Economics: Principles in Action C H A P T E R 1 What Is Economics? © 2001 by Prentice Hall, Inc.

What Is Economics? Economics is the study of how nations & people make choices about scarce resources to produce goods & services which satisfy their needs & wants. For example: You must choose how to spend your time. Businesses must choose how many people to hire. 2 3 Chapter 1, Section 1

Scarcity vs Shortages Scarcity occurs when there are limited quantities of resources to meet unlimited needs or desires. Scarcity is permanent and everyone faces it Shortages occur when producers will not or cannot offer goods or services at current prices. Shortages are temporary. 2 3 Chapter 1, Section 1

The Factors of Production / Resources / Inputs Land All natural resources that are used to produce goods and services. Labor Any effort a person devotes to a task for which that person is paid. Capital Any human-made resource that is used to create other goods and services. Technology The use of science or new ideas to improve production. Entrepreneurship The willingness to take a risk and start a new business. 2 3 Chapter 1, Section 1

The Factors of Popcorn Production 2 3 Chapter 1, Section 1

Services: something done for someone for a fee Goods vs Services Goods: something that is tangible, meaning it can be physically manipulated. Examples: cars, food, CDs, etc. Services: something done for someone for a fee

NEEDS VS WANTS Needs: something that is required for human survival Examples Food, shelter, and clothing Wants: something that is desired but not needed Most goods and services today satisfy human wants since most Western societies do well enough to provide their people with the basic needs Conspicuous Consumption: coined by Thorstein Veblen, he used this term to describe the habit of buying something to impress others

Trade-offs and Opportunity Cost All individuals and groups of people make decisions that involve trade-offs. Trade-offs involve exchanging one thing for the use of another. For example, exchanging money for food. The next best alternative given up as a result of a decision is known as opportunity cost. For example, by buying lunch you cannot spend the money on a cd. 1 3 Chapter 1, Section 2

Marginal Analysis Economists encourage us to consider the benefits and costs of our decisions. Karen’s Decision-making Grid Alternatives Sleep late Wake up early to study Benefits Enjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction Decision Sleep late Wake up early to study for test Opportunity cost Extra study time Extra sleep time Benefits forgone Better grade on test Teacher and parental approval Personal satisfaction Enjoy more sleep Have more energy during the day 1 3 Chapter 1, Section 2

Marginal Analysis Weighing the additional costs vs the additional benefits of a decision is called marginal analysis. . 1 3 Chapter 1, Section 2

Production Possibilities A production possibilities graph shows the possible combinations of two goods/services that can be produced from fixed resources. The production possibilities frontier is the line that shows the maximum possible output for that economy. Watermelons (millions of tons) Shoes (millions of pairs) 25 20 15 10 5 Production Possibilities Graph a (0,15) 15 8 14 b (8,14) 14 18 20 21 12 9 5 A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) 1 2 Chapter 1, Section 3

Watermelons (millions of tons) Shoes (millions of pairs) Opportunity Cost Watermelons (millions of tons) Shoes (millions of pairs) 25 20 15 10 5 Production Possibilities Graph 14 18 21 12 9 8 c (14,12) d (18,9) Opportunity Cost A production possibilities graph shows the opportunity cost of producing more of one item. To move from point c to point d on this graph has a cost of 3 million pairs of shoes. 1 2 Chapter 1, Section 3

Shoes (millions of pairs) Watermelons (millions of tons) 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. Shoes (millions of pairs) 25 20 15 10 5 Watermelons (millions of tons) Production Possibilities Graph c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S g (5,8) A point of underutilization 1 2 Chapter 1, Section 3

Shoes (millions of pairs) Watermelons (millions of tons) Growth Factors Leading to Growth “shifts the production possibilities curve to the right.” 1) Changes in Technology or investment in new capital equipment 2) Discovery of new resources 3) Trade Shoes (millions of pairs) 25 20 15 10 5 Watermelons (millions of tons) Production Possibilities Graph T Future production Possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S 1 2 Chapter 1, Section 3

Absolute vs Comparative Advantage Absolute Advantage: occurs when one country can produce a greater quantity of a good/service than another country. Comparative Advantage: occurs when one country can produce a good/service at a lower opportunity cost than another country. A B C D E 0 5 9 10 15 Guns Country X 60 40 24 20 0 Butter 0 10 19 20 30 Guns Country Y 90 60 33 30 0 Butter

Homework A B C D E 0 5 10 15 20 Guns Country X 50 35 20 15 0 Butter Country Y 40 30 20 10 0 Butter Who has the absolute advantage in guns? In butter? Who has the comparative advantage in guns? In butter? What are acceptable terms of trade? 1g=_____b & 1b=_____g p 11 #1-6, p18 # 1-7;