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: 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!

Which would you choose? HawaiiNew York Las VegasCancun ParisTokyo VailTahiti

Trade-offs Individuals –work or free time –study or sleep Business –grow wheat or corn –sell shoes or hats

Alternatives Go to CollegeTake a year off Benefits ?? Decision Go to College right away Take a year off after grad. Opportunity Cost ?? Benefits forgone ?? Decision Making Grid

Thinking at the Margin OptionsBenefitOpportunity Cost 1 summer off?? 1 semester off?? 1 year off??

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

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.

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.”

Chapter 1 Things to think about…

What is the difference between a good and a service?

Why is the idea of scarcity a starting point for thinking economically?

How is scarcity different from shortages?

What special advantages does physical capital offer?

What role do entrepreneurs play in the economy?

Name three examples that illustrate how all decisions involve trade-offs.

Why must the opportunity cost of a decision always be something desirable?

What does the term “guns or butter” mean?

What does it mean to “think at the margin”?

What are the opportunity costs involved in: Name at least 3 for each example

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

Create a decision making grid to defend a decision you will make today

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

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

How is underutilization depicted on a production possibilities frontier?

How does a production possibilities curve illustrate how efficient an economy is?

How does a production possibilities curve illustrate opportunity cost?

Describe a specific event that would make each of the following happen to a production possibilities curve:

A point moves down and to the left The frontier shifts to the right

Describe three services that the government provides to its citizens then identify some of the opportunity costs of providing those services.