foundations of economics what comes to your mind when you hear the word scarce?

FOUNDATIONS OF ECONOMICS

WHAT COMES TO YOUR MIND WHEN YOU HEAR THE WORD SCARCE?

WHAT IS ECONOMICS?WHAT IS ECONOMICS?

• So then the big two concepts are that:• Resources are scarce!• Society has unlimited needs and wants!

Economics decides the “best” way of providing one to the other

VOCABULARY:• Economics

• Goods

• Services

• Scarcity

VOCABULARY

• Need

• Want

… MORE VOCABULARY

• Shortage

• Factors of Production

• Land

• Labor

VOCABULARY…

• Capital-Resources

• Physical Capital

• Human Capital

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION

• There are 4 factors that must all be used to produce anything• 1) Natural Resources (also referred to as “land”)

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION

• There are 4 factors that must all be used to produce anything• 2) Labor – effort of a person for which they are paid

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION

• There are 4 factors that must all be used to produce anything• 3) Capital – human-made resources used to create other goods

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION

• A) Physical Capital – Also called Capital Goods, objects that are used to produce other goods

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION

• B) Human Capital – knowledge or skills workers get from education and experience

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION

• There are 4 factors that must all be used to produce anything• 4) Entrepreneurship – person who takes a risk in combining the other 3 factors to create a new good

VOCABULARY CONTINUED…

• Entrepreneur

1.1 QUIZ – GET A PARTNER!NUMBER YOUR PAPER 1 - 6

• 1. Which of the following are factors of production?• a. Capital and Land• b. Scarcity and shortages• c. Technology and productivity• d. economics and business decisions

ANSWER IS …

• a. capital and land

NEXT QUESTION …

• 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?• b. building extra space in a factory to simplify production• c. switching from oil to coal to make production cheaper• d. lowering workers’ wages to increase profits

ANSWER IS …

• b. building extra space in a factory to simplify production

NEXT QUESTION …

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

ANSWER IS …

• c. human capital

NEXT QUESTION …

• 4. Which of the following is an entrepreneur?• 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• 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

ANSWER IS …

• c. a person who starts an all-organic cleaning supplies business that employs others

NEXT …

• 5. What is the difference between a shortage and scarcity?• 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. • 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

ANSWER …

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

NEXT….

• 6. What does an economist mean by the term LAND?• a. farmland only• b. food crops grown on farmland as well as the farmland

itself• c. goods and services that are produced form the land• d. all natural resources used to produce goods and

services

ANSWER …

• d. all natural resources used to produce goods and services!

FIVE APPEALING VACATION DESTINATIONS…

Hawaii Paris

Dunns River Falls, Jamaica

AlaskaIreland

What is your first choice? What is your second choice?

Section 1.2 – Opportunity Cost

MAKING ECONOMIC DECISIONSMAKING ECONOMIC DECISIONS

• The most desirable of the options you pass up is called the Opportunity Cost

• Rank sleep, studying, and playing video games 1st, 2nd, and 3rd on a list for what you value the most

MAKING ECONOMIC DECISIONSMAKING ECONOMIC DECISIONS

•Every decision we make involves trade-offs – alternatives that we must give up when we make a choice• Example – “I could stay up for 3 hours playing Halo, study, or sleep.”

MAKING ECONOMIC DECISIONSMAKING ECONOMIC DECISIONS

•1st Place is what you would choose to do

•2nd Place is your opportunity cost (you give it up to do option 1)

MAKING ECONOMIC DECISIONSMAKING ECONOMIC DECISIONS

• What other option do you have other than using 3 hours for one task?

• 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

MAKING ECONOMIC DECISIONSMAKING ECONOMIC DECISIONS

OptionsOptions BenefitBenefit Opportunity CostOpportunity Cost

0 hours studying, 0 hours studying, 3 hours sleeping3 hours sleeping

F on TestF on Test NoneNone

1 hours studying, 1 hours studying, 2 hours sleeping2 hours sleeping

C on TestC on Test 1 hour of sleep1 hour of sleep

2 hours studying, 2 hours studying, 1 hour sleeping1 hour sleeping

B on TestB on Test 2 hours of sleep2 hours of sleep

3 hours studying3 hours studying B+ on TestB+ on Test 3 hours of sleep3 hours of sleep

MAKING ECONOMIC DECISIONSMAKING ECONOMIC DECISIONS

• 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

• This same process is used by businesses and consumers to make decisions

QUIZ TIME…

• 1. 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• b. opportunity cost• c. decision at the margin• d. opportunity at the margin

ANSWER IS …

• b. opportunity cost

NEXT…

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

ANSWER IS ..

• a. examining opportunity costs!

NEXT …

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

ANSWER …

• c. d. cost and benefit ranked in progressive units

GRAPHS….

• WHY do graphs sometimes show information more clearly than text or tables?

Section 1.3 – Production Possibilities Curves

PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES

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

PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES

PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES

• Production Possibilities Graph – shows alternatives to what an economy can produce• The outer red line shows the maximum possible output with any given combination

• This is the Production Possibilities Frontier (or Curve)

PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES

•To move from one point to another, the economy must make trade-offs

PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES

• 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 above the line is presently impossible, until new resources are available

PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES

• 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…

PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES

• Every resource is best suited for certain types of goods• 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 …

• To convert butter production to guns, you must sell the cows and build new factories on the land

QUIZ TIME …

• 1. The economic concept of guns or butter means that …• a. a person can spend extra money either on

sports equipment or food.• 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

• d. a government can buy unlimited military and civilian goods if it is rich enough

ANSWER …

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

•2. A production possibilities curve shows the relationship between the production of:

• a. farm goods and factory goods• b. two types of farm goods• c. two types of factory goods• d. any two categories of goods

ANSWER

• d. any two categories of goods.

NEXT …

• 3. 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• b. opportunity cost line• c. utilization of resources• d. maximum possible production line

ANSWER …

• a. production possibilities frontier

QUESTION …

• 4. The law of increasing costs means that as production shifts from one item to another,

• • 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.• 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

ANSWER IS …

• c. more and more resources are necessary to increase production of the second item

AND LAST QUESTION …

• 5. The curve usually seen in a production possibilities frontier can be explained by:• a. growth in the economy• b. underutilization of resources• c. increasing an economy’s efficiency• d. the law of increasing costs

FINAL ANSWER IS …

• d. the law of increasing costs!

AN ECONOMY THAT IS EFFICIENT IS …

Producing the maximum amount of goods and

services .. now that’s efficient!