SCARCITY, OPPORTUNITY COST & THE FOUR FACTORS OF PRODUCTION

OBJECTIVES 1. Define scarcity and explain how it affects your daily life 1. Define scarcity and explain how it affects your daily life 2. Explain why everybody has to make choices 2. Explain why everybody has to make choices 3. Define opportunity cost and explain how it relates to your everybody life 3. Define opportunity cost and explain how it relates to your everybody life 4. Identify & describe the four factors of production 4. Identify & describe the four factors of production 5. Identify the three basic economic questions that every society must answer 5. Identify the three basic economic questions that every society must answer 6. Explain the basic differences between capitalism and socialism 6. Explain the basic differences between capitalism and socialism

WHAT IS SCARCITY? Scarcity – The condition in which our wants are forever greater than the available supply of time, goods, and resources Scarcity – The condition in which our wants are forever greater than the available supply of time, goods, and resources Wants – Things people desire to have Wants – Things people desire to have People want things they expect will give them utility or satisfaction People want things they expect will give them utility or satisfaction Some wants are tangible (able to be felt or touched) EX: Computer, Books, Clothes, Etc. Some wants are tangible (able to be felt or touched) EX: Computer, Books, Clothes, Etc. Some wants are intangible (cannot be felt or touched) EX: Friendship Some wants are intangible (cannot be felt or touched) EX: Friendship

WHAT IS SCARCITY? Because of scarcity, it is impossible to satisfy every desire; wealth does not solve the problem of scarcity Because of scarcity, it is impossible to satisfy every desire; wealth does not solve the problem of scarcity Scarcity is a fact of life throughout the world Scarcity is a fact of life throughout the world Wants are unlimited, resources are limited Wants are unlimited, resources are limited Resources – Anything that is used to produce goods or services Resources – Anything that is used to produce goods or services EX: Land, Labor, Capital, Entrepreneurship EX: Land, Labor, Capital, Entrepreneurship

OPPORTUNITY COST Because of scarcity, people must make choices and each choice incurs an opportunity cost Because of scarcity, people must make choices and each choice incurs an opportunity cost Once one option is chosen, another option is given up Once one option is chosen, another option is given up Trade-offs – All the available alternatives Trade-offs – All the available alternatives Opportunity Cost – The best opportunity or alternative forfeited or given up when a choice is made Opportunity Cost – The best opportunity or alternative forfeited or given up when a choice is made

OPPORTUNITY COST It is the next best thing you would like to do It is the next best thing you would like to do EX: Every time you make a choice you incur an opportunity cost EX: Every time you make a choice you incur an opportunity cost EX: If you have to decide whether to buy a sweater or 2 CDs and you buy the sweater, the opportunity cost is the 2 CDs EX: If you have to decide whether to buy a sweater or 2 CDs and you buy the sweater, the opportunity cost is the 2 CDs EX: The national gov’t decides to spend tax money on a space station. The opportunity cost depends on the next best program not funded EX: The national gov’t decides to spend tax money on a space station. The opportunity cost depends on the next best program not funded

Trade-offs and Opportunity Costs All economic decisions require us to make choices among alternatives. Trade-offs are all the available alternatives. The opportunity cost is the next-best alternative we give up.

DEFINITION OF ECONOMICS Economics – The study of scarcity & choice Economics – The study of scarcity & choice Examines how people choose to satisfy their wants in a world of scarcity Examines how people choose to satisfy their wants in a world of scarcity

FOUR FACTORS OF PRODUCTION Four factors of production are also called resources Four factors of production are also called resources (1) Land (1) Land * All the natural resources found in nature * EX: Water, minerals, forests, gold, diamonds, oil, air, animals, sun, moon

FOUR FACTORS OF PRODUCTION (2) Labor (2) Labor * The mental & physical talents that people use to produce goods & services people use to produce goods & services

FOUR FACTORS OF PRODUCTION (3) Capital (3) Capital * The physical plants, machinery, and equipment used to produce goods * EX: Machinery, tools, computers, trucks, buildings, factories (Each of these is used to produce some other good)

FOUR FACTORS OF PRODUCTION (4) Entrepreneurship (4) Entrepreneurship * The creative ability that some people have for searching out & taking have for searching out & taking advantage of new business opportunities advantage of new business opportunities and for developing innovative new and for developing innovative new products or new ways of doing things products or new ways of doing things * EX: Bill Gates – Microsoft Sam Walton – Wal-Mart Sam Walton – Wal-Mart Donald Trump Donald Trump * Entrepreneurs are willing to take great risks

ENTREPRENEURS Bill Gates Sam Walton Donald Trump

THREE FUNDAMENTAL ECONOMIC QUESTIONS Every nation must answer the following 3 questions: Every nation must answer the following 3 questions: (1) What goods will be produced? (1) What goods will be produced? * Which goods are to be produced & in what quantities * EX: Should society produce more CDs and fewer computer software programs? * More of one good, leaves fewer resources to produce other goods

THREE FUNDAMENTAL ECONOMIC QUESTIONS (2) How will the goods be produced? (2) How will the goods be produced? * This question requires society to decide the resource mix used to produce goods * Will a production technique be more or less capital-intensive? * EX: Will farmers using modern farm tractors produce food, or will farmers using primitive tools produce it?

THREE FUNDAMENTAL ECONOMIC QUESTIONS (3) For whom will the goods be produced? (3) For whom will the goods be produced? * Will anyone who is able & willing to pay the prices for the goods be able to receive them, or will the gov’t decide who receives them?

TWO MAJOR ECONOMIC SYSTEMS Economic System – The way in which a society answers the What, How, and For Whom to produce questions Economic System – The way in which a society answers the What, How, and For Whom to produce questions Two Major Economic Systems: Two Major Economic Systems: (1) Capitalism (1) Capitalism (2) Socialism (2) Socialism Economic goals (equity, efficiency, freedom, growth, security, and stability) influence the way in which a society answers the three economic questions Economic goals (equity, efficiency, freedom, growth, security, and stability) influence the way in which a society answers the three economic questions

CHARACTERISTICS OF CAPITALISM Also known as a market or free-market economy Also known as a market or free-market economy The three basic questions are answered by the individual and business owners who produce goods & services for those who are willing & able to afford them The three basic questions are answered by the individual and business owners who produce goods & services for those who are willing & able to afford them Economic decisions are made by producers & consumers Economic decisions are made by producers & consumers Consumers “vote” on what to produce through purchases Consumers “vote” on what to produce through purchases Producers determine what to produce Producers determine what to produce

CHARACTERISTICS OF CAPITALISM Freedom of competition Freedom of competition Private ownership Private ownership Resources are privately owned Resources are privately owned Voluntary exchange Voluntary exchange Choice Choice Income depends on incentives and profit Income depends on incentives and profit Social goals include efficiency, freedom and growth Social goals include efficiency, freedom and growth Results in unequal economic classes Results in unequal economic classes

ADAM SMITH Founder of capitalism Founder of capitalism Wrote The Wealth Of Nations in 1776 Wrote The Wealth Of Nations in 1776

CHARACTERISTICS OF SOCIALISM Also known as a command economy or communism Also known as a command economy or communism Answers the three basic economic questions through government decisions in the interests of all the citizens Answers the three basic economic questions through government decisions in the interests of all the citizens Economic decisions are made by the government Economic decisions are made by the government Resources are owned by the government Resources are owned by the government Goal is to bring economic equality & security Goal is to bring economic equality & security

CHARACTERISTICS OF SOCIALISM Aims for a classless society Aims for a classless society Filling the plan or quotas is a priority Filling the plan or quotas is a priority Life-long employment & universal health care Life-long employment & universal health care

KARL MARX Founder of socialism Founder of socialism Wrote The Communist Manifesto Wrote The Communist Manifesto

MIXED ECONOMY Answers the what, how, & for whom questions through a mixture of market & command features Answers the what, how, & for whom questions through a mixture of market & command features U.S. is a mixed economy U.S. is a mixed economy