Chapter 1 What is Economics?

Section 1-1: The Basic Problem in Economics What is economics? The study of how people satisfy their unlimited wants and needs with limited resources (people have to make choices) Wants vs. Needs: Wants are anything other than what is needed for basic survival New car, video games, or a stereo system Needs are things required for basic survival Food, clothing, and shelter

Economic Choices Choices are a result of unlimited wants in a world of limited resources (scarcity exists) Spending and production decisions involve choices Choices compete with each other going to dinner vs. going to the movies choices: 1. Eat steak and no movie, 2. Eat a burger and go to a budget movie, 3. Eat at home and see a new release Societies and businesses face choices about how to utilize their resources in the production of goods and services.

Scarcity All resources are limited. Income, time, natural resources People compete for limited resources Scarcity- not being able to have all of the goods and services one wants- an item is scarce even if the store shelves are full-that is why we pay for things (different from shortages) .

Scarcity vs. Shortages Scarcity always exists because of competing alternative uses for resources. Why do you thin scarcity is an issue for both the rich and poor? Shortages differ from scarce goods in that they are temporary. A shortage occurs when a producer can not or will not produce a good or service at the current price. Shortages can be temporary or long term. Ex: After a hurricane, there is a shortage of goods for people in need. Why is this?

Factors of Production Factors of Production (p. 5 figure 1.1) Productive resources are the inputs used to produce the goods and services that people want. Someone has to pay for production Resources used to produce goods and services- land, labor, and capital Entrepreneurship will tie them all together .

Land: natural resources and surface land and water Land, water, fish, animals, forests, mineral deposits Labor: the work people do-human effort both physical and mental results in economic goods and services Goods are tangible objects that satisfy people’s wants or needs Ex. Clothes, food, cars, etc. Services are actions that can satisfy people’s wants or needs Ex. Seeing a doctor, watching a baseball game, getting my oil changed

Capital: manufactured goods used to make other goods and services Ex. Machines, buildings, and tools used to assemble automobiles Capital increases productivity- the amount of output that results from a given level of inputs Human capital – is the knowledge and skills a worker gains through education and experience Physical capital – human made objects used to create other goods and services. Invesment P.C. = more productivity (extra time, more knowledge, more productivity) – dishwasher example

Putting it all together – The Entrepreneur Entrepreneurship: the ability to start a new business or create new products About 30% of new business enterprises fail Of the 70% that survive, only a few become successful

Last Thought – Scarcity: Factors of production are also scarce What does it take to get french fries to your mouth? Potato field in Idaho 7.5 gallons of water irrigated to the half foot plot of land Nurtured with fertilizers and protected by pesticides Potato was harvested, processed, frozen, and transported to Seattle It was fried in corn oil from Nebraska Salted with salt from Louisiana And eaten in a restaurant in L.A.

Section 1.2 – Opportunity Cost Does every decision you make involve trade-offs? How can a decision-making grid help you identify the opportunity cost of a decision? How will thinking at the margin affect decisions you make?

Section 1.2 TINSTAAFL – ever hear of this? “THERE IS NO SUCH THING AS A FREE LUNCH”

Section 1-2: Trade-Offs Trade offs: are all the alternatives we give up whenever we choose one course of action over another. (individual with time, business with production decisions, society with “Guns or Butter”) Trade-offs involve opportunity costs Opportunity costs are the value of the next best alternative given up for the alternative that was chosen There is no “free lunch”- everything has a cost because you could be doing something else with your time ex. Working, studying, sleeping, watching TV (all have value)

The Decision-Making Grid Economists encourage us to consider the benefits and costs of our decisions The Decision-Making Grid Benefits Enjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction Decision Sleep late Wake up early to study for test Opportunity cost Extra study time Extra sleep time Benefits forgone Wake up early to study Alternatives Karen’s Decision-making Grid

Thinking at the Margin When you decide how much more or less to do, you are thinking at the margin. Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours of sleep 3 hours of sleep

The cost of selecting a Coronation Date – Who to choose? VS

How is a girl to choose? VS

Section 1-3: What do Economists Do? Two parts of economics Microeconomics: the branch of economic theory that deals with behavior and decision making by small units-individuals and firms Macroeconomics: the branch of economic theory that deals with the economy as a whole and decision making by large units (ex. Governments) Economy: activity that affects the production and distribution of goods and services in a society

Production Possibilities Frontier The production possibilities frontier (the line) shows all the possible combinations of the two products using all the available resources. Since we are using all available resources, increasing the production of one of the goods means decreasing the production of the other good (illustrates idea of scarcity). The decrease in production is the opportunity cost (we had to give up some of one good to get more of the other).

My time Time is a perfect example of a resource that is scarce. I have a 16 hours in a day to decide whether I will work or play. I am going to use a PPC to illustrate my tradeoffs. Work vs. Play Hours per each? What if I want more time for each? Less time? Impossible vs. inefficient Always a straight PPC line? Nothing is free!!!! We always face tradeoffs What should I give up? What is my opportunity cost?

Production Possibilities A production possibilities graph shows alternative ways that an economy can use its resources. The production possibilities frontier is the line that shows the maximum possible output for that economy. Watermelons (millions of tons) Shoes (millions of pairs) 25 20 15 10 5 Production Possibilities Graph a (0,15) 15 8 14 b (8,14) 14 18 20 21 12 9 5 A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0)

Shoes (millions of pairs) Watermelons (millions of tons) Efficiency Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently. Shoes (millions of pairs) 25 20 15 10 5 Watermelons (millions of tons) Production Possibilities Graph c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S g (5,8) A point of underutilization

Shoes (millions of pairs) Watermelons (millions of tons) Growth Growth If more resources become available, or if technology improves, an economy can increase its level of output and grow. When this happens, the entire production possibilities curve “shifts to the right.” Shoes (millions of pairs) 25 20 15 10 5 Watermelons (millions of tons) Production Possibilities Graph T Future production Possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S

Watermelons (millions of tons) Shoes (millions of pairs) Cost Cost A production possibilities graph shows the cost of producing more of one item. To move from point c to point d on this graph has a cost of 3 million pairs of shoes. Watermelons (millions of tons) Shoes (millions of pairs) 25 20 15 10 5 Production Possibilities Graph 14 18 21 12 9 8 c (14,12) d (18,9)

Next Example Trade off between smarties and dum-dums

Smarties Dum-Dums Production Possibilities Frontier A 50 B 40 Lose 20 Smarties (opportunity cost) 30 C 20 Gain 20 Dum-Dums 10 D 25 50 70 75 Dum-Dums

Opportunity costs are not constant along the frontier. As resources are moved from the production of Smarties to Dum-Dums, increasingly larger amounts of Smarties must be given up to get decreasingly smaller amounts of Dum-Dums. This is known as the Law of Increasing Costs. This happens because resources are not equally suited to the production of both goods.

Smarties Dum-Dums A 50 Lose 10 Smarties B 40 Lose 20 Smarties 30 C 20 Gain 50 Dum-Dums Gain 20 Dum-Dums 10 D 25 50 70 75 Dum-Dums

It is possible to produce at any point on the frontier or inside the frontier Only points on the frontier are efficient. Any point inside of the frontier is inefficient and shows an underutilization of resources. When moving from inside the frontier to the frontier there is no opportunity cost because resources were underutilized.

Smarties Dum-Dums Efficient production A 50 B 40 Inefficient Production or Underutilization of resources F 30 C 20 10 D 25 50 70 75 Dum-Dums

Production outside of the frontier is not possible with current available resources. If there is an increase in land, labor or capital OR technology then the frontier will shift outwards. A shift out means that more of both products can be produced.

Point G not possible with current resources or technology Smarties A 50 G B 40 30 With more resources or technology the line shifts outward C 20 10 D 25 50 70 75 Dum-Dums

Nations must make choices about how to use their available resources (guns and butter). An increase in the production of military goods (guns) will cause a decrease in the production of consumer goods (butter). The production possibilities curve can also demonstrate unemployment within an economy (point inside the curve) and economic growth (this curve shifts out).

Guns Butter A Economic Growth of Economy 50 B 40 30 Lose 20 Guns U C Unemployed land, labor or capital 10 Gain 20 Butter D 25 50 70 75 Butter