What is Economics? Chapter 1

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

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

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.

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 Sleep Late Wake up early to study Benefits ?? Decision Sleep Late Wake up early to study Opportunity Cost ?? Benefits forgone ?? Decision Making Grid

Thinking at the Margin OptionsBenefitOpportunity Cost 1 st hour of extra study time ?? 2 nd hour of extra study time ?? 3 rd hour of extra study time ??

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

Coffee Tea 50

Coffee Tea 50 Any production in this space is inefficient…you have the supplies but aren’t making the coffee or tea

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 50 Any production along this line is EFFICIENT

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 50 Al gets a loan from The bank and now He can make even More coffee or tea!

Chapter 1 Things to think about…

What is the difference between a good and a service?

How is scarcity different from shortages?

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

How is underutilization depicted on a production possibilities frontier?

How does a production possibilities curve illustrate opportunity cost?

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

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