Understanding Economics: Study of Scarcity and Choices

1. Economics What is ??

2. It is • The study of how things are made, bought, sold and used • The study of how people make choices to satify their wants For Example • You must choose how to spend your time • Businesses must choose how many people to hire

3. The study of ECONOMICS begins with the idea that people cannot have everything the need and want NEED • Something like air, food, shelter that is necessary for survival WANT • An item that we desire but is not essential to survival

4. To look at the world economically we can focus on the decisions people make. • Because people cannot have everything they need or want, they must consider their options and decide which choice will fill their needs best. • Why must people make choices? • Scarcity • Living in America – a relatively wealthy country, many citizens find this hard to understand because store shelves brim with goods.

5. Goods • Anything that can be grown or manufactured • Food • Clothing • Cars • Tools • Jewelry • Televisions

6. Services • Actions or activities people do for others in exchange for money or something else of value • Barbers, doctors, waiters, and entertainers all provide services

7. Resources • Factors of production that are used in the promotion of goods and services • Types • Natural • Human • Capital • entrepreneurship

8. A country with many resources is capable of satisfying its people’s wants and needs better than a country with few resources

9. No country has all the resources it needs • Scarcity is a problem all countries must face.

10. Scarcity • The inability to satisfy all wants at the same time • All resources and goods are limited • This requires that choices be made

11. Scarcity • Economics is about solving the problem of scarcity • Scarcity affects the economic decisions a country and its people will make concerning what and how much to produce, how goods and services will be produced and who will get what is produced

12. Choice • Selecting an item or action from a set of possible alternatives • individuals must choose/make decisions about desired goods and services because these are limited

13. Scarcity occurs when there are limited quantities of resources to meet unlimited needs or desires Always exists because our needs and wants are always greater than our resources Goods and services are scarce because they are made from resources that are scarce. Shortages occur when producers will not or cannot offer goods or services at current prices Can be temporary or long term Example: Christmas demand Wars & droughts Scarcity vs. Shortages

14. The Factors of Production – resources that are used to make all goods and services • Land All natural resources (materials found in nature) that are used to produce goods and services. Includes fertile land for farming, and products that are in the or on the land such as coal, water and forests. • Labor Any effort a person devotes to a task for which that person is paid. Includes medical aid, artist’s creation, repair of a product, installation of a product. • Capital Any human-made resource that is used to create other goods and services. Two kinds: • Physical capital • Human capital

15. Physical Capital • Human-made objects used to create other goods and services • Includes buildings and tools • Important factor of production • Can save people and companies a great deal of time and money • When we create or buy physical capital we usually become more productive • Typical benefits • Extra time • More knowledge • More productivity

16. Human Capital • People can invest in themselves • Knowledge and skills a worker gains through education and experience • Economy requires both human and physical to produce goods and services

17. Entrepreneurs • The ambitious leaders who decide how to combine land, labor and capital resources to create new goods and services • Individuals who take risks to develop original ideas, start businesses, create new industries and fuel economic growth

18. Scarce Resources • Economists say all goods and services are scarce because the land, labor, and capital used to create them are scarce. • The combining of human, natural, capital, and entrepreneurship resources to make goods or provide services • Resources available and consumer preferences determine what is produced. • Supplies of land, labor and capital are all limited and have many alternative uses.

19. Land Popping Corn Vegetable Oil Labor The human effort needed to pop the corn Capital Corn-PoppingDevice The Factors of Popcorn Production

20. Section 1 Assessment 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

21. Section 1 Assessment 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

22. Activity!! Think About it: • Land, labor and capital, also known as factors of production, are the ‘inputs’ or resources, used to create all goods and services. • What role do entrepreneurs play in producing goods and services? Do it: • Create your own diagram or chart that demonstrates what entrepreneurs do.

23. Section 2 - Opportunity Cost • Does every decision you make involve trade-offs? • How can a decision-making grid help you identify the opportunity cost of a decision? • How will thinking at the margin affect decisions you make?

24. Trade-offs and Opportunity Cost • Trade-offs are all the alternatives that we give up whenever we choose one course of action over others. • An alternative that we sacrifice when we make a decision • The most desirable alternative given up as a result of a decision is known as opportunity cost.

25. All individuals, businesses and large groups of people make decisions that involve trade-offs. • If a you choose to spend time at work, you give up watching a movie or going to a baseball game. • Choosing to play soccer might prevent you from working on the yearbook or from having a part-time job. • Farmers who want to plant broccoli cannot use the same land at the same time to grow cauliflower. • A manufacturer who uses all their equipment to build chairs eliminates the possibility of building tables or desks at the same time. • A country that decides to produce more military goods (“guns”) has fewer resources to devote to consumer goods (“butter”) and vice versa. Guns or Butter Phrase that refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods

26. Opportunity Cost • What is given up when a choice is made-the highest valued alternative forgone • Individuals, businesses or governments must consider the value of what is given up when making a choice • The most desirable alternative given up as a result of a decision is called opportunity cost.

27. What would you do??? Even ordinary decisions that we make every day have an opportunity cost! • Sleep late or wake up early for a ski trip? • Sleep late or wake up early to eat your breakfast? • Sleep late or wake up early to study for a test? • Most likely you would not choose sleep late for all 3 decisions. Your decision would depend on the opportunity cost – whatever you were willing to sacrifice!

28. Karen’s Decision-making Grid Alternatives Sleep late Wake up early to study 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 The Decision-Making Grid • Economists encourage us to consider the benefits and costs of our decisions. • The grid can help you determine whether you are willing to accept the opportunity cost of a choice you are about to make. • Karen is trying to decide whether to sleep late or get up early to study for a test. Obviously, she cannot do both.

29. 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 • When you decide how much more or less to do, you are thinking at the margin. • Example, each additional hour of study would yield a higher test score. • Cost/Benefit Analysis – comparing opportunity costs and benefits at the margin to enable you to make a decision, comparing what you will sacrifice to what you will gain. • Once opportunity cost outweighs the benefits, no more units should be added

30. Section 2 Assessment 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.

31. Section 2 Assessment 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.

32. Section 3 - Production Possibilities Graphs • What is a production possibilities graph? • How do production possibilities graphs show efficiency, growth, and cost? • Why are production possibilities frontiers curved lines?

33. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 a (0,15) 8 14 b (8,14) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Production Possibilities • A production possibilities graph shows alternative ways that an economy can use its productive resources. • The production possibilities frontier is the line that shows the maximum possible output for that economy.

34. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 a (0,15) 8 14 b (8,14) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Production Possibilities • Axes can show and compare categories of goods. (farm v factory) • Axes can display any pair of specific goods or services. (watermelons v shoes)

35. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 a (0,15) 8 14 b (8,14) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Production Possibilities • Economists begin by deciding which goods or services to examine (farm v factory – again).

36. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 a (0,15) 8 14 b (8,14) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Production Possibilities • The graph also helps economists determine if they can produce BOTH goods (shoes AND watermelons). • Using made-up data (like below), points can be plotted and connected to draw a line that shows combinations of production of these goods or the PRODUCTION POSSIBILITIES FRONTIER.

37. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 a (0,15) 8 14 b (8,14) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Production Possibilities • Any point on the line represents a point in which all resources are being used to maximize a combination of the two products. • Opportunity Cost on the FRONTIER – look at any point on the curve and compare it to another and compare production of the goods to each other. What is the opportunity cost of producing the combination of goods at Point C instead of at Point D? 3 million pairs of shoes

38. Trade-Offs • Each point on the graph represents a trade-off • The more shoes produced meant fewer watermelons were grown. • Why? Because the factors of production are limited. • Land, labor & capital are all scarce. • Using the factors of production to make one product means that fewer resources are left to make something else.

39. Efficiency, Growth, & Cost • Production possibilities graphs can show us how efficient an economy is, whether an economy has grown or shrunk, and the opportunity cost of a decision to produce more of one good or service.

40. Production Possibilities Graph 25 20 15 10 5 S Shoes (millions of pairs) a (0,15) b (8,14) c (14,12) g (5,8) d (18,9) A point of underutilization e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Efficiency • Efficiency means 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.

41. Production Possibilities Graph 25 20 15 10 5 S Shoes (millions of pairs) a (0,15) b (8,14) c (14,12) g (5,8) d (18,9) A point of underutilization e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Underutilization • IF the economy weakens and leads to lay-offs, farms and factories will produce fewer goods. • This would be represented by a point INSIDE the line. • Any point inside the line indicates underutilization- using fewer resources than the economy is capable of using; much less than the maximum possible production.

42. Production Possibilities Graph 25 20 15 10 5 Future production Possibilities frontier T S a (0,15) Shoes (millions of pairs) b (8,14) c (14,12) d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Growth • If more resources become available, or if technology improves, an economy can increase its level of output and grow. • When this happens, the entire production possibilities curve “shifts to the right,” indicating growth

43. Production Possibilities Graph 25 20 15 10 5 Future production Possibilities frontier T S a (0,15) Shoes (millions of pairs) b (8,14) c (14,12) d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Growth • By contrast, if a country’s production capacity decreases the curve shifts to the left. • Possible reasons: • Country goes to war • Land is lost • Population ages, becomes less healthy, less educated labor supply resulting in decreased human capital

44. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 8 14 c (14,12) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) d (18,9) 0 5 10 15 20 25 Watermelons (millions of tons) Cost • Cost - the alternative we give up when we choose one option over another (to an economist cost = opportunity cost) • Increasing cost – each time we increase the production of a particular good, the sacrifice in terms of the goods given up increases

45. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 8 14 c (14,12) Shoes (millions of pairs) 14 18 20 21 12 9 5 0 d (18,9) 0 5 10 15 20 25 Watermelons (millions of tons) Law of Increasing Costs • States that as we shift factors of production from making one good or service to another, the cost of producing the second item increases. • Reasons? Some resources may be suited better for farming than for manufacturing • Explains why production possibilities frontiers curve – as we move along the curve, we trade off more and more to get less and less output

46. Resource and Technology • In order to create production possibility curves, the goods and services a country can produce must be determined, given its current resources. • Land/natural resources • Work force (labor) • Physical & human capital • Physical & Human resources reflect a vital ingredient • TECHNOLOGY • A country’s production possibilities depend on both its technological level and the resources it has available.

47. Section 3 Assessment 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.

48. Section 3 Assessment 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.