EconomicsChapter 1

All of the Basics

Scarcity• The Fundamental Economic Problem is…Scarcity… the condition all societies confront where unlimited human wants face limited resources.

• Economics… the study of how people satisfy wants with scarce resources—the study of how we deal with scarcity.

• Needs are required for survival.• Wants are desired for

satisfaction.• We need food but we want

___________? –Why do you think scarcity is an issue with the rich as well as the poor?

Needs vs. Wants

Scarcity forces us to make Choices

Three Basic Economic Questions help us make Choices.

1. What must/will we produce? • Society must choose based on its

needs. 2. How should we produce it?

• Society must choose based on its resources.

3. For whom should we produce? • Society must choose based on its

population and other available markets (trade).

Scarcity forces us to make Choices

The GOLDEN RULE—T I N S T A A F L???

• There is no such thing as a free lunch.– Someone has to pay for production

costs– What about “buy one get one free” and

other “free” stuff?

The Factors of Production• There are four factors of production:

– Factors of production are resources necessary to produce what people want or need Figure 1.2Figure 1.2Figure 1.2

Adam Smith

• Wrote The Wealth of Nations (1770’s)• Basic idea of Capitalism• “Laissez-Faire”

– Governments should not interfere in economic affairs of people or businesses

• “Invisible Hand”– People/Businesses don’t need to be told

what to do with resources– There is an “invisible hand” that guides

the resources to the right places

Goods, Services, and Consumers

• Economic products are goods and services that are useful, scarce, and transferable to others.

• Goods are items that are economically useful or satisfy an economic want.

• Goods are tangible and can be classified in 4 ways:1) Consumer goods are intended for final use

by individuals• food, clothing, video games, cars, etc.2) Capital goods are used to create other goods • bulldozer, hammer and nails, robots, etc.

3) Durable goods are intended to last more than 3 years • cars, washing machines, silverware, etc. 4) Nondurable goods are intended to last less

than 3 years• paper products, personal hygiene products,

food

• Consumer goods

• Capital goods

• Durable goods

• Nondurable goods

• Services are work performed for someone and are intangible

• doctor visit, haircut, hiring a lawyer, housecleaning service

• Consumers use goods and services to satisfy wants and needs.

The Circular Flow of Economic Activity

• Markets are locations/mechanisms for buyers and sellers to trade.

• A factor market is where people earn their incomes. Factor markets center on the four factors of production: land, capital, labor, and entrepreneurs.

• A product market is where people use their income to buy from producers. Product markets center on goods and services.

The Circular Flow of Economic Activity

Productivity and Economic Growth

• Productivity is a measure of the amount of output produced by the amount of inputs within a certain time. Productivity increases with efficient use of scarce resources.

• Specialization and division of labor may improve productivity because they lead to greater efficiency (and greater economic interdependence). Know the difference.

• Investing in human capital improves productivity because when people’s skills, abilities, health, and motivation advance, productivity increases.

• How do we invest in human capital? Know examples

• Economic growth depends on high productivity. Yet, an economy’s productivity may be affected by its interdependence—reliance on others and their reliance on us to provide goods and services.

Making Decisions—or—Beginning to think Economically (don’t write this)

• The process of making a choice is not always easy.

• Because resources are scarce, consumers AND producers need to make wise choices.

• Finally, you have to make your choice in a way that carefully considers the costs and benefits of each possibility.

• This is called cost-benefit analysis

Choices Involve Trade Offs and Opportunity Cost

• Trade-offs are the alternative choices people face in making an economic decision.

• Study for a quiz or pizza with friends?

• Opportunity cost is the cost of the next best alternative among a person’s choices. The opportunity cost is the money, time, or resources a person gives up, or sacrifices, to make his final choice.

• (What is the opportunity cost of going out for pizza with friends vs. studying for your econ. quiz?)

• Trade offs (choices) always cost the person an opportunity to do something else

Lists the advantages and disadvantages of each choiceProvides an efficient way of looking at a problemForces you to look at the trade offsForces you to set criteria for making your decisionForces you to evaluate each possible choice

A Decision-Making Grid

(don’t write this)

Production Possibilities

• Production Possibilities Frontiers (PPF) examine the opportunity costs of producing one item over another.

• The production possibilities frontier illustrates the concept of opportunity cost.

• The line on the graph represents the full potential—the frontier—when the economy uses all of its resources efficiently. – Identifying possible alternatives allows an

economy to examine how it can best put its limited resources into production.

– Considering different ways to fully use its resources allows an economy to analyze the combination of goods and services that leads to maximum output.

Lem-Lem’s PPF

footballs

bask

etb

alls

24

18

12

6

6 12 18 240

A

B

C D

Lem-Lem’s PPF

footballs

bask

etb

alls

24

18

12

6

6 12 18 240

Production Possibilities

GUNS AND BUTTER• Classic economic example/model shows

the relationship between a nation's investment in military and consumer goods

• Illustrates a nation’s choose between two options when spending its limited resources

• Nations buy either guns (invest in defense/military) or butter (invest in production of goods), or a combination of both

GUNS AND BUTTER

A

B

GUNS AND BUTTER• At point A, a nation produces 20 guns

& 900 butters• At point B, a nation produces 180

guns & 100 buttersA

B

GUNS AND BUTTER• What is the opportunity cost of shifting

resources from A to B?

A

B