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Scarcity and Economic Reasoning Unit 1

Define each of the productive resources (natural, human, capital) and explain why they are necessary for the production of goods and services. Explain how consumers and producers confront the condition of scarcity by making choices which involve opportunity costs and tradeoffs. Explain the important role of the entrepreneur in taking the risk to combine productive resources to produce goods and services. Describe how people respond predictably to positive and negative incentives.

Objectives (cont.) Explain that voluntary exchange occurs when all participating parties expect to gain. Compare and contrast how the various economic systems (traditional, market, command, mixed) answer the questions: –What to produce? –How to produce it? –For whom to produce?

Describe how clearly defined and enforced property rights are essential to a market economy. Use a production possibilities curve to explain the concepts of choice, scarcity, opportunity cost, tradeoffs, unemployment, productivity and growth. Diagram and explain a Circular Flow Model of a market economy

VOCAB Natural resources Human resources Capital resources Scarcity Tradeoffs Opportunity costs Incentives Traditional economy Command economy Market economy Mixed economy Decision-making model

Natural Resources Materials or substances such as minerals, forests, water, and fertile land that occur in nature and can be used for economic gain.

Resource Curse Theory Also called “Paradox of Plenty” Countries with abundance of a natural resource have less economic growth WHY? –Excessive borrowing because future income is assumed –Conflict within country or between countries over resources –Lack of diversification If all of income depends on ONE thing, all of income depends on the demand for that thing

Human Resources Those individuals who make up the labor force –Employees Can also refer to the department within a corporation that handles hiring, firing, employee benefits, etc.

Capital Resources Machinery and other equipment used to produce a final product Referred to as real capital or economic capital

Financial Capital Money used to purchase capital resources Tangible assets that can be used as money –Stocks, bonds Referred to as capital

What is scarcity? Finite, or limited, amount of resources cannot meet unlimited wants and needs of the population

Opportunity Cost The benefits you could have received by taking an alternative action

Tradeoff Exchange of one thing for another

So what’s the difference? Opportunity Cost What could have been Tradeoff Actual things being exchanged

What is one way consumers and producers might deal with the listed item being scarce? Soda –Consumers: Seek alternative beverages –Producers: Raise prices on remaining soda 1.Automobiles 2.Food 3.Land