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Chapter 1: What is Economics?. Section 1: Scarcity and Factors of Production. What is Economics?. What is Economics?. The study of scarcity and choices Scarcity- limited resources for unlimited wants. “There is no such thing as a free lunch”. Choices. - PowerPoint PPT Presentation
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Chapter 1: What is Economics?
Section 1: Scarcity and Factors of Production
What is Economics?
What is Economics?• The study of scarcity and choices• Scarcity- limited resources for unlimited wants
“There is no such thing as a free lunch”
Choices• People need to decide how to use limited
resources– Need: necessary for survival– Want: desirable but not essential
Goods and Services• Goods: physical objects that are produced• Services: actions performed
Factors of Production
• Land• Labor• Capital (Physical & Human)
Land• Natural resources used to produce goods.– Oil, Trees, Iron-Ore
Labor
• Effort of people to create a product. – Manufacturers, managers, engineers, etc.
Capital
• Human made resources used to produce other goods.– Physical Capital– Human Capital
Physical Capital• Human-made goods used to produce other
goods.
Human Capital
• Skills and knowledge of a worker acquired through education and experience.
Entrepreneurship: The 4th Factor of Production
• Entrepreneur: someone who combines land, labor, and capital to creates and services
In groups…
• Choose an object• What was necessary for its creation?– Land?– Labor?– Capital (Physical and Human)?
– Report back to class
Section 2: Opportunity Cost
• Because of scarcity: we need to make decisions about how to manage resources.
Economics: Science of Decision Making
• Trade-offs are alternatives given up when making a decision
Guns or Butter?
• Countries need to decide how they will use their resources• If a country chooses to produce more military goods (“guns”)
they will have less consumer goods (“butter”)
Opportunity Cost• Opportunity cost is the most desirable alternative
given up in a decision.
Decision Benefit Opportunity CostGo to College Education, increased job
opportunityMoney earned/saved from
working
Work after High School Money earned/saved Education, increased job opportunity
Thinking at the Margin
• Black and White decisions in economies are rare, thinking at the margin considers compromises and multiple scenarios.
Decisions at the MarginOptions Benefit Opportunity Cost
1st hour of extra study time Grade of C on test One hour of sleep
2nd hour of extra study time Grade of B on test 2 hours of sleep
3rd hour of extra study time Grade of A on test 3 hours of sleep
Decisions at the Margin
Options Benefit Opportunity Cost
Work for 1 hour $10 One hour of studying
Work for 2 hours $20 Two hours of studying
Work for 3 hours $30 Three hours of studying
Section 3: Production Possibilities Curves
Watermelons (millions of tons) Shoes (millions of pairs)0 158 14
14 1218 920 521 0
Production possibilities curves plot decision making on a graph, or curve
Production Possibilities Curve
0 5 10 15 20 250
2
4
6
8
10
12
14
16
Watermelons (millions of tons)
Shoe
s (m
illio
ns o
f pai
rs)Watermelon
s (millions of tons)
Shoes (millions of
pairs)0 15
8 14
14 12
18 9
20 5
21 0
Frontier
0 5 10 15 20 250
2
4
6
8
10
12
14
16
Watermelons (millions of tons)
Shoe
s (m
illio
ns o
f pai
rs)
The Frontier represents maximum efficiency: the full production capability of the economy
Underutilization
• Underutilization: economy is not producing at capability– WHY?
0 5 10 15 20 250
2
4
6
8
10
12
14
16
Watermelons (millions of tons)
Shoe
s (m
illio
ns o
f pai
rs)
Future Production Possibilities Curve
0 5 10 15 20 250
2
4
6
8
10
12
14
16
Watermelons (millions of tons)
Shoe
s (m
illio
ns o
f pai
rs)
Sometimes the entire curve shifts outwardWHY?
Examples of trade-offs: Soviet Union
• The former Soviet Union prioritized military development at the expense of consumer goods and development.