What is Economics? Chapter 1

Economics: The study of how people seek to satisfy their needs and wants by making choices about how to use scarce resources

Needs vs. Wants Needs: things NECESSARY for survival Wants: things we desire but are NOT ESSENTIAL to survival

Scarcity Limited quantities of resources to meet unlimited wants

Shortage A situation in which a good or service is unavailable temporarily

Factors of Production Land Labor Capital –Human –Physical Remember these! You will hear them a lot this semester!

Land Natural resources (land, coal, water, forests, etc.)

Labor The effort people devote to a task for which they are paid

Capital –Physical: Human made objects used to create other goods and services –Human: The skills and knowledge gained by a worker through education and experience

Entrepreneurs Ambitious leaders who combine land, labor, and capital to create and market new goods and services.

Factors of Production Model LAND - cotton LABOR -seamstress CAPITAL – thread, sewing machine. ENTREPRENEUR –designer, business owner GOOD – t-shirt

Factors of Production Model

Opportunity Cost There is no such thing as a free lunch!

Spring Break…Which would you choose? Hawaii New York Las Vegas Cancun Paris Tokyo Vail Tahiti

Trade-offs…options when you make a choice. Individuals –work or free time –study or sleep Business –Goods or Services –Produce or Sell

Alternatives Go to CollegeTake a year off Benefits Decision Go to College right away Take a year off after grad. Opportunity Cost Benefits forgone Decision Making Grid

Thinking at the Margin OptionsBenefitOpportunity Cost 1 summer off before college 1 semester off before college 1 year off before college

Production Possibilities Curves Graphs that show alternative ways to use an economy’s resources

Coffee Tea A B C D 0

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.

Coffee Tea Any production along this line is EFFICIENT Productions possibilities frontier

Efficiency Efficiency also means that in order to produce more of one good you must give up producing some of the other good. This is because the line represents the limits that scarce resources place on our production possibilities.

Coffee Tea CoffeeTea Efficiency A B C D 0

Underutilization Any point inside the line indicates an underutilization of resources. This economy is not using all of the resources that are available. This economy is not producing all the goods and services it could be producing.

Coffee Tea Any production in this space is inefficient…you have the supplies but aren’t making the coffee or tea

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.”

Coffee Tea Al buys more equipment and now he can make even more coffee or tea!

Law of Increasing Costs As we shift resources from making one good to another, the cost of producing the second item increases. In other words, we have to give up more and more of the first item for each additional unit of the second item. This is because some resources are better suited for one purpose over another.

Coffee Tea CoffeeTea Law of Increasing Costs A B C D 0

Chapter 1 Things to think about…

What is the difference between a good and a service?

Why is the idea of scarcity a starting point for thinking economically?

How is scarcity different from shortages?

What special advantages does physical capital offer?

What role do entrepreneurs play in the economy?

Name three examples that illustrate how all decisions involve trade-offs.

Why must the opportunity cost of a decision always be something desirable?

What does the term “guns or butter” mean?

What does it mean to “think at the margin”?

What are the opportunity costs involved in:

Eating pizza

Going to see a movie on a Tuesday

Going to see a movie on a Saturday

Watching TV

Studying for a test

Finishing High School

Getting Married

Having a Kid

Create a decision making grid to defend a decision you will make today

Decide whether to work 2, 4, or 6 hours at an after-school job by comparing the opportunity cost and benefit of each alternative. CostBenefit 2 hours 4 hours 6 hours

Decide whether to finish the semester and graduate by comparing the opportunity cost and benefit for each alternative CostBenefit Graduate Now Graduate later Get a GED Drop Out

How is underutilization depicted on a production possibilities frontier?

How does a production possibilities curve illustrate how efficient an economy is?

How does a production possibilities curve illustrate opportunity cost?

Describe a specific event that would make each of the following happen to a production possibilities curve:

A point moves down and to the left The frontier shifts to the right Still capable of same output but not producing total possible Capable of producing more of every combination of products

Describe three services that the government provides to its citizens then identify some of the opportunity costs of providing those services.