What is Economics?

What is Economics? Mr. Bordelon Economics

What is Economics? • Economics is the study of how people make choices to satisfy their wants and needs. • Basic definition...key thing in economics. Whenever you work with the language in the class, explain it basically. If you can explain the idea to your Mom or a four-year old child, you’ve got it.

Why do we have to make a choice? • Scarcity. Scarcity happens when there is a limited amount of resources to meet unlimited wants and needs. • What’s a need? • What’s a want? • Shortage. Shortage is not scarcity. Shortages happen when producers can’t offer goods or services at current prices. • What’s a good? • What’s a service?

Why do we have to make a choice? • Look, there’s just not enough things on this planet to get everything you want. No, not even for you, Monserrat. • Not only that, but just because you want something doesn’t mean you can have it. For example, you can not have my awesome car. NOT YOURS.

Factors of Production • Land. All natural resources that are used to produce goods and services. • Labor. Any effort a person devotes to a task for which that person is paid. • Capital. Any man-made resource that is used to create other goods and services. • Entrepreneur. People who decide how to combine land, labor and capital to create new goods and services.

Factors of Production • Land. All natural resources that are used to produce goods and services. • Awesome. What’s a natural resource?

Factors of Production • Labor. Any effort a person devotes to a task for which that person is paid. • Awesome. Translate this into a language we can understand. • Great, what about volunteer work?

Factors of Production • Capital. Any man-made resource that is used to create other goods and services. • Awesome. What’s a man-made resource?

Factors of Production • Capital. Any man-made resource that is used to create other goods and services. • Well, let’s back up. Two categories to help you out that you should know. • Physical capital. Man-made objects used to create other goods and services. • What are we talking about here? • Human capital. Knowledge and skills a worker gains through education and experience. • What are we talking about here?

Factors of Production • Entrepreneur. People who decide how to combine land, labor and capital to create new goods and services. • Awesome. So what’s an entrepreneur?

Putting It Together • In your groups, you, the entrepreneur, will take one of these companies and write out what you need in terms of the factors of production. • Shoemaker • Car company • Graphic design firm • Doctor’s office • Orange producer

Questions • 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 gods and services; a scarcity concerns a single item. • (d) There is no real difference between a shortage and a scarcity. • 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

It’s all about choice, baby. • Okay, so we have to make choice. Why do we have to make a choice? • Scarcity! Remember, we only have a limited amount of resources to meet an unlimited amount of wants and needs. • But can we actually measure what the alternatives are? Can we actually put a value on it? • Gee, what do you think?

Trade-Offs • Trade-off. All the alternatives that a person gives up when he chooses one alternative over another. • Sleeping or studying? • Playing Call of Duty or studying? • Texting or studying? • Winking or smiling?

Opportunity Cost • HEY YOU! THIS IS IMPORTANT!!! • Opportunity cost. The most desirable alternative given up as a result of a decision. • Awesome. Now let’s translate this into a language we can all understand.

Opportunity Cost • Understand that if we’re talking about opportunity costs, and trust me, we will talk a lot about opportunity cost, we must first MAKE A CHOICE. • Once that choice is made, we can then identify the opportunity cost. • Think of it as an opportunity missed. • Ultimately the decision you make depends on what you are willing to sacrifice. That sacrifice is the opportunity cost.

Opportunity Cost • Should I go out with that hot chick at Breakers, or should I stay loyal to my girlfriend? • Should I have a salad or a steak? • Should I buy an iPhone, or put the $200 into a savings account or Certificate of Deposit? • Should Best Buy open more box stores, or focus its assets on a stronger online presence? • Should I fail a class and stay another year at University High School, or should I graduate, go on with my life and make an obscene amount of cash?

Guns or Butter • Countries also have to make decisions as to how to spend their money, allocate resources, etc. • “Guns or Butter” is an economic model that economists use to see how a particular economy works. • Guns: military/industrial goods • Butter: food/consumer goods • Why these two things?

Guns or Butter • Guns or Butter also focuses on the health of nations. Economists and political scientists use the model of guns or butter to judge how a society is doing, and even what a society looks like. • And you can do the same.

Guns or Butter: Brazil

Guns or Butter: Japan

Guns or Butter: United States

Guns or Butter: The Bahamas

Guns or Butter: Mali

Guns or Butter:

Guns or Butter: Libya

Guns or Butter: North Korea

Guns or Butter • So what conclusions can we make about the results of guns or butter: • Political stability? • Society: happy/sad? • Democratic/Authoritarian?

Questions • 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. • 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.

Learning Target • Economic Decision Making and Economic Systems • Analyze production possibilities curves to explain scarcity, choice and opportunity costs.

Production Possibilities Curve • The Production Possibilities Curve (PPC) is the first graph you will need to learn how to make and interpret in Economics. • A PPC shows alternative ways that an economy can use its resources.

PPC: The Set-Up • The PPC is a hypothetical model. Models help economists find information about an economy, see if something is right or wrong, and even make predictions about where the economy is going. • In the PPC, we’re making a model of a basic economy with only TWO products, very different ones.

Draw the Basic Graph and Label

What does this all mean? • Production Possibilities Frontier (PPF). Any point along the PPF is considered efficient. You are using every single resource in the economy for either one good or the other, or both. • Efficiency means using resources in such a way as to maximize the production of goods and services. Good.

What does this all mean? • If there’s efficiency, then there’s gotta be inefficiency too. • Underutilization. Any point inside the PPF is considered inefficient. Why?

What does this all mean? • If there’s efficiency, then there’s gotta be inefficiency too. • Underutilization. Any point inside the PPF is considered inefficient. Why? • Inefficiency means that this economy is not using all of its resources to produce goods and services. Stuff is just sitting there. Watching you. Wondering why you’re not using it. It’s probably crying too. Bad.

What does that all mean? • The point on the outside is considered impossible. Why?

What does that all mean? • The point on the outside is considered impossible. Why? • Because the economy we’re looking at doesn’t have enough resources to reach that point. • But could it ever?

What does that all mean? • Yes, if the economy were to grow... • If we were to find a new resource to use or new technology, then the entire PPC would shift to the right. • This is an indication that the economy is growing.

What does that all mean? • Okay, fine. But what if the economy were to experience a nuclear war or the Grays were to come down and wipe out technology? • In that case, the economy would shrink, and we would see the PPC shift to the left. • Economic growth and contraction (or shrinking) is a common feature. For now, just focus on the graph.

Let’s Draw a Real One Out

What does it all mean? • Now that you’ve got your graph all nice and pretty, let’s start asking what this actually means. • Identify the PPF. What does the PPF mean in your new graph? • Identify a point of underutilization? What does that point mean? • Identify a point that’s impossible to achieve Why can’t we reach it? Could we ever? How?

Awesome. What’s the Opportunity Cost? • Remember, economists want to make models that give them accurate and detailed information and even be able to predict events. • This graph allows us to actually measure the opportunity cost, to give a specific value.

Opportunity Cost and the PPC • Label each one of the points you drew on your graph A through F. • Start at point B and let’s move to point C. In this scenario, our economy has decided to make more watermelons. This means we have to give up making some shoes. The number of shoes we give up is the opportunity cost. • So how many shoes are we giving up?

Opportunity Cost and the PPC • If you said 2 million pairs of shoes, you win. • Start at point D and let’s move to point C. In this scenario, our economy has decided to make more shoes. This means we have to give up making some watermelons. The number of watermelons we give up is the opportunity cost. • So how many watermelons are we giving up?

Opportunity Cost and the PPC • If you said 4 million tons of watermelons, you win. • You can actually start at any of the points you labeled in any direction. Whatever you choose to make more of, the opportunity cost is what you could have made if you had dedicated the resources to it.

But there’s a slight problem... • Why is the line curved? Why isn’t it straight? Is that a little weird-looking to you?

Ah, but there’s a solution! • The Law of Increasing Opportunity Costs. When an economy switches from one item of production to another, more and more resources are necessary to increase production of the second item. • Awesome. Let’s translate, shall we?

What is Economics?