Unit 1 Chapter 1 “The Economic Way of Thinking” Economics

Main Idea Economics is the study of how individuals and societies satisfy their unlimited wants with limited resources. Scarcity is the situation that exists because wants are unlimited and resources are limited.

Essential Question How does scarcity require choices by both individuals and society?

Scarcity-The Basic Economic Problem: What is Scarcity? scarcity: the situation that exists when there are not enough resources to meet human wants economics involves: 1. how individuals, businesses, governments, and societies choose to use scarce resources to satisfy their wants 2. organizing, analyzing, and interpreting data about those economic behaviors 3. developing theories and economic laws that explain how the economy works and to predict what might happen in the future Principle 1: People have wants- choice is central to the use of scarce resources; wants are unlimited and ever changing (computers) Principle 2: Scarcity affects everyone- including which goods are made and which services are provided

scarcity unlimited wants limited resources what to produce? for whom to produce? how to produce?

Scarcity Leads to Three Economic Questions Key Concept: scarcity confronts individuals, producers, and whole societies; every society must address 3 basic economic questions: ? 1: What will be produced? what to produce and how much depends on resources and consumer demand (except in N. Korea or Cuba) ? 2: How will it be produced? involves using scarce resources in the most efficient way to satisfy society’s wants (skilled labor in U.S. v. unskilled labor in China) ? 3: For whom will it be produced? how goods and services are distributed among people in a society-exactly how much should people get, and how it should be delivered to them

The Factors of Production Key Concepts: Factors of Production are the economic resources needed to produce goods or services, and help answer the first 2 economic questions, what to produce and how to produce it Factor 1-Land: all natural resources found on or under the ground that are used to produce goods and services Factor 2-Labor: all the human time, effort, and talent that go into the production of goods and services are considered labor Factor 3-Capital: all the physical resources made and used by people to produce and distribute goods and services are considered capital. So, too, are the knowledge and skills that make workers more productive Factor 4-Entrepreneurship: the combination of vision, skill, ingenuity , and willingness to take risks that is needed to create and run new businesses

Economic Choice Today-Opportunity Cost: Making Choices Factors that shape the economic choices people make: incentives: encouraging people to act in certain ways utility: satisfaction gained from using a good or service economizing: decisions made according to costs & benefits trade-offs: alternative given up by making an economic choice

economic choice trade-offs: choice alternatives: opportunity costs incentives: encourage a particular choice utility: benefit derived from that choice economizing; balancing costs and benefits of choice

Trade-Offs and Opportunity Cost Trade-offs: taking one course during the summer for extra college credit, then spending 4 weeks at the beach, instead of two courses during the summer for maximum extra college credits. Trade-offs? Opportunity cost: spending a year working, or 6 months working and 6 months travelling to see friends. Opportunity cost in each situation?

Analyzing Choices cost-benefit analysis: decision-making grid 1 hr. study(choice) = D in Econ (benefit) = 1 hr. with friends(O. Cost) 6 hrs. study = A in Econ = 6 hrs. with friends

Analyzing Production Possibilities: Graphing the Possibilities Key Concepts: a production possibilities curve (PPC) is an economic model or graph that illustrates the impact of scarcity on an economy by showing the maximum number of goods or services that can be produced using limited resources

Production Possibilities Curve

Efficiency v. Underutilization

What We Learn from PPCs Key Concepts: the simplified model spotlights concepts that work in the real world of scarce resources Example-Efficiency: producing the maximum amount of goods and services; Underutilization: not using economic resources to their full potential Example-law of increasing opportunity costs: as production switches, resources are needed to increase production of second product

Changing Production Possibilities A Shift in the PPC: new resources or the more efficient use of resources is needed

Shift in the PPC

The Economist’s Toolbox: Economic Models How: by creating a simplified representation of complex economic forces Why: helps economists explain why things are as they are or predict future economic activity

Statistics, Charts, Tables, & Graphs How: by showing numbers in relation to other numbers Why: revealing patterns in the data examples: charts, line graphs, bar graphs, & Pie graphs

Macroeconomics and Microeconomics Units of Study: economic growth; economic stability; international trade Topics of Interest: money, banking finance; government taxing and spending policies; employment and unemployment; inflation Units of Study: consumer markets; business markets; labor markets Topics of Interest: markets, prices, costs, profits, competition, government regulation; consumer behavior; business behavior

Positive Economics and Normative Economics studies economic behavior as it is; using the scientific method to observe data, hypothesize, test, refine, and continue testing involves judgments of what economic behavior ought to be; it goes beyond the facts to to ask if actions are good

Adam Smith lived 1723-1790 wrote The Wealth of Nations laid the foundation for modern economics the word economics was not in his book at all reasoned that people behave in ways that satisfy their economic self-interest both buyer and seller benefit from each transaction, meaning an “invisible hand” guides the marketplace