What is Economics? Define Economics and the importance of making choices Compare Scarcity and shortage Identify key terms: land, labor and capital. The role of entrepreneurs

What is Economics? Economics is the study of how people seek to satisfy their needs and wants by making choices OR How people look to fill their unlimited wants with limited resources. Need: Air, food, shelter, i.e. things necessary for survival Want: Something desired but not necessary for survival

Goods - physical objects Services - Actions or activities that someone performs for another While our wants may be unlimited, there are only so many resources available to us and to create goods and services.

Shortages come and go, but scarcity always exists….Why? Scarcity implies limited quantities of resources to meet unlimited wants. Sooner or later a limit is always reached Scarcity and shortage are not the same thing Shortages come and go, but scarcity always exists….Why? Goods and services are made from resources that are scarce

Can be short term or long term Shortage: Producers cannot or will not offer goods or services at current prices Can be short term or long term What could cause a shortage? War Changes in population Changes in consumer tastes Holidays

Factors of Production Resources that are used to make all goods and services. Land Labor Capital

Land All natural resources that are used to produce goods and services. Materials found in nature Fertile land for farming Products in or on the land Coal, water, forests, etc Labor Effort that a person devotes to a task for which that person is paid Anything you do and get paid for it

Capital Any human made resource that is used to produce other goods and services. Two types: Physical Capital (capital goods) - buildings and tools Saves time and money Increases productivity Other benefits Extra time More knowledge Time to do other things

Human Capital The knowledge and skills that a person acquires through education and experience Economies require both human and physical capital to produce goods and services

Entrepreneur Ambitious leaders who decide how to combine land, labor, and capital resources to create new goods and services They take risks and develop new ideas, start new businesses, create new industries and fuel economic growth Could be anyone

CH 1.2 - Opportunity Cost Why is every decision a trade off? Identify the trade offs and opportunity costs using a decision making grid How do people make decisions by thinking on margin

Trade offs Everyone makes decisions that involve trade offs All the alternatives we give up whenever we choose one one course of action instead of another Trade offs in business How businesses choose to use land, labor, and capital resources

Maybach Exelero $ 8M ?

Opportunity Costs Opportunity Cost is the most desirable alternative given up when a decision is made Or The value of the lost choices **Must be a desirable choice**

Guns or Butter If a country decides to use more resources to make military items, it has less resources available to make consumer goods and vice versa Why?….Resources are limited More guns = less butter. Butter is the opportunity cost

Decision Making Grids Alternatives Benefits Decision Opportunity Cost Benefits Forgone

Lose three hours of sleep Thinking at the margin: instead of thinking about a decision as a whole, think about it in terms of units. Study time: 1 hour of studying = C = 1 less hour of sleep. 2 hours = B = 2 less hours, 3 hours = B+ = 3 less hours. Improvement between 2 and three hours is not enough to sacrifice the extra hour of sleep. Cost does not equal the benefit. Take the B Once the costs outweigh the benefits, no more units should be added. 1 Hour of studying C Lose 1 hour of sleep 2 hours of studying B Lose two hours of sleep 3 hours of studying B+ Lose three hours of sleep

CH 1.3 Production Possibilities Graph What do they show? What can we learn from them?

Economists use graphs to analyze the choices and trade offs people make Production possibilities graphs (PPG) show alternative ways to use resources. The axes show categories of goods and services, or pairs of specific goods and services

Shoes or Watermelons Shoes Watermelons

Shoes and Watermelons 15 8 14 12 18 9 20 5 21 Shoes Watermelons Shoes (Millions of tons) Shoes (Millions of pairs) 15 8 14 12 18 9 20 5 21 Shoes Watermelons

Any point on the graph shows the maximum combination of each of the two products Why is there an inverse relationship? Land, Labor and Capital Making one product leaves less resources to make others

By producing the maximum of each product the economy is operating efficiently. Efficiency = using resources in such a way that maximizes the output of goods and services What causes inefficiency? Lay offs, broken machinery Any point inside the line in the production possibilities frontier would be underutilization or inefficient

What are some limitations to the PPF? It only shows what is happening right now Exact number of people Exact number of resources These are constantly changing Any change in these numbers will affect the slope of the graph

How do these changes affect production in a positive way More labor = Produce more New technology or inventions This shifts the curve to the right

Shoes and Watermelons 15 8 14 12 18 9 20 5 21 Shoes Watermelons Shoes (Millions of tons) Shoes (Millions of pairs) 15 8 14 12 18 9 20 5 21 Shoes Watermelons

What causes a PPF to shift to the left, or an economy to decline in production Loss of land Population Unhealthy, less education, Aging

Shoes and Watermelons 15 8 14 12 18 9 20 5 21 Shoes Watermelons Shoes (Millions of tons) Shoes (Millions of pairs) 15 8 14 12 18 9 20 5 21 Shoes Watermelons

Opportunity costs and PPF Law of increasing costs: As production switches from one item to another, more and more resources are sacrificed to increase production of that item 1 million tons of watermelons = 5 million pairs of shoes Watermelons (Millions of tons) Shoes (Millions of pairs) 15 8 14 12 18 9 20 5 21

Law of increasing costs Watermelons (Millions of tons) Shoes (Millions of pairs) 15 8 14 12 18 9 20 5 21 +8 +6 +4 +2 +1 -1 -2 -3 -4 -5

Law of Increasing Costs Factory F a r m

Resources and Technology A country’s Production Possibilities depend on both resources available and technological level Many different ways to produce watermelons and shoes Better technology increases the amount that an economy can produce Plant, harvest, sew by hand Use of animals and hand operated looms Tractors and harvesting equipment, or sewing machines other textile producing machinery