What is Economics?

1. What is Economics? Chapter 1

2. Fundamentals • Economics– Study of how societies deal with scarcity • Scarcity – involves limited quantities of resources to meet unlimited wants • Needs – something necessary for survival • Wants – an item desired but not necessary for survival • A luxury

3. http://www.youtube.com/watch?v=eivSr8BcPLY&feature=related How do we satisfy wants? • Wants and needs break down into two simple categories: • Goods – which are tangible, physical objects: NOUNS • (ex – car, food, ipod) • Services – actions or activities: VERBS • (ex – haircut, waiting tables, housecleaning) **Notice that these are things we spend our money on day-to-day

4. Playground Economics • Scarcity exists everywhere • In the classroom, on the road or on the playground • What if all the children wanted to play on the swings at the same time? • What about musical chairs?

5. Scarcity vs. Shortage • Shortage results from a company being unable or unwilling to supply at a certain quantity or at a certain price • Scarcity involves the finite resources used to fulfill infinite wants • There will ALWAYS be scarcity; it is naturally occurring • Shortages are human created

6. Dealing with Scarcity • In an effort to combat limited resources governments and businesses employ a handful of strategies • Business may raise prices • Governments may ration supplies • Governments may control prices http://yadayadayadaecon.com/clip/47/

7. Factors of Production • Most of the things we use or buy are made from other things • The things we use to make other things are our productive resources • The easiest way to spot the difference between societies is by who owns the factors of production • They can be renewable or nonrenewable

8. CELL • Land – natural resources used to produce goods and services • Labor – effort devoted to a task for which the person is paid (work) • Capital – physical: human made objects to create other objects or human: theknowledge and skills we possess • Entrepreneurship – taking risks, developing ideas, starting businesses, pulling together resources http://www.youtube.com/user/mjmfoodie#p/search/3/efSttefJiwQ http://www.youtube.com/watch?v=OS_9A_EA30M http://www.visualeconomics.com/how-the-average-american-uses-energy/

9. There’s No Such Thing as a Free Lunch • When you make a decision there are always options and alternatives • Trade offs are ALL of the alternatives that we give up whenever we choose something ex – working part-time to earn money vs. playing sports, sleeping, studying, hanging with friends... • Opportunity Cost – the most desirable alternative given up as the result of a decision • OR the cost of anything is what you give up to get it http://economicsinthemovies.swlearning.com/demo/demo.html

11. How Do I Make a Rational Decision?

12. Guns & Butter Decisions • Countries/nations must make decisions just like individuals and businesses • For countries those decisions are based on balancing military (security) vs. consumer needs (domestic) • In economics military needs are called guns and consumer needs are called butter

13. GunsButter • **Remember scarcity and that no one, not even a country, can have unlimited amounts of everything at the same time—decisions and tradeoffs must be made

14. “The promises of the Great Society have been shot down on the battlefields of Vietnam” Vietnam War (Guns) LBJ’s War on Poverty (Butter) http://www.youtube.com/watch?v=1UDBziEsn0Y

15. Thinking at the Margin • Many decisions are not “all or nothing,” but involve marginal changes – incremental adjustments to an existing plan. • Margin involves adding or subtracting one more unit • earning one more $, producing one more stick of butter, getting one more minute/hour of sleep • One must compare the benefits and costs, what will be sacrificed and what will be gained with the addition or subtraction of one more—that’s “at the MARGIN” http://www.youtube.com/watch?v=SSZJT4H5cPI

17. Models & Graphs: Ways of Structuring Information about the World

18. Production Possibilities Curve • Graph that shows alternate ways to use an economy’s resourcesor the opportunity cost of any decision

19. What Should We Make and how should we make it? • Efficiency – using resources in a way to maximizeproduction of goods and services • Less cost, more profit • Underutilization – user fewer resources than one is capable of using (inefficiency) • Getting very little after great effort • Growth – with growth – PPC shifts to the right, with decline- PPC shifts to the left • Growth involves producing more over time at less cost • Cost – value of anything given up to achieve a purpose

20. Shifting Curves • The Curve, or frontier, itself can shift to the left or right • Rather than just moving along the line by changing the amount of each good we produce • the entire curve can shift left or right by changing the amount of inputs or their costs

21. The Frontier of Possibilities • Frontier is the line on the graph that shows the different combinations of production between two items • AGAIN, when the graph’s frontier shifts to the right, signaling growth, an economy has generally become MORE PRODUCTIVE

22. Law of Increasing Cost • As an economy switches production from one good or service to another, (ex- guns to butter, watermelons to shoes), more & more resources are necessary to increase the production of the second item • Therefore that economy’s opportunity cost is increasing. Why?

23. What to Produce & How? • Why do costs increase like this? • Many times the increase is because someresources are better suitedfor other purposes than increasing the production of another good • In the shoes & watermelons example, as we move along the curve left to right ––> we sacrifice MORE resources to get LESS goods, or output • Resources for one item are not easily adapted for another item • Is farmland very good for making guns?