C H A P T E R 1What Is Economics?

Economics• Economics is determining how to

satisfy unlimited wants with limited resources.

• For example: – You must choose how to spend your time– Businesses must choose how many people to

hire

Wants vs. Needs• Want - Something that people would like

to have but is not necessary for survival – has some value for you

• Need - Something people must have to survive – air, food, shelter

Goods vs. Services

• Good – any item that can be bought or sold – physical presence

• Service – any action that one person or group does for another in exchange for payment

Scarcity• Scarcity is the universal problem that forces

us to make choices in a world of limited resources to meet unlimited wants.

• Some resources are plentiful, and some resources are scarce because they are rare.

• Some resources are renewable and some are nonrenewable.

• All resources are scarce in that they require effort to make them useful to people.

Scarcity and Shortages

• Scarcity - finite amount or limited - occurs when there are limited amounts of resources to meet unlimited needs or desires

• Shortages occur when producers will not or cannot offer goods or services at current prices – just don’t have any right now, it’s in the mail

• Is gasoline scarce or is there a shortage?

Factors of Production• The essential ingredients needed to produce any

good or service.

• Land All natural resources that are used to produce goods and services. In their usual unaltered form.

• Labor Any physical or mental effort a person devotes to a task for which that person is paid.

• Capital Any human-made resource that is used to create other goods and services.– Physical Capital: objects made by people– Human Capital: knowledge and skills of people

• Entrepreneur Person who takes risk and combines the other factors of production in a creative way for the chance to earn profit.

Trade-offs• Trade-offs situation in which more of one

thing necessarily means less of something else - all the alternatives that we give up

• Vacation Destinations – Whistler, Washington D.C. or Maui

Opportunity Cost• The most desirable alternative given up

as a result of a decision .

• Most highly valued alternative forfeited when a choice is made

• Once a choice is made there is always side effect or cost involved = opportunity cost

• The higher the cost of doing something, the less likely it will be done

Marginal• Marginal in economics means additional or

extra• When you decide how much more or less

to do, you are thinking at the margin.• Economists use marginal analysis to

compare benefits and costs• Incentives usually guide your decisions

(100% tax on production)

Production Possibilities Graph and Frontier

• A production possibilities graph shows alternative ways that an economy can use its resources.

• The production possibilities frontier is the line that shows the maximum possible output for that economy.

• PPF illustrates scarcity, choice & opportunity costs.• Moving from one unit to the next demonstrates

opportunity costs or what is given up.

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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)

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Efficiency

• Efficiency means using resources in such a way as to maximize the production of goods and services. Make the most with what you have

• Underutilization – not using all the resources available

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Production Possibilities Graph

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Future productionPossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

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Growth

• 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.”