Chapter 1: What is Economics? Essential Questions: Unit 1: How does economics affect everyone? Chapter 1: How can we make the best economic choices?

Scarcity and the Factors of Production Scarcity and choice Economics exists because we have unlimited wants & needs but limited resources. ____vs. _______ Which is essential for survival? What is something we want but can live without? ______ v. _______ Physical objects such as ________ &___________ Actions or activities such as __________ & __________

___________ is the fundamental problem in economics Needs and wants are ___________. When one is satisfied, others come up. Goods & services are ___________ No one can have an ________ supply of ________ This is scarcity!!

People Choose As a result of _______, people have to ________________. Examples: Scarce _____: play a sport or have an after school job? Scarce _______: save for a car or save for college? Scarce _______: hire more workers or open a new store?

What is Economics? Economics is the study of how people (and businesses & governments) make choices as a result of the reality of scarcity. Scarcity ≠ shortage Scarcity is __________ as a _________ Scarcity is a fundamental _______ ____________________ A shortage is a specific situation where buyers want ________ of a _______ than sellers are willing to make available at a given _________. (more about this in chapter 6)

Who makes goods & services?: The role of the _________________ Entrepreneurs are _________ who decide how to combine _________ to create new _______ and ________. They are willing to assume ______ in hopes of __________________ Etymology: French word coined by Jean-Baptiste Say (French economist in the 1700s)

The Factors of _______________ The factors of production are the _________ used to make all _______ and _________ What are they? _________ (all the natural resources needed) _________ (workers) _________ (human-made resource used to make other goods & services) (Entrepreneurship) many textbooks also list this as a factor of production.

Factors of Production continued Land Land for farming Coal for mining Water for running a hydroelectric dam Doesn’t have to be made or produced Naturally occurring

Factors of production continued Labor Work people do that they are paid for Doctors providing medical care Instruction provided by a teacher Mechanic fixing your car Painter painting your house

Factors continued Capital _________ (human made) used to produce other ______ & _________ Two types: ___________ capital (capital goods) Buildings such as a factory Equipment on an assembly line __________ capital Knowledge & skills gained by workers

Benefits of Capital Many businesses choose to invest in capital Increases _____________ Better equipment such as faster computers _______for workers to make them more _______ See the book’s dishwasher example on p. 6-7

Benefits of Capital 1. Extra __________ More ______________ Saves time to be more efficient More ______________ Learn skills that can transfer to other activities More _______________ Can do more in the extra time that is freed up

Scarce Resources Remember that __________ is ________ so everyone has to _______________ Even french fries Use the land to grow the potatoes Use the water to help them grow Use the workers to farm the land Use the fuel to run the equipment and transport them to stores

Scarcity continued Everyone faces scarcity Individuals Businesses Families governments Scarcity means we have to make choices about how to best use our scarce resources This is what economics is all about!

Can something that is abundant be scarce? YES! Things can be scarce and abundant at the same time! Remember, it’s not the same as a shortage! Water Air Oil in Saudi Arabia What makes the difference? Is it rare? Are there alternative uses? Choices! (mutually exclusive?)

Section 2: Opportunity Cost Every time we _______________________, we _____________________ to do something else! ________________ and _________________ A ___________ is giving up one benefit to get another benefit The foregone opportunity of the most desirable alternative is the ________________

Would you….? Sleep late or wake up early to study for a test Sleep late or wake up early to go to work Sleep late or wake up early to eat breakfast Sleep late or wake up early to go on a trip The specific opportunity costs of each choice determined your answer.

Thinking at the Margin Many economic decisions are made at the ___________ & thinking in terms of __________: What difference will _______________ of investment make? _________________ worker? Studying for one more hour? To decide, you can compare the costs and benefits. This is called cost/benefit analysis You can calculate the marginal benefits and the marginal cost. If marginal benefits are _____________ than marginal ___________, it pays to add more units (dollars, hours, workers, etc.)

Production Possibilities Curves Remember that scarcity means that everyone (individuals, businesses, governments) has to make choices How should scarce resources be used? Production Possibilities curves can help because they show the options Guns vs. butter The example of Capeland on p. 14

Comparing options

Production Possibilities Frontiers Each point on the _____ reflects a ___________ These trade-offs must be made because ______________________ If you use __________________ to make one thing, ____________to produce more of the other Not all points are possible given the resources available What does it mean to be underneath the curve or outside the curve?

Production Possibilities continued What does it mean if a point is below the curve on the production possibilities frontier? Underutilization of resources Unemployment Old equipment?

What does it mean if a point is outside the frontier? Can’t achieve that point given the current resources Requires _________ in the economy Means the curve has shifted to the _________ How could you get there? __________ investment (human or physical) Build a new factory Hire more workers New _____________? The curve can also shift to the ___________ Recession Drought Increase in the cost of capital goods?

Cost Can use production _______________ to calculate the costs of ______ about how to use ___________ How much of producing ________ will you have to give up to get more of the __________? Law of _____________ costs: you reach a point where it takes more and more of a resource to increase production Rain forest in South America Oil in North America (“fracking”) THIS LAW IS WHY THE CURVE IS A CURVE and not a straight line. There’s not a 1:1 trade-off It reaches a point where there’s more and more traded off for less and less output

Remember the essential question? How can we make the best economic choices? Trade-offs and opportunity cost The fundamental problem is scarcity That’s why economics exists