? 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

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

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

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.

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.

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.

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

Entrepreneurs, cont An entrepreneur’s first task is to assemble the factors of production: land, labor, and capital.

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

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

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

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

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. Checkpoint Answer: because the resources used to produce them are scarce

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

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

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

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.

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.

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.

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.

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. Checkpoint Answer: Because when you select one alternative, you must sacrifice another.

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.

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. Once the marginal costs outweigh the marginal benefit, no more units can be added.

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? Answers: one extra hour of study time; a higher grade on the test.

Chapter 1: What is Economics? Section 3

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

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

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.

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.

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? Answers: 18 million

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.

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.

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.

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.

Law of Increasing Costs

Technology and Education Technology can increase a nation’s efficiency. Many governments spend money investing in new technology, education, and training for the workforce.