The Economic Way of Thinking

1. The Economic Way of Thinking

2. Chapter 1: The Economic Way of Thinking • Scarcity is the situation that exists because wants are unlimited and resources are limited.

3. Scarcity: The Basic Economic Problem What Is Scarcity? • Wants — desires that can be met by consuming products • Needs — things necessary for survival • Scarcity — lack of resources available to meet all human wants • not a temporary shortage • Economics — study of how people use resources to satisfy wants • examines how individuals and societies choose to use resources • organizes, analyzes, interprets data about economic behaviors • develops theories, economic laws to explain economy, predict future • Shortage – a situation when suppliers decide to cut production of a good

4. People Have Wants • People make choices about all their needs and wants • Wants are unlimited, ever changing

5. Scarcity Affects Everyone • Scarcity affects which goods & services are provided • Goods — physical objects that can be bought • Services — work one person does for another for pay • Consumer — person who buys good or service for personal use • Producer — person who makes a good or provides a service

6. Scarcity leads to 3 economic questions every society must answer: • what will be produced? • how will it be produced? • for whom will it be produced?

7. Question 1: What Will Be Produced? • Societies must decide on mix of goods to produce • depends in part on their natural resources • Some countries allow producers and consumers to decide • In other countries, governments decide • Must also decide how much to produce; choice depends on societies’ wants

8. Question 2: How Will It Be Produced? • Decisions on production methods involve using resources efficiently • decisions influenced by a society’s natural resources • Societies adopt different approaches • with unskilled labor force, might use labor-intensive methods • with skilled labor force, might use capital-intensive methods

9. Question 3: For Whom Will It Be Produced? • How goods and services are distributed involves: • how should each person’s share be determined? • how will goods & services be delivered to people?

10. The Factors of Production • Factors of production — resources needed to produce goods and services • include land, labor, capital, entrepreneurship • supply of these factors is limited

11. Factor 1: Land • Land means all natural resources on or under the ground • includes water, forests, wildlife, mineral deposits

12. Factor 2: Labor • Labor is all the human time, effort, talent used to make products • physical and mental effort used to make a good or provide a service

13. Factor 3: Capital • Capital is a producer’s physical resources • includes tools, machines, offices, stores, roads, vehicles • sometimes called physical capital or real capital • Workers invest in human capital — knowledge and skills • workers with more human capital are more productive

14. Factor 4: Entrepreneurship • Entrepreneurship — vision, skill, ingenuity, willingness to take risks • Entrepreneurs anticipate consumer wants, satisfy these in new ways • develop new products, methods of production, marketing or distributing • risk time, energy, creativity, money to make a profit

15. Practice • With a partner, decide on a good or service you would like to produce (of course it’s appropriate for class and legal). Tell me in your notes: • 1. the good or service • 2. each of the 4 factors of production • -tell me the land you need to produce • -tell me the labor you need to produce • etc. • We will share out when everyone is finished.

16. Reviewing Key Concepts • Explain the relationship between the terms in each of these pairs: • wants and scarcity • consumer and producer • factors of production and entrepreneurship

17. Economic Choice Today: Opportunity Cost Making Choices • Economic choices shaped by • Incentives — benefits that encourage people to act in certain ways • Utility — benefit or satisfaction gained from using a good or service • To make choices, people economize: • make decisions according to best combination of costs and benefits

18. There’s No Such Thing as a Free Lunch • All choices have a cost • choosing one thing means giving up another, or paying a cost • cost can take form of money, time, other thing of value

19. Trade-Offs and Opportunity Cost • Trade-off is alternative people give up when they make a choice • Your most desired Trade-off is your OPPORTUNITY COST

20. Analyzing Choices • Cost-benefit analysis — examination of costs, expected benefits of choices • one of most useful tools for evaluating relative worth of economic choices

21. Analyzing Choices • Example: Max’s Decision-Making Grid (text pg. 15) • Decision-making grid shows what one gets, gives up with each choice • Max’s grid shows all possible choices for his free hours each week • lists choices, benefits and opportunity cost of each choice • With time, costs and benefits change; also goals and circumstances • Changes influence decisions, make people alter original choices

22. Marginal Costs and Benefits • Marginal cost • additional cost of using one more unit of a good or service Marginal benefit • additional benefit of using one more unit of a good or service

23. Reviewing Key Concepts • Explain the relationship between the terms in each of these pairs: • incentive and utility • trade-off and opportunity cost • marginal cost and marginal benefit

24. Analyzing Production Possibilities Graphing the Possibilities • Economic models — simplified representations of economic forces • Production possibilities curve (PPC) is one model • maximum goods or services that can be produced from limited resources • also called production possibilities frontier

25. Production Possibilities Curve • PPC based on assumptions that simplify economic interactions • resources are fixed • all resources are fully employed • only two things can be produced • technology is fixed

26. Production Possibilities Curve • PPC runs between extremes of producing only one item or the other • Data is plotted on a graph; lines joining points is PPC • shows maximum number of one item relative to other item • PPC shows opportunity cost of each choice • more of one product means less of the other

27. What We Learn from PPCs • Each point on PPC represents efficiency (producing the maximum amount of goods and services possible); points inside curve mean underutilization (producing fewer goods and services than possible); outside curve cannot be met (unattainable)

28. Increasing Opportunity Costs • Law of increasing opportunity costs • as production switches from one product to another, more resources are needed to increase production of second product anotherwords, each new unit costs more than last one • Reasons for increasing cost of making more of one product • need new resources, machines, factories • must retrain workers • Costs paid by making less and less of other product

29. Shifting the Production Possibilities • A country’s supply of resources changes over time • Example: U.S. in 1800s grew, gained resources, workers, new technology • new resources mean new production possibilities beyond frontier • Increased production shown on PPC as shift of curve outward • Increase in total output called economic growth

30. Reviewing Key Concepts • Explain how each term is illustrated by the production possibilities curve: • underutilization • efficiency

31. Case Study: The Real Cost of Expanding O’Hare Airport • Background • Chicago’s O’Hare Airport is one of the busiest airports in the United States. • Delays at O’Hare are commonplace. • Considerable debate over the best solution to improve efficiency. • What’s the Issue • What are the real costs involved in airport expansion? Study these sources to determine the costs tied to the expansion of O’Hare airport.

32. Case Study: The Real Cost of Expanding O’Hare Airport {continued} • Thinking Economically • Explain the real cost of expanding O’Hare Airport. Use information presented in the documents to support your answer. • Who are the most likely winners and losers as a result of the O’Hare expansion? Explain your answer. • How might supporters of expansion use a production possibilities model to strengthen their case?