WHAT IS ECONOMICS?

Economics Standard SSEF1 The student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments. Define scarcity as a basic condition that exists when unlimited wants exceed limited productive resources. Define and give examples of productive resources (factors of production) (e.g., land (natural), labor (human), capital (capital goods), entrepreneurship). List a variety of strategies for allocating scarce resources. Define opportunity cost as the next best alternative given up when individuals, businesses, and governments confront scarcity by making choices.

Unit 1: Basic Economic Concepts I WON THE LOTTERY! I’ll give you anything you want other than money. What do you want? Would your list ever end? Why not? Scarcity!!!

What is Economics? Economics - the science of scarcity. Scarcity- we have unlimited wants but limited resources. Since we are unable to have everything we desire, we must make choices on how we will use our resources. Economics is the study of choices In economics we study the choices of individuals, firms and governments

Examples: You must choose between buying jeans or buying shoes. Businesses must choose how many people to hire. Governments must choose how much to spend on welfare.

WRITE THIS DOWN!!! ECONOMICS: Study of how people and nations decide to use scarce resources to satisfy unlimited wants and needs.

WRITE THIS DOWN TOO: 2 areas of Economics MICROeconomics- Study of small economic units such as individuals, firms, and industries (ex: supply and demand in specific markets, production costs, labor markets, etc.) MACROeconomics- Study of the large economy as a whole or economic aggregates (ex: economic growth, government spending, inflation, unemployment, international trade etc.) Copyright ACDC Leadership 2015

Scarcity is a limited amount of resources used to meet unlimited wants and needs. We cannot have all we want. Scarcity forces everyone to make decisions and choices. Every choice has a cost. Opportunity cost. Efficiency is getting the most out of scarce resources

TWO IMPORTANT WORDS GOODS SERVICES

Physical objects such as shoes & cars - YOU CAN TOUCH THEM GOODS Physical objects such as shoes & cars - YOU CAN TOUCH THEM

Work or duties done for others, usually for pay. SERVICES Work or duties done for others, usually for pay.

An item that we desire but that is not essential to survival WANT I NEED FOOD! I WANT PIZZA! An item that we desire but that is not essential to survival

NEED An item necessary for survival Ex: food,shelter,and clothing

NEEDS OR WANTS?

Scarcity and Choices ..\Scarcity\mjm.Episode 2_ Scarcity and Choice.mp4

SHORTAGE VS. SCARCITY Scarcity = limited amount of resources. Resources are FINITE. It is a naturally occurring phenomenon. Shortage = temporary or longer lasting. Caused by man.

Shortage Producers will not or cannot offer goods & services at the current prices A popular item is sold out during the busy holiday season

All Resources are Scarce! This video was made in 2008. Did it come true? Copyright ACDC Leadership 2015

WHAT IS ANOTHER NAME FOR THESE SCARCE RESOURCES?

THE FACTORS OF PRODUCTION

Resources used to make all goods & services Factors of production Resources used to make all goods & services MUST FILL NEEDS AND WANTS

The Factors of Production CAPITAL LAND LABOR ENTREPRENEURSHIP

BRAIN BREAK Use the hand that you do NOT write with. Draw something from the video with that hand that you do NOT write with….

LAND All natural resources used to produce goods & services Oil, Water, Air. Fields, Forests

CATTLE

LAND? Iron ore pellets LAND: any natural resource Gold, Natural gas, Fertile soil, Diamonds, Oil, Water, Air

Any and all human effort used to produce goods & services LABOR Any and all human effort used to produce goods & services

Ex: TEACHER

CAPITAL Any human-made resource used to produce other goods & services TOOLS

CAPITAL Types of Capital Physical capital Human capital

HUMAN CAPITAL Expertise or knowledge that performs labor and produces economic value. Ex: Engineers, nurses

Human capital includes a taxi driver’s knowledge of the streets

physical capital includes saws & drills Human-made objects used to create other goods & services A woodworker’s physical capital includes saws & drills

BULLDOZERS Physical Capital FACTORIES

Advantages of physical capital for example: TECHNOLOGY Extra time Increased knowledge Greater productivity

ENTREPRENEURSHIP Individuals who decide how to combine land, labor, & capital resources to produce new goods & services. In the economy, they decide how to combine the factors of production to create new goods and services They take the RISK….

Review with your neighbor… Define Scarcity Define Economics Identify the relationship between scarcity and choices Explain how Macroeconomics is different than Microeconomics What are the factors of production? Name 4 Disney movies

The Factors of Production and Money (add to your notes)

Land - Rent

Labor - Wages

Capital - Interest

Entrepreneurial Ability Profit

ALLOCATION… REMEMBER THESE? Supply and demand Authority Random Selection First Come, first served Personal characteristics Contest

OLD MACDONALD SING-A-LONG Watch the video and write specific examples of the Factors of Production that Old MacDonald has….

Trade-Offs and Opportunity Cost

Scarcity means we can’t have everything we want so we must make… Scarcity means we can’t have everything we want so we must make…..DECISIONS

INDIVIDUALS OR

BUSINESSES

GOVERMENTS OR

Why do decisions involve trade-offs? Resources are limited

Individuals, businesses,and governments Who makes trade-offs? Individuals, businesses,and governments Me and …..YOU

DECISION-MAKING PROCESS

WHEN YOU CHOOSE ONE THING

YOU ARE NOT CHOOSING SOMETHING ELSE

YOU ARE GIVING SOMETHING UP

of the alternatives that we sacrifice when we make a decision All of the alternatives that we sacrifice when we make a decision TRADE-OFFS

OPPORTUNITY COST The SECOND most desirable opportunity given up as the result of a decision

What you give up when you make one decision over another is your opportunity cost

OPPORTUNITY COST CAN BE A SPECIFIC MEASUREMENT

Always desirable b/c it is 2nd BEST choice It helps you: Determine some of the opportunity costs for your decision Make a better decision Always desirable b/c it is 2nd BEST choice

BRAIN BREAK Write your birth date on the sheet of paper. At the sound of the bell, line up according to birth dates in the hall.

Economics Standard SSEF2 The student will give examples of how rational decision making entails comparing the marginal benefits and the marginal costs of an action. Illustrate by means of a production possibilities curve the trade offs between two options. Explain that rational decisions occur when the marginal benefits of an action equal or exceed the marginal costs.

ie Factors of Production When a country decides to use its scarce resources, ie Factors of Production

…it must take away using its resources to make something else to make one thing… …it must take away using its resources to make something else

It can use its scarce resources to make a combination of both But not unlimited amounts of both

GUNS OR BUTTER The phrase that refers to the trade-offs that nations face when choosing whether to produce military or consumer goods

A GUNS OR BUTTER ISSUE The government of a country must make a decision between increasing military spending and subsidizing wheat farmers

A GUNS OR BUTTER ISSUE The government of a country must make a decision between spending money on a hospital or spending the same amount on border security

Read the passage you picked up on the way in today and answer the following… What 3 items does Eisenhower cite that are stealing from others? What 2 groups are being robbed? Other than money, what 3 things are the world in arms spending? The cost for a heavy bomber is what 4 things? What is the cost of a single fighter plane? A single destroyer? What economic concept(s) is Eisenhower discussing?

Guns and Butter "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.” “The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement.” “We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.” -Dwight Eisenhower Speaking against the military build up of the cold war 70

The USS Dwight Eisenhower Launched in 1975 and cost $679 million ($4.5 billion in 2007 dollars) 71

HOW DOES SCARCITY AFFECT THE CHOICES YOU MAKE?

Scarcity - A limited quantity of resources WE NEED STUFF! WE WANT STUFF! We want it ALL video …to meet unlimited wants & needs

What is scarce?... The Factors of Production

PRODUCTION POSSIBILITIES CURVE Shows alternate ways to use an economy’s resources

Efficiency is getting the most out of scarce resources. Why is it important?

Because the resources used to make all goods and services are scarce (limited) We must decide to use them in the most efficient way. Being efficient allows us to get the greatest output and meet the greatest number of unlimited wants and needs possible.

GRAPHS

Graph: Offers a way to visually express ideas that might be less clear if described with equations or words

Possibilities Curve – draw this Production Possibilities Curve – draw this Monsters

How does PPC show efficiency? Shows maximum amount an economy can produce with its limited resources

How is opportunity cost graphically measured? QUESTION How is opportunity cost graphically measured?

How does PPC illustrate opportunity cost? Points on curve show alternate ways to use an economy’s resources When one product is gained,some of another is lost

PRODUCTION POSSIBILITIES CURVE Graph that shows alternate ways to use an economy’s resources Shows maximum amount an economy can produce with its limited resources Compares the amount of resources used to produce two goods

Categories or specific goods are compared on the horizontal and vertical axes

Range of combinations Range of choices in the combination of goods or services produced are points plotted on the graph

At Point Q, the country uses its resources to make 11 units of food and 5 computers

At Point T, the country uses its resources to make 8 units of food and 9 computers

Maximum Output Line on a production possibilities curve that shows the maximum possible output

Line connecting the plotted points is the frontier

EFFICIENT: All resources are being used in production to make the greatest possible number of goods & services

EFFICIENCY An economy working at its most efficient production levels is producing on the production possibilities frontier

What does point D represent? UNDERUTILIZATION/ INEFFICIENCY H L D What does point D represent?

Draw a point on your PPC UNDERUTILIZATION v Food O Clothing Production inside the production possibility curve Food v O Clothing

POINT X

Beyond the frontier is unattainable…At the present.

POINT Y

EXPANDING THE FRONTIER PPF2 Food PPF1 O Clothing

Must add factors of production: labor, technology, etc.

Which point is unattainable? D Which point is unattainable?

How to calculate opportunity cost

At Point T, how many units of food are being produced?

8

At Point T, how many computers are being produced?

9

At Point T, what is the opportunity cost of making one additional computer?

3 Units of Food

To make 1 additional computer, you have to move from Point T to Point V

This would lower your production of food from 8 units to 5 units

3 Units of Food At Point T, what is the opportunity cost of making one additional computer?

1 Computer At Point R, what is the opportunity cost of making one additional unit of food?

The opportunity cost of a decision can be examined (measured) by using a DECISION-MAKING GRID Used to measure the opportunity cost of one decision over another.

Rational decision Weigh cost and benefits of alternatives Make decision in your best self interest

You are weighing COSTS versus BENEFITS

YOU HAVE TO BE THE JUDGE OR SLEEP MONEY

Deciding whether to do or use one additional unit of some resource THINKING AT THE MARGIN Deciding whether to do or use one additional unit of some resource Small, incremental adjustments to a plan of action

Compare the costs & benefits THINKING AT THE MARGIN Compare the costs & benefits Decide extra cost or benefit of doing something

Decision making grid State the goal Identify the alternatives you are deciding among List and rank the criteria you are judging the alternatives by Cost/Benefit analysis-Weigh the benefits and the costs by evaluating the alternatives according to the criteria + if it meats criteria and – if not Choose based on frequency and placement of the pluses and minuses Re-evaluate your decision

Would you see the movie three times? Thinking at the Margin # Times Watching Movie Benefit Cost 1st $30 $10 2nd $15 3rd $5 Total $50 Would you see the movie three times? Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3rd time.

Marginal Analysis In economics the term marginal = additional Marginal analysis (aka: thinking on the margin) making decisions based on increments Example: When you decide to go to the mall you consider the additional benefit and the additional cost (your opportunity cost). Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends. Since your marginal benefits and costs can quickly change your analyzing them every second. What if your ex-girlfriend shows up? The Point: You will continue to do something as long as the marginal benefit is greater than the marginal cost

Which flight should you choose? Why? Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant)…what is Latin term? Ceteris Paribus 1. You want to visit your friend for a week. You will return Sunday night. 2. You work every weekday earning $100 per day 3. You have three flights to choose from: Thursday Night Flight = $275 Friday Early Morning Flight = $300 Friday Night Flight = $325 Which flight should you choose? Why?