2. Unit 1: Foundations of Economics What comes to your mind when you hear the word SCARCE? (video about scarcity)

3. What is Economics? “A science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants.” – Addison-Wesley “A science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants.” – Addison-Wesley

4. OBJECTIVES 1.1 EXPLAIN why scarcity and choice are basic problems of economics EXPLAIN why scarcity and choice are basic problems of economics IDENTIFY land, labor, and capital as the three factors of production, and identify the two types of capital IDENTIFY land, labor, and capital as the three factors of production, and identify the two types of capital EXPLAIN the role of entrepreneurs EXPLAIN the role of entrepreneurs EXPLAIN why economists say all resources are scarce EXPLAIN why economists say all resources are scarce

5. What is Economics? So then the big two concepts are that: So then the big two concepts are that: Resources are scarce! Resources are scarce! Society has unlimited needs and wants! Society has unlimited needs and wants! Economics decides the “best” way of providing one to the other

6. Scarcity Definition Definition A situation in which the amount of something actually available would not be sufficient to satisfy the desire for it, if it were provided free of charge. A situation in which the amount of something actually available would not be sufficient to satisfy the desire for it, if it were provided free of charge.

7. Factors of Production There are 4 factors that must all be used to produce anything There are 4 factors that must all be used to produce anything Natural Resources (also referred to as “land”) Natural Resources (also referred to as “land”)

8. Factors of Production There are 4 factors that must all be used to produce anything There are 4 factors that must all be used to produce anything Labor – effort of a person for which they are paid Labor – effort of a person for which they are paid

9. Factors of Production There are 4 factors that must all be used to produce anything There are 4 factors that must all be used to produce anything Capital – human-made resources used to create other goods Capital – human-made resources used to create other goods

10. Factors of Production 2 Kinds of Capital 2 Kinds of Capital Physical Capital – Also called Capital Goods, objects that are used to produce other goods Physical Capital – Also called Capital Goods, objects that are used to produce other goods

11. Factors of Production 2 Kinds of Capital 2 Kinds of Capital Human Capital – knowledge or skills workers get from education and experience Human Capital – knowledge or skills workers get from education and experience

12. Factors of Production There are 4 factors that must all be used to produce anything There are 4 factors that must all be used to produce anything Entrepreneurship – person who takes a risk in combining the other 3 factors to create a new good Entrepreneurship – person who takes a risk in combining the other 3 factors to create a new good

13. 1.1 QUIZ – get a partner! 1. Which of the following are factors of production? 1. Which of the following are factors of production? a. Capital and Land a. Capital and Land b. Scarcity and shortages b. Scarcity and shortages c. Technology and productivity c. Technology and productivity d. economics and business decisions d. economics and business decisions

14. Answer is … a. capital and land a. capital and land

15. Next question … 2. Which of the following is an example of using physical capital to save time and money? 2. Which of the following is an example of using physical capital to save time and money? a. hiring more workers to do a job? a. hiring more workers to do a job? b. building extra space in a factory to simplify production b. building extra space in a factory to simplify production c. switching from oil to coal to make production cheaper c. switching from oil to coal to make production cheaper d. lowering workers’ wages to increase profits d. lowering workers’ wages to increase profits

16. Answer is … b. building extra space in a factory to simplify production b. building extra space in a factory to simplify production

17. next question … 3. To what part of an industry does a worker’s education contribute? 3. To what part of an industry does a worker’s education contribute? a. technology a. technology b. physical capital b. physical capital c. human capital c. human capital d. scarce resources d. scarce resources

18. Answer is … c. human capital c. human capital

19. next question … 4. Which of the following is an entrepreneur? 4. Which of the following is an entrepreneur? a. a person who earns a lot of money as a singer or dancer a. a person who earns a lot of money as a singer or dancer b. a person who creates a game and sells it to a game manufacturer b. a person who creates a game and sells it to a game manufacturer c. a person who starts an all-organic cleaning supplies business that employs others c. a person who starts an all-organic cleaning supplies business that employs others d. a person who works as a highly paid computer programmer d. a person who works as a highly paid computer programmer

20. Answer is … c. a person who starts an all-organic cleaning supplies business that employs others c. a person who starts an all-organic cleaning supplies business that employs others

21. Next … 5. What is the difference between a shortage and scarcity? 5. What is the difference between a shortage and scarcity? a. A shortage can be temporary or long-term, but scarcity always exists. a. A shortage can be temporary or long-term, but scarcity always exists. b. A shortage results from rising prices; scarcity results from falling prices. b. A shortage results from rising prices; scarcity results from falling prices. c. A shortage is a lack of all goods and services; scarcity concerns a single item. c. A shortage is a lack of all goods and services; scarcity concerns a single item. d. There is no real difference between a shortage and scarcity d. There is no real difference between a shortage and scarcity

22. answer … a. A shortage can be temporary or long- term, but scarcity always exists! a. A shortage can be temporary or long- term, but scarcity always exists!

23. next…. 6. What does an economist mean by the term LAND? 6. What does an economist mean by the term LAND? a. farmland only a. farmland only b. food crops grown on farmland as well as the farmland itself b. food crops grown on farmland as well as the farmland itself c. goods and services that are produced form the land c. goods and services that are produced form the land d. all natural resources used to produce goods and services d. all natural resources used to produce goods and services

24. answer … d. all natural resources used to produce goods and services! d. all natural resources used to produce goods and services!

25. Survival Activity You will be working in groups of 3-4. You will be working in groups of 3-4. Arrange the desks so that your group is separate from the other groups in the room. Arrange the desks so that your group is separate from the other groups in the room. Assign roles in your group. Assign roles in your group. Let’s get started! Let’s get started!

26. Step 1 Review the island’s environment and equipment that remains. Review the island’s environment and equipment that remains. You have 10 minutes to figure out how you will survive. You have 10 minutes to figure out how you will survive. Be prepared to share your survival plan with the class. Be prepared to share your survival plan with the class.

27. Thinking further… What did you make to eat or for shelter? What did you make to eat or for shelter? How did you make it? How did you make it? Who made it? Who made it? What natural resources were used? What natural resources were used? What tools were used? What tools were used? Did everyone get a share of what was produced? Did everyone get a share of what was produced? Did the goods go only to those who helped to produce them? Did the goods go only to those who helped to produce them? Did a leader decide who got what? Did a leader decide who got what? Did those who did not work get any of the goods produced? Did those who did not work get any of the goods produced?

28. Allocation (use) of Resources Because there is never enough to satisfy everyone, there has to be some way of allocating all resources, and the goods and services they produce. Because there is never enough to satisfy everyone, there has to be some way of allocating all resources, and the goods and services they produce. Allocating requires rules and those rules determine the type of competition that takes place. Allocating requires rules and those rules determine the type of competition that takes place. Even no rules will quickly become a rule—the rule of force where desirable things are acquired by the meanest and strongest who simply take what they want from others. Even no rules will quickly become a rule—the rule of force where desirable things are acquired by the meanest and strongest who simply take what they want from others.

29. Five common methods include the following: 1. Rule of force 2. First come-first serve 3. Government 4. Markets 5. Appearance and personality

30. Rule of Force Important function of government is to outlaw the rule of force Important function of government is to outlaw the rule of force Needs to be replaced by better rules Needs to be replaced by better rules Competition through force remains common between governments in the form of wars. Competition through force remains common between governments in the form of wars. Rule of force is costly to society Rule of force is costly to society it motivates destructive competition it motivates destructive competition discourages productive competition discourages productive competition

31. First Come-First Serve This rule causes people to compete by waiting in line, with the competition favoring those who wait the longest. This rule causes people to compete by waiting in line, with the competition favoring those who wait the longest. Does not motivate destructive competition, but neither does it motivate productive cooperation that can make everyone better off. Does not motivate destructive competition, but neither does it motivate productive cooperation that can make everyone better off. Waiting in line does nothing to get people to work together to produce more of what people are waiting for, or more of anything else of value. Waiting in line does nothing to get people to work together to produce more of what people are waiting for, or more of anything else of value.

32. Government A way of making sure that things go to those who most deserve them instead of to those best able to compete A way of making sure that things go to those who most deserve them instead of to those best able to compete Method doesn't eliminate competition; they just change the type of competition that takes place. Method doesn't eliminate competition; they just change the type of competition that takes place. The more wealth government allocates, the more money people will spend contributing to political campaigns, hiring lawyers and lobbyists to influence the decisions of politicians. The more wealth government allocates, the more money people will spend contributing to political campaigns, hiring lawyers and lobbyists to influence the decisions of politicians.

33. Markets Firms compete for more customers and higher profits, workers compete for better jobs and larger incomes, and consumers compete by being willing to pay more for the products they value most. Firms compete for more customers and higher profits, workers compete for better jobs and larger incomes, and consumers compete by being willing to pay more for the products they value most.

34. Appearance & Personality People want to be popular, have good friends, get invited to parties, and get dates for Saturday night, and they will compete for these things by making efforts to improve their appearances and personalities. People want to be popular, have good friends, get invited to parties, and get dates for Saturday night, and they will compete for these things by making efforts to improve their appearances and personalities. This competition is certainly productive because it results in people being more pleasant to be around. But it doesn’t motivate the development of skills and efforts that produce more general goods and services, as market competition does. This competition is certainly productive because it results in people being more pleasant to be around. But it doesn’t motivate the development of skills and efforts that produce more general goods and services, as market competition does.

35. FIVE appealing VACATION Destinations… HawaiiParis Dunns River Falls, Jamaica Alaska Ireland List your choices of vacation in your notebook #’s 1-5. Opportunity Cost

36. Making Economic Decisions Every decision we make involves trade-offs – alternatives that we must give up when we make a choice Every decision we make involves trade-offs – alternatives that we must give up when we make a choice

37. Making Economic Decisions The most desirable of the options you pass up is called the Opportunity Cost The most desirable of the options you pass up is called the Opportunity Cost Rank sleep, studying, and playing video games 1 st, 2 nd, and 3 rd on a list for what you value the most Rank sleep, studying, and playing video games 1 st, 2 nd, and 3 rd on a list for what you value the most

38. Making Economic Decisions 1 st Place is what you would choose to do 1 st Place is what you would choose to do 2 nd Place is your opportunity cost (you give it up to do option 1) 2 nd Place is your opportunity cost (you give it up to do option 1)

39. Making Economic Decisions What other option do you have other than using 3 hours for one task? What other option do you have other than using 3 hours for one task? You could split your time among multiple activities! You could split your time among multiple activities! Thinking at the Margin – decision involving adding one unit and subtracting one unit, rather than all or nothing Thinking at the Margin – decision involving adding one unit and subtracting one unit, rather than all or nothing

40. Making Economic Decisions OptionsBenefit Opportunity Cost 0 hours studying, 3 hours sleeping F on Test None 1 hours studying, 2 hours sleeping C on Test 1 hour of sleep 2 hours studying, 1 hour sleeping B on Test 2 hours of sleep 3 hours studying B+ on Test 3 hours of sleep

41. Making Economic Decisions There is a point at which you are paying the same increase in cost, but seeing lower benefits There is a point at which you are paying the same increase in cost, but seeing lower benefits You must make the decision as to whether the cost is worth it You must make the decision as to whether the cost is worth it This same process is used by businesses and consumers to make decisions This same process is used by businesses and consumers to make decisions

42. GRAPHS…. WHY do graphs sometimes show information more clearly than text or tables? WHY do graphs sometimes show information more clearly than text or tables? Section 1.3 – Production Possibilities Curves

43. Production Possibilities

44. Production Possibilities Graph – shows alternatives to what an economy can produce Production Possibilities Graph – shows alternatives to what an economy can produce The outer red line shows the maximum possible output with any given combination The outer red line shows the maximum possible output with any given combination This is the Production Possibilities Frontier (or Curve) This is the Production Possibilities Frontier (or Curve)

45. Production Possibilities To move from one point to another, the economy must make trade- offs To move from one point to another, the economy must make trade- offs

46. Production Possibilities Any point along the line shows the economy operating at maximum efficiency Any point along the line shows the economy operating at maximum efficiency Any point below the line is underutilization – they are not getting all that they could Any point below the line is underutilization – they are not getting all that they could Any point above the line is presently impossible, until new resources are available Any point above the line is presently impossible, until new resources are available

47. Production Possibilities Production Possibilities Graph – shows alternatives to what an economy can produce Production Possibilities Graph – shows alternatives to what an economy can produce Let’s say we can produce 2 things: Guns and Butter Let’s say we can produce 2 things: Guns and Butter

48. Production Possibilities Why does the graph curve instead of making a straight line? Why does the graph curve instead of making a straight line? Law of Increasing Costs – as production increases for one item, more and more resources are necessary to increase production of the second item! The OPPORTUNITY COST increases… Law of Increasing Costs – as production increases for one item, more and more resources are necessary to increase production of the second item! The OPPORTUNITY COST increases…

49. Production Possibilities Every resource is best suited for certain types of goods Every resource is best suited for certain types of goods Farmland and cows make butter Farmland and cows make butter Metals and factories make guns and many times you hear about butter vs. guns due to military spending on weaponry using resources … Metals and factories make guns and many times you hear about butter vs. guns due to military spending on weaponry using resources … To convert butter production to guns, you must sell the cows and build new factories on the land To convert butter production to guns, you must sell the cows and build new factories on the land

50. QUIZ time.. grab a partner! 1. The economic concept of guns or butter means that … 1. The economic concept of guns or butter means that … a. a person can spend extra money either on sports equipment or food. a. a person can spend extra money either on sports equipment or food. b. a company must decide whether to manufacture guns or butter b. a company must decide whether to manufacture guns or butter c. a government must decide whether to produce more or less military or consumer goods c. a government must decide whether to produce more or less military or consumer goods d. a government can buy unlimited military and civilian goods if it is rich enough d. a government can buy unlimited military and civilian goods if it is rich enough

51. answer … c. a government must decide whether to produce more or less military or consumer goods … trade off …. due to scarcity! c. a government must decide whether to produce more or less military or consumer goods … trade off …. due to scarcity!

52. next.. 2. If a person who wants to buy a compact disc (CD) has just enough money to buy one, and chooses CD A instead of CD B, then CD B is the 2. If a person who wants to buy a compact disc (CD) has just enough money to buy one, and chooses CD A instead of CD B, then CD B is the a. trade-off a. trade-off b. opportunity cost b. opportunity cost c. decision at the margin c. decision at the margin d. opportunity at the margin d. opportunity at the margin

53. answer is … b. opportunity cost b. opportunity cost

54. next… 3. A decision-making grid is a visual way of: 3. A decision-making grid is a visual way of: a. examining opportunity costs a. examining opportunity costs b. selling goods or services b. selling goods or services c. making marginal decisions c. making marginal decisions d. identifying shortages d. identifying shortages

55. answer is.. a. examining opportunity costs! a. examining opportunity costs!

56. next … 4. A decision is made at the margin when each alternative considers 4. A decision is made at the margin when each alternative considers a. a different trade-off than the others a. a different trade-off than the others b. where the most costly alternative will be. b. where the most costly alternative will be. c. what the “all or nothing” alternative will be. c. what the “all or nothing” alternative will be. d. cost and benefit ranked in progressive units. d. cost and benefit ranked in progressive units.

57. answer … c. d. cost and benefit ranked in progressive units c. d. cost and benefit ranked in progressive units

58. quiz time quiz time Number your paper 1 – 4 Number your paper 1 – 4 1. A production possibilities curve shows the relationship between the production of: 1. A production possibilities curve shows the relationship between the production of: a. farm goods and factory goods a. farm goods and factory goods b. two types of farm goods b. two types of farm goods c. two types of factory goods c. two types of factory goods d. any two categories of goods d. any two categories of goods

59. answer d. any two categories of goods. d. any two categories of goods.

60. next … 2. The line on a production possibilities curve showing the relative amounts of two types of goods produced using all resources is called the 2. The line on a production possibilities curve showing the relative amounts of two types of goods produced using all resources is called the a. production possibilities frontier a. production possibilities frontier b. opportunity cost line b. opportunity cost line c. utilization of resources c. utilization of resources d. maximum possible production line d. maximum possible production line

61. answer … a. production possibilities frontier a. production possibilities frontier

62. question … 3. The law of increasing costs means that as production shifts from one item to another, 3. The law of increasing costs means that as production shifts from one item to another, a. the cost of production gets cheaper and cheaper. a. the cost of production gets cheaper and cheaper. b. the cost of producing an item stays the same no matter how many are produced. b. the cost of producing an item stays the same no matter how many are produced. c. more and more resources are necessary to increase production of the second item c. more and more resources are necessary to increase production of the second item d. the land costs of increasing production rise much more steeply than do the labor costs d. the land costs of increasing production rise much more steeply than do the labor costs

63. answer is … c. more and more resources are necessary to increase production of the second item c. more and more resources are necessary to increase production of the second item

64. and last question … 4. The curve usually seen in a production possibilities frontier can be explained by: 4. The curve usually seen in a production possibilities frontier can be explained by: a. growth in the economy a. growth in the economy b. underutilization of resources b. underutilization of resources c. increasing an economy’s efficiency c. increasing an economy’s efficiency d. the law of increasing costs d. the law of increasing costs

65. final answer is … d. the law of increasing costs! d. the law of increasing costs!

66. An economy that is efficient is … producing the maximum amount of goods and services.. now that’s efficient! producing the maximum amount of goods and services.. now that’s efficient!