Scarcity and the Factors of Production What is Economics? Scarcity and the Factors of Production

Defining Economics What fundamental principles make up economics? Needs Wants Versus

“The Story of Stuff”

What is the definition? Economics is the study of how people seek to satisfy their needs and wants by making choices.

Why do people make these choices? SCARCITY

The Condition of Scarcity Our resources are limited…but our desire for good and services are NOT Unlimited Wants Limited Resources Something is scarce if it has more than one valuable use. Consider your time When resources are used to do one thing they are unavailable to do others. BUT

To Choose is to Sacrifice Scarcity forces us to make choices Choosing an action means we sacrifice doing something else. Thus we make choices meaning we are sacrificing doing something else. The Opportunity Cost of a choice is the value of what is given up (The next best alternative).

Question… Scarcity is correctly described by which of the following statements? I. Scarcity exists if there are more uses for resources than can be satisfied at one time. II. Scarcity exists if decisions must be made about alternative uses for resources. III. Scarcity would not exist in a society in which people wanted to help others instead of themselves. (a) I only (b) II only (c) III only (d) I and II only (e) I, II, and III

Scarcity vs. Shortages NOT THE SAME THING!!! A shortage occurs when producers will not or cannot offer goods or services at the current prices. They can be temporary or long-term Exs? Scarcity on the other hand always exists because our needs and wants are always greater than our resource supply.

What to do with the fundamental economic problem of scarcity? Factors of Production What to do with the fundamental economic problem of scarcity?

Three Basic Questions In order to solve the problem of scarcity, economists must attempt to answer three basic questions. What? How? For Whom?

What must we Produce? Society must choose based on its needs

How to Produce? Society must choose based on its resources

For Whom to Produce? Society must choose based on its population and other available markets

Factors of Production Once a society is ready to work on answering the three basic questions, they must then turn to their available factors of production (the resources needed to produce what people want and need).

Land The society’s limited natural resources Landforms Minerals Vegetation Animal life Climate

Labor (Human Resources) The workers who apply their efforts, abilities, and skills to production Physical Abilities Mental Abilities

Capital The means by which something is produced Money Tools Equipment Machinery Factories

Entrepreneurship Risk-takers who combine the land, labor, and capital into new products Makes basic business policy decisions Innovator for new products, production techniques, organizational forms Bears the risk of time, effort, and funds

Production Creating goods and services—the result of land, capital, labor, and entrepreneurs

Who makes these decisions? Consumers – the people who decide to buy things What is the incentive of the consumer? Get the most of what they value from their expenditures, BUT they are constrained by their budget.

What is the difference between a NEED and a WANT? NEEDS WANTS Those goods and services that are necessary for survival Food, clothing, shelter Those goods and services that people consume beyond what is necessary for survival

Item/Activity Need Want Clothing Going to the Movies Going out to eat A place to live A car/truck A computer Owning an iPod Going to a basketball game Owning a vacation home Food

Question… Human wants are… a) Always fixed b) Limited c) Unlimited d) Likely to decrease over time

What is the main incentive of the producer? Producers – the people who make the things that satisfy consumers needs and wants What is the main incentive of the producer? Provide consumers with what they value the most while covering their costs of production and making a profit.

What are Goods and Services? Physical objects that can be purchased Pizza, bicycle, shoes Actions or activities that are performed for a fee. Lawyers, teachers, plumbers