1. The Economic Way of Thinking

2. Scarcity: The Basic Economic Problem
What Is Scarcity?
KEY CONCEPTS
Wants — desires that can be met by consuming products
Needs — things necessary for survival
Scarcity — lack of resources available to meet all human wants
not a temporary shortage
Economics — study of how people use resources to satisfy wants
examines how individuals and societies choose to use resources
organizes, analyzes, interprets data about economic behaviors
develops theories, economic laws to explain economy, predict future

3. What Is Scarcity? Principle 1: People Have Wants
People make choices about all their needs and wants
Wants are unlimited, ever changing

4. What Is Scarcity? Principle 2: Scarcity Affects Everyone
Scarcity affects which goods and services are provided
Goods — physical objects that can be bought
Services — work one person does for another for pay
Consumer — person who buys good or service for personal use
Producer — person who makes a good or provides a service

5. Scarcity Leads to Three Economic Questions
Question 1: What Will Be Produced?
Societies must decide on mix of goods to produce
depends in part on their natural resources
Some countries allow producers and consumers to decide
In other countries, governments decide
Must also decide how much to produce; choice depends on societies’ wants

6. Scarcity Leads to Three Economic Questions
Question 2: How Will It Be Produced?
Decisions on production methods involve using resources efficiently
decisions influenced by a society’s natural resources
Societies adopt different approaches
with unskilled labor force, might use labor-intensive methods
with skilled labor force, might use capital-intensive methods

7. Scarcity Leads to Three Economic Questions
Question 3: For Whom Will It Be Produced?
How goods and services are distributed involves two questions
how should each person’s share be determined?
how will goods and services be delivered to people?

8. The Factors of Production
KEY CONCEPTS
Factors of production — resources needed to produce goods and services
include land, labor, capital, entrepreneurship
supply is limited

9. The Factors of Production
Factor 1: Land
Land means all natural resources on or under the ground
includes water, forests, wildlife, mineral deposits

10. The Factors of Production
Factor 2: Labor
Labor is all the human time, effort, talent used to make products
physical and mental effort used to make a good or provide a service

11. The Factors of Production
Factor 3: Capital
Capital is a producer’s physical resources
includes tools, machines, offices, stores, roads, vehicles
sometimes called physical capital or real capital
Workers invest in human capital — knowledge and skills
workers with more human capital are more productive

12. The Factors of Production
Factor 4: Entrepreneurship
Entrepreneurship — vision, skill, ingenuity, willingness to take risks
Entrepreneurs anticipate consumer wants, satisfy these in new ways
develop new products, methods of production, marketing or distributing
risk time, energy, creativity, money to make a profit

13. Economic Choice Today: Opportunity Cost
Making Choices
KEY CONCEPTS
Economic choices shaped by
Incentives — benefits that encourage people to act in certain ways
Utility — benefit or satisfaction gained from using a good or service
To make choices, people economize:
make decisions according to best combination of costs and benefits

14. Making Choices Factor 1: Motivations for Choice
People motivated by incentives, expected utility, desire to economize
They weigh costs against benefits to make purposeful choices
motivated by self-interest: look for ways to maximize utility

15. Making Choices
Factor 2: No Free Lunch “There is no such thing as a free lunch!”
All choices have a cost
choosing one thing means giving up another, or paying a cost
cost can take form of money, time, other thing of value
Even if something is free to you, is it really free?

16. Trade-Offs and Opportunity Cost
KEY CONCEPTS
Trade-off is alternative people give up when they make a choice
usually means giving up some, not all, of a thing to get more of another

17. Trade-Offs and Opportunity Cost
Example 2: Counting the Opportunity Cost
Opportunity cost is value of next-best alternative a person gives up
not the value of all possible alternatives
Dan chooses to work for six months so he can travel for six months opportunity cost – 6 months of salary
LeBron James, Cam Newton

18. Analyzing Choices KEY CONCEPTS
Cost-benefit analysis — examination of costs, expected benefits of choices
one of most useful tools for evaluating relative worth of economic choices

19. Analyzing Choices Example: Marginal Costs and Benefits Marginal cost
additional cost of using one more unit of a good or service
Marginal benefit
additional benefit of using one more unit of a good or service
When making a decision, we weigh the marginal costs and marginal benefits
Rational decisions = when marginal benefits = or are > marginal costs

20. Graphing the Possibilities
Analyzing Production Possibilities
Graphing the Possibilities
KEY CONCEPTS
Economic models — simplified representations of economic forces
Production possibilities curve (PPC) is one model
maximum goods or services that can be produced from limited resources
also called production possibilities frontier

21. Graphing the Possibilities
Production Possibilities Curve
PPC based on assumptions that simplify economic interactions
resources are fixed
all resources are fully employed
only two things can be produced
Technology is fixed
PPC runs between extremes of producing only one item or the other
Data is plotted on a graph; lines joining points is PPC
shows maximum number of one item relative to other item
PPC shows opportunity cost of each choice
more of one product means less of the other

22. What We Learn from PPCs KEY CONCEPTS Concepts revealed by PPC:
Efficiency — producing the maximum amount of goods and services possible
Underutilization — producing fewer goods and services than possible

23. What We Learn from PPCs Example: Efficiency and Underutilization
Each point on PPC represents efficiency
points inside curve mean underutilization; outside curve cannot be met
Law of increasing opportunity costs
as production switches from one product to another, more resources needed to increase production of second product
Reasons for increasing cost of making more of one product
need new resources, machines, factories
must retrain workers
Costs paid by making less and less of other product

25. Changing Production Possibilities
Example: A Shift in the PPC
A country’s supply of resources changes over time
Example: U.S. in 1800s grew, gained resources, workers, new technology
new resources mean new production possibilities beyond frontier
Increased production shown on PPC as shift of curve outward
Increase in total output called economic growth

27. The Economists Toolbox
Working with Data
Statistics — numerical data or information
show patterns of human behavior
Economic models help organize and interpret data

28. Microeconomics and Macroeconomics
Microeconomics — studies behavior of individual players in an economy
includes individuals, families, businesses
Microeconomics examines specific, individual elements in an economy
prices, costs, profits, competition, consumer and producer behavior
Some Topics of Interest: business organization, labor markets, environmental issues

29. Microeconomics and Macroeconomics
Macroeconomics — studies behavior of economy as a whole
topics include inflation, unemployment, aggregate demand and aggregate supply
Macroeconomics studies sectors — combination of all individual units
Includes consumer, business, public or government sectors
Macroeconomics studies national or global topics:
monetary system, business cycle, tax policies, international trade

30. Positive Economics and Normative Economics
Positive economics describes and explains economic behavior as it is
uses verifiable facts; does not make judgments
Normative economics studies what economic behavior should be
makes value judgments to recommend future actions

31. Adam Smith: Founder of Modern Economics
Seeing the Invisible
An Inquiry into the Nature and Causes of the Wealth of Nations, 1776
challenged mercantilism; argued for free trade
Invisible hand guides free marketplace, benefits sellers and buyers
people pursue own economic self-interest
producers sell at prices that satisfy them and that consumers will pay