CHAPTER 1 “ What is Economics ?” What Reichling Economics is NOT! =related =related

Economics  Book Definition – The study of how people seek to satisfy their seemly unlimited needs and wants with limited resources by making choices.

We Must Make Choices? Because of …..  Scarcity – fundamental problem in economics  Scarcity occurs because our wants and needs exceed societies ability to satisfy all of them due to a limited amount of resources.  Limited quantities of resources to meet unlimited wants.  Scarcity will always exist!

Several principles support economic thinking. Scarcity-forces-tradeoffs principle: Limited resources force people to make choices and face tradeoffs when they choose. Cost-versus-benefits principle: People choose something when the benefits of doing so are greater than the costs. Thinking-at-the-margin principle: Most decisions involve choices about a little more or a little less of something. Incentives-matter principle: People respond to incentives in generally predictable ways. Trade-makes-people-better-off principle: By focusing on what we do well and then trading with others, we will end up with more and better choices than by doing everything for ourselves. Markets-coordinate-trade principle: Markets usually do better than anyone or anything else at coordinating exchanges between buyers and sellers. Future-consequences-count principle: Decisions made today have future (and often unintended) consequences.

QUESTIONS  Living in America do you always fear that there will not be an item on the shelf when you go shopping?  Who faces the problem of scarcity?  Are scarcity and shortages the same thing?

SHORTAGES  Shortages and scarcity are not the same thing. Shortages occur when producers either can not or will not offer goods and services at a certain price.  Holiday season, workers going on strike, change in prices  Some resources that we use on a daily basis are scarce because they are limited, but currently there is not a shortage of that resource.

TRADE-OFFS  Trade-off – all alternatives that we sacrifice when we make a decision.  All alternative choices. Trade offs are another word for choices or alternatives.  We have to make choices because of the condition of scarcity.

 Individually we make these decisions which are trade-offs.  When you choose not to study then you miss out on a good test grade. So the cost of your decision is how hard are you going to have to work for the rest of the six weeks or what are you going to do to bring up your grade.  Coming to school today and paying attention in class you are currently sacrificing whatever you would be doing instead. For most it would be sleeping. So the cost of coming to school and sitting through economics class is sleep.

OPPORTUNITY COST  Trade-offs are ALL the alternatives you give up with every decision that you make. Opportunity cost is the result of trade-offs.  Opportunity cost – next best alternative  Every decision we make has a cost, and the most desirable alternative given up as the result of a decision is called the opportunity cost.

BUILDING A ZOO ACTIVITY!  Get into groups  Follow the directions!  Your group is building a new zoo.  You have to decide what animals to have.  Space is limited. You get 25 acres.  Take 8-10 minutes to make your selections, based on the next slide.

QUESTIONS 1.Why didn't you put one of every animal in the zoo?" 1.Why didn't you put one of every animal in the zoo?" 2. "Why didn't you put a turkey in your zoo?" 2. "Why didn't you put a turkey in your zoo?" 3. "Why didn't you have a zoo with only monkeys?" 3. "Why didn't you have a zoo with only monkeys?" 4. "Why did you choose an Asian elephant and not an African elephant?"

5. "What is the last animal to make the cut for your zoo?" 5. "What is the last animal to make the cut for your zoo?" 6. "What is the animal that just missed the cut for your zoo?" 6. "What is the animal that just missed the cut for your zoo?" 7. What animal did everyone in your group agree to include ___? 7. What animal did everyone in your group agree to include ___? 8. Would everyone in your group have made the same choices if they did it alone?" 8. Would everyone in your group have made the same choices if they did it alone?"

FACTORS OF PRODUCTION  Resources that are used to make all goods and services are called the factors of production.  Three categories  Land  Labor  Capital – both human and physical

LAND  Natural resources that are used to make goods and services. Land is sometimes refered to as natural capital.  Gifts of nature that we use in the production of goods and services.  Economically, "land" is far more than just plots of ground; it is all natural materials and opportunities.  Cotton  Water  Mineral Deposits

LABOR  Effort people devote to a task for which they are paid.  In economics, labor is human exertion, mental or physical, in production. This is needed to produce the goods and services.

CAPITAL  Divided into two sub categories.  Physical - Buildings, machines, and technical equipment used in production plus inventories of raw materials, half-finished goods, and finished goods. You may use financial capital to purchase physical capital.  Human - People’s innate abilities and talents plus their knowledge, skills, and experience that make them economically productive. Human capital can be increased by investing in health care, education, and job training.

ENTREPRENEURS  Ambitious leader who combines the factors of production to create and market new goods and services. They are the risk takers.

PPF Curve  In economics, a production possibilities frontier (PPF) or is a graph that shows the different quantities of two goods that an economy could efficiently produce with limited productive resources. economics graphgoods economyproductive resourceseconomics graphgoods economyproductive resources

 Point A in the diagram for example, shows that FA of food and CA of computers can be produced when production is run efficiently.  A move from point A to point B indicates an increase in the number of computers produced. But it also implies a decrease in the amount of Food produced. This decrease is the opportunity cost of producing more computers. opportunity cost opportunity cost

 All points on a production possibilities curve are points of maximum productive efficiency or minimum productive inefficiency: allocated such that it is impossible to increase the output of one commodity without reducing the output of the other. That is, there must be a sacrifice, an opportunity cost productive efficiency inefficiencyopportunity costproductive efficiency inefficiencyopportunity cost

 Point W: A point inside of the curve means that the economy is operating inefficiently. In other words the economy is not living up to its potential. (Unemployed resources)  Point Z: A point outside of the curve represents a level of production not currently possible with a given amount of resources and technology. May be possible in the future.

 A rightward shift of the PPF Curve represents economic growth. In other words point Z with growth may be possible where before it was not.  Two ways for economic growth to occur: 1. Get more resources 2. Get more out of your existing resources (we call this increasing your productivity)

 How does productivity increase? 1.Education (Increase human capital) 2.Technology (Increase capital stock) 3.Specialization (International trade)

GUNS AND BUTTER  This is a scenario of a constant trade-off situation. The trade-off deals with defense vs. consumer and social issues. Each government has to choose between guns and butter. OR

PPF Analysis of Great Depression Era Guns B D A C Match the dates with the points on the PPF Butter

PPF Analysis of Great Depression Era Butter Guns C A B D Point D: 1928 Point C: 1946 Point B: 1933 Point A: 1941