CHAPTER 1 THE BASICS OF ECONOMICS

WHAT IS ECONOMICS? The science of how people seek to satisfy their needs and wants by making choices based on scarce resources Essentially, how people interact and trade with one another

MERCANTILISM 1500’S-1700’S An economic theory that the prosperity of a nation depends upon its capital, or wealth, trade among nations was considered bad The Enlightenment 1700’s European philosophers began to rethink society, specifically: nature, slavery, religion, trade Adam Smith 1776 publishes “Wealth of Nations” Mercantilism is wrong Government intervention is wrong Trade is good for all parties

ECONOMICS AS A FIELD Economics Finance Industrial Organization Sociology Marketing Resource Management Cousin to Accounting Combines, history, math, psychology, political science

ECONOMIST A person who studies Economics Analyze, explain, predict Ben Stein in Ferris Buhler’s Day Off

ECONOMICS IS Economics is the study of how people make choices to satisfy their needs and wants For example: You must choose how to spend your time Businesses must choose how many people to hire Need: necessary for survival Want: item we desire but not essential for survival

NEED OR WANT?

SCARCITY AND CHOICE But why must people make choices? The reason is SCARCITY. There is a limited supply of goods and services in our world Goods: physical objects Hay, soybeans, orange juice Services: actions or activities that one person performs for another Custom hay harvesting, Pest Control Advisor

GOOD OR SERVICE?

PROBLEM FOR HUMANS People have unlimited wants People have limited resources to get those wants We call this problem: Scarcity

SCARCITY VS. SHORTAGE Scarcity occurs when there are limited quantities of resources to meet unlimited needs or desires Always exists because our needs and wants are greater than our supply A Shortage occurs when producers will not or cannot offer goods or services at the current prices Temporary or long term Often seen during wars droughts

FACTORS OF PRODUCTION Factors of production: resources that are used to make all goods and services 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. Entrepreneurs: Ambitious leaders who decide how to combine land, labor, and capital to create new goods and services.

Look at each of 8 photographs and identify three goods and services for each. You have 1 minute to look at each picture. Do this on your own paper

IDENTIFY THE FOLLOWING AS LAND, LABOR, CAPITAL, OR ENTREPRENEUR Delivery truck Teacher Bill gates Factory Tree Atm machine Corn crop River Hair stylist Gold Henry Ford Barrel of oil Doctor Bulldozer Tractor Farmer Factory worker

CHOICES Because of scarcity, we must all make decisions that involve trade-offs Trade-offs are all the alternatives that we give up whenever we choose one course of action over others. The most desirable alternative given up as a result of a decision is known as opportunity cost. We make decisions everyday! Go to the gym, or sit at home and watch Netflix Hang out with friends, or do homework Work with pig, or play video games

SCENARIO Karen is trying to decide whether to sleep late or get up early to study for a test. Karen likes to sleep. Getting up early is tough. However, getting up early to study would probably improve her test score. She knows that she is choosing between her top two alternatives: sleeping late and waking up early to study. Because of scarcity, she cannot do both. The time can only be occupied in one way. To help her decide, Karen lists the benefits of each alternative on the grid. Waking up early to study will probably result in a better grade. Also, she will receive teacher and parent approval and experience the personal satisfaction that comes with doing well on a test. However, she knows she would enjoy sleeping later and that the extra sleep would give her more energy during the day.

THE DECISION-MAKING GRID Economists encourage us to consider the benefits and costs of our decisions. This is the “all or nothing” scenario BenefitsEnjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction DecisionSleep lateWake up early to study for test Opportunity costExtra study timeExtra sleep time Benefits forgoneBetter grade on test Teacher and parental approval Personal satisfaction Enjoy more sleep Have more energy during the day Sleep lateWake up early to study Alternatives Karen’s Decision-making Grid

THINKING AT THE MARGIN When you decide how much more or less to do, you are thinking at the margin. Making a decision about each extra hour would mean that she was thinking on the margin. Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours of sleep 3 hours of sleep

PRACTICE DETERMINING OPPORTUNITY COST What are some opportunity costs in your life? Example: Everyday, I ask myself: Will you go to the gym for one hour or will you go home and relax for one hour before dinner. If I choose to go home and relax, the opportunity cost is one hour of gym time. If I choose to go to the gym, the opportunity cost is one hour of relaxation before dinner.

PRACTICING WITH OPPORTUNITY COST 1. Working after school every day 2. Training to be an Olympic champion 3. Increasing federal spending on national defense 4. Restricting the development of nuclear power plants 5. Commuting a long distance to work 6. Living at home while attending college

LOOKING AT OPPORTUNITY COST A fictional country produces shoes and watermelons It can produce 21 million tons of watermelon each year OR 15 million pairs of shoes. Watermelons (millions of tons) Shoes (millions of pairs)

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) 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.

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 T Future production Possibilities frontier 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.”

Watermelons (millions of tons) Shoes (millions of pairs) Production Possibilities Graph Watermelons (millions of tons) c (14,12) d (18,9) LOOKING AT OPPORTUNITY 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.

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 LAW OF INCREASING OPPORTUNITY COST Law of increasing opportunity costs: as production switches from one item to another (i.e: from shoes to watermelons), more and more resources are necessary to increase production of the second item (watermelons). Therefore, the opportunity costs increases.

iid=180 iid=180 Education Portal Videos

ACTIVITY Read the story of an entrepreneur Answer the following questions 1. What is the entrepreneur’s famous accomplishment? 2. Identify the factors of production that this entrepreneur used. 3. How was this person able to arrange the factors of production to make a successful business? 4. What risks did the entrepreneur take? What was his or her reward?