What is economics
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What is Economics?. Chapter 1. Economics:. The study of how people seek to satisfy their needs and wants by making choices about how to use scarce resources. Needs: things NECESSARY for survival Wants: things we desire but are NOT ESSENTIAL to survival. Needs vs. Wants. Scarcity.

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What is Economics?

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What is Economics?

Chapter 1


Economics:

  • The study of how people seek to satisfy their needs and wants by making choices about how to use scarce resources


Needs: things NECESSARY for survival

Wants: things we desire but are NOT ESSENTIAL to survival

Needs vs. Wants


Scarcity

  • Limited quantities of resources to meet unlimited wants


Shortage

  • A situation in which a good or service is unavailable temporarily


Factors of Production

  • Land

  • Labor

  • Capital

    • Human

    • Physical

Remember these!

You will hear them a lot this semester!


Land

Natural resources (land, coal, water, forests, etc.)


Labor

The effort people devote to a task for which they are paid


Capital

  • Physical: Human made objects used to create other

    goods and services

  • Human: The skills and knowledge gained by a worker through education and experience


Entrepreneurs

  • Ambitious leaders who combine land, labor, and capital to create and market new goods and services.


Factors of Production Model

LAND - cotton

LABOR -seamstress

ENTREPRENEUR –designer, business owner

GOOD – t-shirt

CAPITAL – thread, sewing machine.


Factors of Production Model


Opportunity Cost

There is no such thing

as a free lunch!


Spring Break…Which would you choose?

HawaiiNew York

Las VegasCancun

ParisTokyo

VailTahiti


Individuals

work or free time

study or sleep

Business

Goods or Services

Produce or Sell

Trade-offs…options when you make a choice.


Decision Making Grid


Thinking at the Margin


Production Possibilities Curves

  • Graphs that show alternative ways to use an economy’s resources


Al's Coffee Shop!

Coffee

A

50

B

40

30

C

20

10

D

0

25

50

70

75

Tea


Efficiency

  • Efficiency means using resources in such a way as to maximize the production of goods and services.

  • An economy producing output levels on the production possibilities frontier is operating efficiently.


Coffee

Productions possibilities frontier

50

Any production

along

this line is

EFFICIENT

75

Tea


Efficiency

  • Efficiency also means that in order to produce more of one good you must give up producing some of the other good.

  • This is because the line represents the limits that scarce resources place on our production possibilities.


Coffee

Tea

Efficiency

Coffee

50

40

20

0

0

50

70

75

A

50

B

40

30

C

20

10

D

0

25

50

70

75

Tea


Underutilization

  • Any point inside the line indicates an underutilization of resources.

  • This economy is not using all of the resources that are available.

  • This economy is not producing all the goods and services it could be producing.


Al's Coffee Shop!

Coffee

50

Any production

in this

space is

inefficient…you

have the supplies

but aren’t making

the coffee or tea

75

Tea


Growth

  • 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.”


Al's Coffee Shop!

Coffee

50

Al buys more

equipment

and now he can

make even more

coffee or tea!

75

Tea


Law of Increasing Costs

  • As we shift resources from making one good to another, the cost of producing the second item increases.

  • In other words, we have to give up more and more of the first item for each additional unit of the second item.

  • This is because some resources are better suited for one purpose over another.


Law of Increasing Costs

Coffee

Tea

Coffee

50

40

20

0

0

50

70

75

A

50

B

40

30

C

20

10

D

0

25

50

70

75

Tea


Chapter 1Things to think about…


What is the difference between a good and a service?


Why is the idea of scarcity a starting point for thinking economically?


How is scarcity different from shortages?


What special advantages does physical capital offer?


What role do entrepreneurs play in the economy?


Name three examples that illustrate how all decisions involve trade-offs.


Why must the opportunity cost of a decision always be something desirable?


What does the term “guns or butter” mean?


What does it mean to “think at the margin”?


What are the opportunity costs involved in:


Eating pizza


Going to see a movie on a Tuesday


Going to see a movie on a Saturday


Watching TV


Studying for a test


Finishing High School


Getting Married


Having a Kid


Create a decision making grid to defend a decision you will make today


Decide whether to work 2, 4, or 6 hours at an after-school job by comparing the opportunity cost and benefit of each alternative.CostBenefit2 hours4 hours6 hours


Decide whether to finish the semester and graduate by comparing the opportunity cost and benefit for each alternativeCostBenefitGraduate NowGraduate laterGet a GEDDrop Out


How is underutilization depicted on a production possibilities frontier?


How does a production possibilities curve illustrate how efficient an economy is?


How does a production possibilities curve illustrate opportunity cost?


Describe a specific event that would make each of the following happen to a production possibilities curve:


Still capable of

same output but

not producing

total possible

  • A point moves down and to the left

  • The frontier shifts to the right

Capable of producing

more of every

combination of

products


Describe three services that the government provides to its citizens then identify some of the opportunity costs of providing those services.


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