Foundations of Economics: Scarcity and Factors of Production

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

2. 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

3. OBJECTIVES 1.1 • 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 • EXPLAIN the role of entrepreneurs • EXPLAIN why economists say all resources are scarce

4. 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

5. VOCABULARY: • Need • Want • Economics • Goods • Services

6. Scarcity 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.

7. … MORE VOCABULARY • Shortage • Factors of Production • Land • Labor • Capital • Physical Capital • Human Capital

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

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

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

11. Factors of Production 3 Kinds of Capital Physical Capital – Also called Capital Goods, objects that are used to produce other goods

12. Factors of Production 3 Kinds of Capital Human Capital – knowledge or skills workers get from education and experience

13. Factors of Production 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

14. VOCABULARY CONTINUED… • Entrepreneurs

15. FACTORS of PRODUCTION • Example of FRENCH FRIES … page 6 • IN N OUT

16. Making 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.”

17. PROFILE – Gary Becker! Read p. 7 about Gary Becker’s thoughts about the “marriage market”… hmmm… Then discuss with neighbor: 1. Do you agree or disagree that economics guides even life’s most personal decisions???

18. 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

19. Answer is … • a. capital and land

20. 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

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

22. 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

23. Answer is … • c. human capital

24. 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

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

26. 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

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

28. 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

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

30. FIVE appealing VACATION Destinations… Section 1.2 – Opportunity Cost Hawaii Paris Dunns River Falls, Jamaica Volunteer: What is your first choice? What is your second choice? Ireland Alaska

31. Making 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

32. Making 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)

33. Making 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

34. Making Economic Decisions

35. Making 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

36. QUIZ time .. grab a partner! Number your paper 1 - 4 • 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

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

38. 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 • a. trade-off • b. opportunity cost • c. decision at the margin • d. opportunity at the margin

39. answer is … • b. opportunity cost

40. next… • 3. 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

41. answer is .. • a. examining opportunity costs!

42. next … • 4. 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.

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

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

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

46. Production Possibilities

47. Production 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)

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

49. Production 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

50. Production 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…