1. What is Economics?
Chapter 1

2. Section 1 Scarcity and Factors of Production

3. Book: Scarcity

4. What is Economics?
Economics is the study of how people seek to satisfy their needs and wants by making choices.
For example:
You must choose how to spend your time
Businesses must choose how many people to hire

5. Micro v. Macro Microeconomics Macroeconomics
the branch of economics that examines the choices of individuals concerning one product, one firm, or one industry.
the branch of economics that examines the behavior of the whole economy at once.

6. The fundamental economic problem facing all societies is Scarcity.

7. Scarcity
occurs when there are limited quantities of resources to meet unlimited needs or desires Vs
Shortages
occur when producers will not or cannot offer goods or services at current prices

8. Scarcity Choices Three Basic Questions WHAT to Produce?
HOW to Produce?
FOR WHOM to Produce?
Should they produce military goods or food?
Should they use equipment and few people or use more people and less equipment?
How are the things produced allocated?

9. Economists call the resources that are used to make all goods and services, the factors of production.

10. The Factors of Production
All the processes involved in making wealth and bringing it from its place of origin to the ultimate consumer.
Land
Labor
Capital

11. Land
All natural resources that are used to produce goods and services.

12. Labor
Any effort a person devotes to a task for which that person is paid.

13. Capital
Any human-made resource that is used to create other goods and services.
Physical Capital – (a.k.a capital goods) all the human-made goods that are used to produce other goods and services; tools and buildings
Human Capital – the skills and knowledge gained by a worker through education and experience

14. Entrepreneurs
Ambitious leaders who combines land, labor, and capital to create and market new goods and services.

15. Production
When all factors of production (land, labor, capital and entrepreneurship) are present, production, or the process of creating goods and services, can take place.

16. The Circular Flow

17. Economists say that all goods and services are scarce because the land, labor, and capital used to create them are scarce.

18. The Doorbell Rang
Answer the Questions in your Note Packet Labeled “The Doorbell Rang” based on the reading of this children’s book.

19. Section 2 Opportunity Cost

20. Book: Opportunity Cost

21. Trade-offs
Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.

22. Trade-offs Individuals and Trade-offs Businesses and Trade-offs
Society and Trade-offs
If you choose to spend more time at work, you give up watching a movie or going to a baseball game.
A farmer who decides to plant broccoli cannot use the same land at the same time to grow cauliflower.
“guns or butter”
A country who decides to produce more military goods (“guns”), has fewer resources to devote to consumer goods (“butter”) and vice versa.

23. Trade-offs Which alternative would you choose?
Sleep late or wake early for a ski trip?
Sleep late or wake early to eat breakfast?
Sleep late or wake early to study for a test?

24. Opportunity Cost
The most desirable alternative given up as a result of a decision is known as opportunity cost.

25. Now, in English please…
In life, every choice we make comes at a cost since we forgo other possible alternatives in the process; this cost — whether it’s money, time, education, health, et cetera — is known as an opportunity cost.
An opportunity cost is the value or benefit of the next best alternative.

26. Opportunity Cost: Example

27. Trade-Offs
What is Calvin doing when his father asks him to do a chore?
What other activity might Calvin have been planning to engage in?

28. Trade-Offs What are Calvin’s trade-offs for choosing to do the chore?
What will Calvin get if he does the chore?

29. Trade-Offs
How do the trade-offs for choosing to do the chore change after Calvin demands $25.00 for it?

30. Activity: Monthly Budget
Let’s See the Trade Offs I have made this year – i.e. my BUDGET
You create one and justify your trade-offs.

31. At times, a decision’s opportunity cost may be unclear or complicated
At times, a decision’s opportunity cost may be unclear or complicated. Using a decision-making grid can help you determine whether you are willing to accept the opportunity cost of a choice you are about to make.

32. Karen’s problem: sleep late or get up early to study for a test.
Decision-Making Grid
Karen’s problem: sleep late or get up early to study for a test.

33. In addition to opportunity costs, when economists look at decisions, they point out that many decisions involve adding one unit or subtracting one unit. When deciding how much more or less to do, you are thinking at the margin.

34. Thinking at the Margin
Deciding whether to do or use one additional unit of some resource, whether that resource be a dollar, a minute, etc…

35. Now back to Karen…
When deciding whether or not to study, Karen used the “all-or-nothing” approach.
In reality, Karen could have decided from several options or, in other words, she could have made a decision at the margin.

36. Thinking at the Margin
If Karen…

37. Thinking at the Margin Now, consider this…
Is it worth it to spend 3 hours of studying if your grade is going to increase only slightly?

38. Thinking at the Margin What should Karen do?
At 3 hours, the cost outweighs the benefit. This is thinking at the margin!

39. Thinking at the Margin
Comparing opportunity costs and benefits at the margin could help someone decide
How much money to spend on a car
How many hours to work
How much time to spend watching TV
How many extra workers to hire
If a government program should include more of a particular benefit

40. Thinking at the Margin can also be called cost/benefit analysis
Thinking at the Margin can also be called cost/benefit analysis! What will you sacrifice? What will you gain?

41. Section 3: Production Possibility Curves

42. In continuing the discussion on opportunity costs and trade-offs, we are now going to describe tools that economists use to analyze these concepts.

43. Production Possibilities Curve
A production possibilities graph shows alternative ways that an economy can use its resources.
The axes of the graph can be used to show categories of goods and services, such as farm goods and factory goods.
The axes can also be used to show any pair of specific goods or services, such as watermelon and shoes.

44. Production Possibilities Curve
Notice, our country can produce a maximum of 15m pairs of shoes OR 21m tons of watermelons.

45. If the citizens of our country wanted to produce BOTH watermelons and shoes, there are several different ways we can use our resources.

46. Production Possibilities Frontier

47. By plotting six different combinations of watermelon and shoes, we created a production possibilities frontier.

48. Production Possibilities Frontier
The production possibilities frontier is the line that shows the maximum possible output for that economy.

49. Production Possibilities Frontier
Each point represents a trade-off. To produce more shoes you produce less watermelons.
WHY? Scarcity! Using the factors of production to make one product means that fewer resources are left to make something else.

50. Production possibilities graphs can tell us important information
Production possibilities graphs can tell us important information. They can show how efficient an economy is, whether an economy has grown or shrunk, and the opportunity cost of a decision to produce more of one good or service.

51. Add definition to sheet
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.
Add definition to sheet

52. Shoes (millions of pairs) Watermelons (millions of tons)
Underutilization
Shoes (millions of pairs) 25 20 15 10 5
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
Underutilization means using fewer resources than an economy is capable of using.
This can happen if workers were laid-off and farms or factories produced fewer goods.

53. Shoes (millions of pairs) Watermelons (millions of tons)
Growth
Shoes (millions of pairs) 25 20 15 10 5
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
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.”

54. Lack of Growth
Just as a country’s production capacity can increase so to can it decrease.
When a country’s production capacity decreases, the curve shifts to the left.
A decrease can result from a country going to war and losing territory (land), an aging population (labor), and/or a lack of education (human capital).

55. Watermelons (millions of tons) Shoes (millions of pairs)
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.
Watermelons (millions of tons)
Shoes (millions of pairs) 25 20 15 10 5
Production Possibilities Graph 14 18 21 12 9 8
c (14,12)
d (18,9)

56. Increasing Costs
A switch from shoes to watermelons comes at an increasing cost. Each time we grow more watermelons, the sacrifice in terms of shoes increases.
Note that at the bottom it costs an additional 5m pairs of shoes to increase watermelon production by ONLY 1m tons.

57. Add definition to sheet
Law of Increasing Cost
Law that states that as we shift factors of production from making one good or service to another (shoes to watermelon), the cost of producing the second item (watermelon) increases.
Add definition to sheet

58. Why does the cost increase?

60. The final piece of the equation…
A country’s production possibilities depends on BOTH its technological level and the resources it has.

61. Activity: Production Possibility Curves
Complete the activity and turn it in at the end of class for credit.