The Economic Way of Thinking Scarcity: The Basic Economic Problem

The Economic Way of Thinking

Scarcity: The Basic Economic Problem

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What Is Scarcity

• People Have Lots of Desires• These are broken down in to two categories• WANTS• NEEDS

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What Is Scarcity

• NEED• Satisfied by consuming a good or service• Necessary for survival• FOOD• CLOTHING• SHELTER

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What Is Scarcity

• WANT• Satisfied by consuming a good or service• Satisfy a desire• Wants are UNLIMITED

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What Is Scarcity

• Society cannot satisfy all Needs and Wants• WHY?• We have limited resources.

• SCARCITY• The situation that exists because there are not enough resources to meet

human wants.

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What Is Scarcity

• ECONOMICS• The study of how people choose to use scarce resources• Examining how individuals, businesses, and government use their scarce

resources• Organizing, Analyzing, and Interpreting Data• Developing theories and economic laws.

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Principle 1: People Have Wants

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Principle 1: People Have Wants

• Choice is central to the use of scarce resource.• You have a CHOICE about everything.• You NEED FOOD……..you WANT Pizza.

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Principle 2: Scarcity Affects Everyone

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Principle 2: Scarcity Affects Everyone

• Because resources are limited, decisions have to be made about how to best use them.• As a result, scarcity affects which goods are made and which

services are provided.

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Principle 2: Scarcity Affects Everyone

• GOODS: physical objects that can be purchased.• SERVICES: Work that one person performs for payment• Ie. Sales clerk, teachers, nurses, etc.

• CONSUMER: A person who buys goods or services for personal use.• PRODUCER: A person who makes goods or provides services.

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Scarcity Leads to 3 Economic Questions

• Since resources are SCARCE, we use 3 Economic Questions to Allocate them:• What Will Be Produced• How Will It Be Produced• For Whom Will It Be Produced

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The Factors of Production

• To Understand how societies have answered the first two basic questions, economists have identified the FACTORS OF PRODUCTION

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The Factors of Production

• LAND• ALL NATURAL RESOURCES• Sunshine, water, wildlife, etc.

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The Factors of Production

• LABOR• All human time and effort that go in to making a product.

• CAPITAL• Resources made and used by people to produce goods and services.

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The Factors of Production

• ENTREPRENEURSHIP• Combination of vision, skill, and willingness to take risks that are

needed to create and run a new business.

Economic Choice Today: Opportunity

CostsCh 1, Section 2

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Making Choices

• What shapes Economic Choices?• Incentives: benefits offered to encourage people to act in

certain ways.• Utility: benefit or satisfaction gained from a product.• Economize: make decisions according to what you believe is

the best combination of cost and benefit.

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Motivations for Choice

• SELF INTEREST• Why do you make one decision over another?• IE…. You choose to go to a movie with one friend over staying at home to

listen to another friend on the phone talk about all of their problems….• SELF INTEREST……THAT’S WHY!

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NO FREE LUNCH

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NO FREE LUNCH

• Every choice involves costs.• Movie…have to listen to your friend complain the next time

you see them• Telephone Call….you missed the movie.

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Trade Offs and Opportunity Costs

• Choices ALWAYS involve costs. For every choice you make, you give something up. This is called a TRADEOFF

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Trade Offs and Opportunity Costs

• An Opportunity Cost is the value of the NEXT BEST alternative….or what you give up by making a different choice.

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Making a Trade-off

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Trade Offs and Opportunity Costs

• Cost Benefit Analysis: • The practice of examining the costs and the expected benefits of a

choice as an aid to decision making.

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Trade Offs and Opportunity Costs

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Trade Offs and Opportunity Costs

• Marginal Costs and Benefits• MARGINAL COSTS• The cost of using one additional unit of a good or service

• MARGINAL BENEFITS• The benefit of using one additional unit of a good or service

Analyzing Production Possibilities

Ch 1, Section 3

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Trade Offs & Opportunity CostsChoiceIncome Change

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• Economic Models • Graphical representations of complex economic activities.

• Production Possibilities Curve• A graphical illustration of the impact of scarcity of resources on the

production of goods and services.

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Production Possibilities Curve

• Basic Assumptions of a PPC• Resources are fixed• All resources are fully employed• Only two things can be produced• Technology is fixed.

Production Possibilities Chart

AN EFFICIENT ECONOMY MISSES NO OPPORTUNITIESIn this case….along the curve

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WHAT WE LEARN FROM PPCs

• LAW OF INCREASING OPPORTUNITY COSTS• Each additional unit costs more to make than the last.

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Changing Production Possibilities

• A SHIFT IN THE PPC• The PPC can shift outward if• Additional natural resources• Increased labor• New technology that makes production more efficient

Economic Growth

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The Economists ToolboxSec 4

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Working with Data

• Statistics• Numerical data or information

• Economic Models• Line Graphs• Bar Graphs• Pie Charts

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Microeconomics & Macroeconomics

• Microeconomics• The study of the behavior of the individual or the individual firm.

• Macroeconomics• The study of the behavior of the economy as a whole.

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Positive Economics & Normative Economics

• Positive Economics• Scientific Data to back up statements.

• Normative Economics• Value/Opinion based statements

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The Invisible Hand

• Concept by Adam Smith• The Wealth of Nations• Smith argues: • nations would be wealthier if allowed to engage in free trade.• People act in their own best self interest.