Chapter 1: What Is Economics?. Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost –Production Possibilities

Chapter 1:

What Is Economics?

Chapter 1: What Is Economics?

• Scarcity

• Factors of Production

• Decision Making

• Opportunity Cost

– Production Possibilities Curves


• Scarcity


• Decision Making



Section 1: Scarcity & Factors of Production

• People make choices– How to spend time & money

• Needs– Things necessary for survival

• Air, food, shelter

• Wants– Things desired, but not essential to survival


• Scarcity requires people to make choices– Resources are limited

• money and time• goods and services

• Economics– The study of how people seek to satisfy their needs &

wants by making choices


• Scarcity– Limited quantities of resources to meet unlimited

wants• Supply and demand• Scarcities always exist

• Economics is about solving the problem of scarcity


• Scarcity and shortage are not the same

• Shortage– When a good or a service is unavailable

• Because producers cannot or will not offer them at current prices

• Can be temporary or long-term


• Factors of production– Resources that are used to make all goods and

services

• Land– All natural resources used to produce goods

and services• Labor

– Effort that people devote to a task for which they are paid

• Capital– Any human-made resource that is used to

create other goods and services


• 2 Categories of capital

– Physical capital

– Human capital



1) Physical capital• Human-made goods that are used to produce

other goods or services

– Such as tools, machinery, and buildings

– Important factor of production because it can save time and money (for people and businesses)

» Typical benefits: extra time, more knowledge, more productivity

– Sometimes referred to as Capital Goods



2) Human capital• Skills and knowledge gained by a worker through

education and experience


• Entrepreneurs– Ambitious leaders who combine land, labor, and

capital (factors of production) to create and market new goods and services

• Fuel economic growth• Take risks


• Section 1 Review

– Scarcity

– Factors of Production

Chapter 1, Section 1 Review:

1. 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; a scarcity results from falling prices.

(c) A shortage is a lack of all goods and services; a scarcity concerns a single item.

(d) There is no real difference between a shortage and a scarcity.


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



– Scarcity

– Factors of Production

• Assignment– Chapter 1, Section 1 – Review


• Scarcity


• Decision Making



Section 2: Opportunity Cost

• People make choices– How to spend time & money

• When we decide on one alternative, we gain one thing but lose something else

– Decisions involve trade-offs


• Trade-offs– Alternatives that we sacrifice when we make

decisions

• Individual• Business• Society

– Government


• Trade-offs

– Government

• Guns or butter– A phrase that refers to trade-offs that nations

face when choosing whether to produce more or less military or consumer goods


• Opportunity cost– The most desirable alternative given up as the result

of a decision

• Your “2nd choice” is given up for your 1st choice

• Which would you choose?– Sleep late or wake up early to study for a test?– Sleep late or wake up early to eat breakfast before

school?– Sleep late or wake up early to leave for your dream

vacation?


Benefits • Enjoy more sleep

• Have more energy during the day

• Better grade on test

• Teacher and parental approval

• Personal satisfaction

Decision • Sleep late • Wake up early to study for test

Opportunity cost

• Extra study time • Extra sleep time

Benefits forgone

• Better grade on test

• Teacher and parental approval

• Personal satisfaction

• Enjoy more sleep

• Have more energy during the day

Sleep late Wake up early to study

Alternatives

Decision-making Grid


• Thinking at the margin– Deciding whether to do or use one additional unit of

some resource

• Deciding how much more or less to do


Options

1st hour of extra study time

2nd hour of extra study time

3rd hour of extra study time

Benefit

Grade of C on test

Grade of B on test

Grade of B+ on test

Opportunity Cost

1 hour of sleep

2 hours ofsleep

3 hours of sleep

Thinking at the Margin


• Cost and benefit at the margin

– Compare opportunity costs and benefits at the margin when making decisions

– What will you sacrifice? What will you gain?

– Once the opportunity cost outweighs the benefits, no more units should be added

– The decision-making process is sometimes called cost/benefit analysis



– Decision Making

– Opportunity Cost


1. Opportunity cost is

(a) any alternative we sacrifice when we make a decision.

(b) all of the alternatives we sacrifice when we make a decision.

(c) the most desirable alternative given up as a result of a decision.

(d) the least desirable alternative given up as a result of a decision.


2. Economists use the phrase “guns or butter” to describe the fact that

(a) a person can spend extra money either on sports equipment or food.

(b) a person must decide whether to manufacture guns or butter.

(c) a nation 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.



– Decision Making

– Opportunity Cost

• Assignments– Economic Cartoons, pg. 12 of Unit 1 book– Textbook pg. 11, Applying Economic

Concepts, #7 decision-making grid


• Scarcity


• Decision Making



Section 3: Production Possibilities Curves

• Economists use tools to analyze opportunity costs and trade-offs

• Graphs easily help us to see how one value relates to another value

• Production possibilities curve– A graph that shows alternative ways to use an

economy’s resources

• Show efficiency, growth, and cost


• Drawing a Production Possibilities Curve– Decide which goods or services to examine

• Horizontal and vertical axes– Plot points on a graph indicating possible

production choices– Draw a line connecting the plotted points

• Production possibilities frontier– The line on a production possibilities graph that

shows the maximum possible output

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Production Possibilities Graph


• Production possibilities frontier– The line on a production possibilities graph

that shows the maximum possible output

• An economy working at its most efficient production levels

• Any spot on the line represents a point where all resources are being used to produce a maximum combination of the two products


• Production possibilities frontier– The line on a production possibilities graph that shows the

maximum possible output

• Any spot on the line represents a point where all resources are being used to produce a maximum combination of the two products

• Each point reflects a trade-off

– Because land, labor, and capital are scarce– Using the factors of production to make one

product means that fewer resources are left to make something else


• Production possibility graphs:

Efficiency, Growth, and Cost

• Illustrate how efficiently an economy is working

• Indicate whether an economy has grown or shrunk

• Show the opportunity cost of a decision to produce more of one good or service


• Production possibilities frontier– Represents an economy working at its most

efficient level of production

• Efficiency: Using resources in such a way as to maximize the production or output of goods and services

– An economy producing output levels on the production possibilities frontier is operating efficiently


• Sometimes economies operate inefficiently

• When workers are laid off, fewer goods are produced

– This trade-off is represented by plotting a point inside the production possibilities frontier

• Underutilization


• Underutilization– Using fewer resources than an economy is capable of

using

• Less than the maximum possible production


• Production possibility graphs

(efficiency, growth, and cost)

• Reflect current production possibilities based on unchanging resources

– Quantity of resources constantly changes




• If quantity or quality of available land, labor, or capital changes, then the curve moves

– Increase or decrease in workers– New inventions– Increase or decrease in land




• When an economy grows or increases, the production possibilities curve “shifts to the right”

• When an economy shrinks or decreases, the production possibilities curve “shifts to the left”

• Current production possibilities frontier versus

future production possibilities frontier if amount of land, labor, or capital resources changes




• Cost: The alternative that is given up because of a decision

– “Cost” always means “opportunity cost”

• Law of increasing costs– As factors of production switch from one item

to another, more and more resources are necessary to increase production of the second item

» Opportunity cost increases


• Production possibility graphs:

Resources and technology

– A country’s resources include its land and natural resources, its work force, and its physical and human capital

– A country’s production possibilities depend on both the resources it has available and its level of technology

• Each production method uses different technology, or know-how, to create products





1. A production possibilities frontier shows

(a) farm goods and factory goods produced by an economy.

(b) the maximum possible output of an economy.

(c) the minimum possible output of an economy.

(d) underutilization of resources.


2. An economy that is using its resources to produce the maximum number of goods and services is described as

(a) efficient.

(b) underutilized.

(c) growing.

(d) trading off.


3. Which of the following happens to a production possibilities curve when economic growth occurs?

(a) The curve shifts to the left.

(b) The curve becomes a straight line.

(c) The curve shifts to the right.

(d) The curve does not change at all.




• Assignments– Textbook pg. 21, Skills for Life, #’s 17-21– Vocabulary Practice crossword puzzle,

pg. 9 of Unit 1 book

Documents

Chapter 1: What Is Economics?. Chapter 1: What Is Economics? Scarcity Factors of Production Decision Making Opportunity Cost –Production Possibilities