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Fundamentals of economics

Fundamentals of economics. (topic 1)learning objectives. Explain why scarcity & choice are the basis of economics in every society Describe the 3 economic factors of production Identify why every decision involves trade-offs Explain the concept of opportunity cost

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Fundamentals of economics

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  1. Fundamentals of economics

  2. (topic 1)learning objectives • Explain why scarcity & choice are the basis of economics in every society • Describe the 3 economic factors of production • Identify why every decision involves trade-offs • Explain the concept of opportunity cost • Describe how people make decisions by thinking at the margin

  3. Scarcity • Economics: The study how people seek to satisfy their needs & wants by making choices.

  4. Scarcity means making choices • Unlimited wants, limited resources • Scarcity does NOT mean shortage https://www.pearsonrealize.com/community/program/d23f696c-58d8-3512-b201-60055f184497/10/tier/1f587f5f-d37a-3c9e-9674-299bea7942fa/1/lesson/2c43e957-2f01-3db7-b65e-170c210b17e4/1/content/b7e415a4-e020-3f89-971f-d766e57f044a/1

  5. Entrepreneurs: people who decided how to combine resources to create new goods & services • Factors of Production Capital Labor Land Physical Human

  6. Trade-off • Act of giving up one benefit in order to gain another, greater benefit • Football or school play? • Part time job or volunteer work? • Vacation or new car? • College or job? • Grow broccoli or squash? • Make chairs or tables? • New roads or education?

  7. Guns or butter • Governments face trade-offs • Guns (military goods) • Butter (consumer goods)

  8. 1.2 opportunity cost & trade-offs • In most trade-off situations, one of the rejected alternatives is more desirable than the rest. The most desirable alternative somebody gives up as the result of a decisions is the opportunity cos.

  9. Opportunity Cost • The most desirable alternative somebody gives up as the result of a decision

  10. Opportunity cost • Go to bed early or stay up studying • Go to bed early or go to a party • Go to bed early or stay up watching Netflix Your opportunity cost is…

  11. m

  12. Check point • Someone gives up going to see a movie to study for a test in order to get a good grade. The opportunity cost is ____________ • Jill decides to drive to work instead of taking the bus. It takes her 90 minutes to get there and the bus ride would have been 40, so her opportunity cost is ________ • David decides to quit working and go to school to get further training. The opportunity cost is __________

  13. Thinking at the margin Deciding how much more or less to do • When making decisions, economists look at opportunity cost & thinking at the margin. Marginal = Additional When you add one more additional unit, how much benefit will you get?

  14. Marginal cost/marginal benefit • To make a sensible decision, weigh the marginal cost v the marginal benefit • If MB is > MC, then go for it Extra cost of adding one additional unit Extra benefit of adding the same unit

  15. Look at the marginal cost of each extra hour of studying & compare it to the marginal benefit.

  16. Make your own Decision Making at the Margin chart

  17. (1.3) Production Possibilities Curves • Objectives: • Interpret a PPC • Explain how PPC show efficiency, growth, & opportunity cost • Explain why a country’s production possibilities depend on its resources & technology

  18. A farmer needs to decide what to grow & how much. • In economics you need to decide how to use resources most efficiently

  19. Production possibilities curve

  20. Production possibilities curve To decide what and how much to produce, economists use a PPC

  21. Any spot on the line represents an economy working at its most efficient level The line, Production Possibilities Frontier, shows the different combinations possible

  22. Any spot on the line represents an economy working at its most efficient level The line, Production Possibilities Frontier, shows the different combinations possible

  23. Any spot on the line represents an economy working at its most efficient level Underutilization: the use of fewer resources than the economy is capable of using

  24. Opportunity cost

  25. Opportunity cost D Law of Increasing Opportunity Costs: Trade-offs get more & more expensive A-B: 20 B-C: 60 C-D: 100

  26. growth • A PPC is a snapshot • In the real world, resources are constantly changing • If quantity or quality of land, labor, or capital changes, the curve will move

  27. growth • A PPC is a snapshot • In the real world, resources are constantly changing • If quantity or quality of land, labor, or capital changes, the curve will move Growth examples: more immigration, new natural resources found, better technology

  28. Curve shifts left when production capacity decreases.

  29. Curve shifts left when production capacity decreases. Decrease in supplies, loss of land during war, natural disaster

  30. Growth • If there is an increase in resources available for one product, then the PPF may shift at just one end.

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