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

It goes for individuals, families, and businesses What type of Economic decisions would a business owner or manager need to make? Hiring/firing/laying off. What to produce How much to spend on marketing The average day is spent making these types of decisions—Economics

The Factors of Production C.E.L.L. – T (4 major factors and a 5 th factor = Technology) Capital (Physical) Any human-made resource that is used to create other goods and services. (ex. Hammer, printer, tractor, etc.) Capital (Human) skills a worker gains through experience; skills which help people perform labor. (ex. Schooling, training, internships, apprenticeships, etc) Entrepreneurship – the owner or individual who starts, runs and/or controls the operations of a business. (They are the key factor! They are the factor that brings the other factors together!) (ex. Bill Gates, MSN, etc.) Land - All natural resources that are used to produce goods and services. (ex. Gold, cow, farm (land), peach, oil, etc.) Labor - all human work used to produce goods/services for which that person is paid. Technology – an improvement in practice or capital that increases productivity (= increased output without increased input.) (ex. Computer, computer program, microwave, assembly lines, etc.)

Scarcity vs. Shortages Scarcity occurs when there are limited quantities of resources to meet unlimited needs or desires. (forever) Shortages occur when producers will not or cannot offer goods or services at current prices. (long or short term)

What is the difference between a need and a want? Need:Something like air, food, or shelter that is necessary for survival. Want:An item that we desire but that is not essential to survival.

Micro - Macro What is the difference? Micro:The study of the economic behavior and decision making of small units, such as individuals, families, and businesses Macro:The study of the behavior and decision making of entire economies.

Trade-offs and Opportunity Cost All individuals and groups of people make decisions that involve trade-offs. Trade-offs are all the alternatives that you have, before a decision is made. Opportunity cost is the (single) most desirable alternative given up, after a decision is made.

Opportunity Cost Does every decision you make involve trade-offs? Explain? How do you arrive at a decision?

The Decision-Making Grid (Cost-Benefit Analysis) Economists encourage us to consider the benefits and costs of our decisions. Karen’s Decision-making Grid Alternatives Sleep lateWake up early to study Benefits Enjoy more sleep Have more energy during the day Sleep late Decision Opportunity cost Extra study time Benefits forgone Better grade on test Teacher and parental approval Personal satisfaction Better grade on test Teacher and parental approval Personal satisfaction Wake up early to study for test Extra sleep time Enjoy more sleep Have more energy during the day

Thinking at the Margin When you decide how much more or less to do, you are thinking at the margin.

Production Possibilities Graphs What is the purpose?

Production Possibilities A production possibilities graph shows alternative ways that an economy can use its 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) Production Possibilities Graph Watermelons (millions of tons) 0 a (0,15) b (8,14) A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0)

Underutilization Underutilization means that an economy is producing below the production possibilities frontier. Reasons for underutilization: War, famine, disease, disasters, etc. Shoes (millions of pairs) Watermelons (millions of tons) Production Possibilities Graph g (5,8) A point of underutilization c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S

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) 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

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.” Shoes (millions of pairs) 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

Cost Cost A production possibilities graph shows the 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. Watermelons (millions of tons) Shoes (millions of pairs) Production Possibilities Graph Watermelons (millions of tons) c (14,12) d (18,9)

TINSTAAFL There Is No Such Thing As A Free Lunch = Everything has a cost. This idea originated with an ad during the Great Depression, which read “Free Lunch” You would get a free “sandwich” (small), but you would be expected to buy at least one of the following: –Drink –Salad –Chips –Other sides –The cost of this “side” good would make up for the cost of the “free” sandwich.

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