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The Economic Way of Thinking Scarcity: The Basic Economic Problem.

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Presentation on theme: "The Economic Way of Thinking Scarcity: The Basic Economic Problem."— Presentation transcript:

1 The Economic Way of Thinking Scarcity: The Basic Economic Problem

2 What Is Scarcity People Have Lots of Desires These are broken down in to two categories WANTS NEEDS Loreman - 2014

3 What Is Scarcity NEED Satisfied by consuming a good or service Necessary for survival FOOD CLOTHING SHELTER Loreman - 2014

4 What Is Scarcity WANT Satisfied by consuming a good or service Satisfy a desire Wants are UNLIMITED Loreman - 2014

5 What Is Scarcity Society cannot satisfy all Needs and Wants WHY? We have limited resources. SCARCITY The situation that exists because there are not enough resources to meet human wants. Loreman - 2014

6 What Is Scarcity ECONOMICS The study of how people choose to use scarce resources Examining how individuals, businesses, and government use their scarce resources Organizing, Analyzing, and Interpreting Data Developing theories and economic laws. Loreman - 2014

7 Principle 1: People Have Wants Loreman - 2014

8 Principle 1: People Have Wants Choice is central to the use of scarce resource. You have a CHOICE about everything. You NEED FOOD……..you WANT Pizza. Loreman - 2014

9 Principle 2: Scarcity Affects Everyone Loreman - 2014

10 Principle 2: Scarcity Affects Everyone Because resources are limited, decisions have to be made about how to best use them. As a result, scarcity affects which goods are made and which services are provided. Loreman - 2014

11 Principle 2: Scarcity Affects Everyone GOODS: physical objects that can be purchased. SERVICES: Work that one person performs for payment Ie. Sales clerk, teachers, nurses, etc. CONSUMER: A person who buys goods or services for personal use. PRODUCER: A person who makes goods or provides services. Loreman - 2014

12 Scarcity Leads to 3 Economic Questions Since resources are SCARCE, we use 3 Economic Questions to Allocate them: What Will Be Produced How Will It Be Produced For Whom Will It Be Produced Loreman - 2014

13 The Factors of Production To Understand how societies have answered the first two basic questions, economists have identified the FACTORS OF PRODUCTION Loreman - 2014

14 The Factors of Production LAND ALL NATURAL RESOURCES Sunshine, water, wildlife, etc. Loreman - 2014

15 The Factors of Production LABOR All human time and effort that go in to making a product. CAPITAL Resources made and used by people to produce goods and services. Loreman - 2014

16 The Factors of Production ENTREPRENEURSHIP Combination of vision, skill, and willingness to take risks that are needed to create and run a new business. Loreman - 2014

17 Economic Choice Today: Opportunity Costs Ch 1, Section 2

18 Making Choices What shapes Economic Choices? Incentives: benefits offered to encourage people to act in certain ways. Utility: benefit or satisfaction gained from a product. Economize: make decisions according to what you believe is the best combination of cost and benefit. Loreman - 2014

19 Motivations for Choice SELF INTEREST Why do you make one decision over another? IE…. You choose to go to a movie with one friend over staying at home to listen to another friend on the phone talk about all of their problems…. SELF INTEREST……THAT’S WHY! Loreman - 2014

20 NO FREE LUNCH Loreman - 2014

21 NO FREE LUNCH Every choice involves costs. Movie…have to listen to your friend complain the next time you see them Telephone Call….you missed the movie. Loreman - 2014

22 Trade Offs and Opportunity Costs Choices ALWAYS involve costs. For every choice you make, you give something up. This is called a TRADEOFF Loreman - 2014

23 Trade Offs and Opportunity Costs An Opportunity Cost is the value of the NEXT BEST alternative….or what you give up by making a different choice. Loreman - 2014

24 Making a Trade-off Loreman - 2014

25 Trade Offs and Opportunity Costs Cost Benefit Analysis: The practice of examining the costs and the expected benefits of a choice as an aid to decision making. Loreman - 2014

26 Trade Offs and Opportunity Costs Loreman - 2014

27 Trade Offs and Opportunity Costs Marginal Costs and Benefits MARGINAL COSTS The cost of using one additional unit of a good or service MARGINAL BENEFITS The benefit of using one additional unit of a good or service Loreman - 2014

28 Analyzing Production Possibilities Ch 1, Section 3

29 A Budget Line 65432106543210 0 2 4 6 8 10 12 DVDs $20 Books $10 12 10 8 6 4 2 0 2 4 6 8 10 12 14 $120 Budget Income = $120 P dvd = $20 = 6 Income = $120 P b = $10 = 12 Attainable Unattainable Quantity of Paperback Books Quantity of DVDs Attainable & Unattainable Combos Trade Offs & Opportunity CostsChoiceIncome Change

30 Economic Models Graphical representations of complex economic activities. Production Possibilities Curve A graphical illustration of the impact of scarcity of resources on the production of goods and services. Loreman - 2014

31 Production Possibilities Curve Basic Assumptions of a PPC Resources are fixed All resources are fully employed Only two things can be produced Technology is fixed. Loreman - 2014

32 Production Possibilities Chart AN EFFICIENT ECONOMY MISSES NO OPPORTUNITIES In this case….along the curve

33 WHAT WE LEARN FROM PPCs LAW OF INCREASING OPPORTUNITY COSTS Each additional unit costs more to make than the last. Loreman - 2014

34 Changing Production Possibilities A SHIFT IN THE PPC The PPC can shift outward if Additional natural resources Increased labor New technology that makes production more efficient Loreman - 2014

35 Economic Growth

36 The Economists Toolbox Sec 4 Loreman - 2014

37 Working with Data Statistics Numerical data or information Economic Models Line Graphs Bar Graphs Pie Charts Loreman - 2014

38 Microeconomics & Macroeconomics Microeconomics The study of the behavior of the individual or the individual firm. Macroeconomics The study of the behavior of the economy as a whole. Loreman - 2014

39 Positive Economics & Normative Economics Positive Economics Scientific Data to back up statements. Normative Economics Value/Opinion based statements Loreman - 2014

40 The Invisible Hand Concept by Adam Smith The Wealth of Nations Smith argues: nations would be wealthier if allowed to engage in free trade. People act in their own best self interest. Loreman - 2014


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