The Economic Way of Thinking

1. The Economic Way of Thinking Chapter 1

2. Scarcity: The Basic Economic Problem • KEY CONCEPTS • Economics — study of how people use resources to satisfy wants • how individuals/societies choose to use resources • organizes, analyzes, interprets data about economic behaviors • develops theories, economic laws to explain economy, predict future

3. Scarcity: The Basic Economic Problem • Scarcity • is the economic problem of having seemingly unlimited human needs and wants, in a world of limited resources. • Why does it exist? • It exists because wants are unlimited and resources are limited

4. Basic Economic PrinciplesPrinciple 1: People Have Wants • 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 • People make choices about all their needs and wants • Wants are unlimited, ever changing

5. Basic Economic PrinciplesPrinciple 2: Scarcity Affects Everyone • Scarcity affects which goods and 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. Video Clip: Scarcity & Choice

7. Three Basic Economic Questions • Every society must answer three basic economic questions because of scarcity. • Societies answer these questions differently, leading to a variety of economic systems.

8. Three Basic Economics Questions • Question 1: What Will Be Produced? • Societies must decide on mix of goods to produce • depends 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

9. Three Basic Economics Questions • Question 2: How Will It Be Produced? • Production decisions involve using resources efficiently • Influenced natural resources • Societies adopt different approaches • labor-intensive methods versus capital-intensive methods depends on availability

10. Three Basic Economics Questions • Question 3: For Whom Will It Be Produced? • How goods and services are distributed involves two questions • how should each person’s share be determined? • how will goods and services be delivered to people?

11. The Factors of Production Factors of production • resources needed to produce goods and services • land • labor • Capital • entrepreneurship • supply is limited

12. The Factors of Production • Factor 1: Land • Land means all natural resources on or under the ground • includes water, forests, wildlife, mineral deposits

13. The Factors of Production • 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

14. The Factors of Production • 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

15. The Factors of Production • 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

16. Practice • Label the 4 Factors f Production • (CL Lesson 5, pg 26) • Factors of Production CL Lesson 6 Activity in groups of 2 -3 .

17. Making Economic Choices • Two factors affect economic decisions: • Incentives— benefits that encourage people to act in certain ways • Utility — benefit or satisfaction gained from using a good or service • Choices vary between individuals based on what is best for him / her

18. Making Economic Choices • Factor 1: Motivations for Choice • People motivated by incentives, expected utility, desire to economize • They weigh costs against benefits to make purposeful choices • Motivated by self-interest

19. Making Economic Choices • Factor 2: No 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

20. Trade-Offs and Opportunity Cost • Trade-off • is alternative people give up when they make a choice • usually means giving up some, not all, of a thing to get more of another

21. Trade-Offs and Opportunity Cost • Example of a Trade Off • Jessica wants to earn college credit over summer • semester-long university course offers more credits • six-week high school course leaves time for vacation

22. Trade-Offs and Opportunity Cost • Opportunity costis value of next-best alternative a person gives up • not the value of all possible alternatives • Example of Opportunity Cost • Dan chooses to work for six months so he can travel for six months • opportunity cost = six months of salary

23. Video Clip: Opportunity Cost

24. Opportunity Cost Activity • In a group of 2 -3 consider this scenario: • You have won $1,000. Create a chart with these columns: • What will you buy? • What will you gain from each choice? • What do you give up with each choice? (What’s the opportunity cost?)

25. Analyzing Economic Choices • Cost-benefit analysis: • examines the costs and expected benefits of choices • one of most useful tools for evaluating relative worth of economic choices

26. Analyzing Economic Choices • 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

27. Analyzing Production Possibilities • KEY CONCEPTS • Production possibilities curve (PPC) is one model (graph) • PPC shows the maximum goods or services that can be produced from limited resources • also called production possibilities frontier • PPC • PPC based on assumptions: • resources are fixed • all resources are fully employed • only two things can be produced • technology is fixed

28. Graphing the Possibilities • 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

29. What We Learn from PPCs • Efficiency— producing the maximum amount of goods and services possible • Underutilization— producing fewer goods and services than possible

30. Why is the PPC a Curve? • Law of increasing opportunity costs • as production switches from one product to another, more resources needed to increase production of second product • 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

31. Let’s Look at Some Examples • PPC Practice

32. Changing 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

33. PPF—The Curve • What Does Guns And Butter Curve Mean? • In a theoretical economy with only two goods, a choice must be made between how much of each good to produce. • As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa. 

34. Video Clip: Individual and Society PPCs

35. CL Lesson 7 Activity pg. 35 – PPC Problems

36. Microeconomics and Macroeconomics • Microeconomics • Microeconomics examines specific, individual elements in an economy • prices, costs, profits, competition, consumer and producer behavior • Some Topics of Interest: business organization, labor markets, environmental issues

37. Microeconomics and Macroeconomics • Macroeconomics • Macroeconomics studies sectors — combination of all individual units • Includes consumer, business, public or government sectors • Macroeconomics studies national or global topics: • monetary system, business cycle, tax policies, international trade

38. Examples of Macro and Micro • Which is it? • National Unemployment Figures Rise • World Trade Organization Meets • Shipbuilder Wins Navy Contract • Cab Drivers on Strike! • Gasoline Prices Jump 25 Cents