Chapter 1

1. Chapter 1 What Is Economics?

2. Chapter 1: What is Economics? Lesson 1: Scarcity and the Science of Economics Students will know: • Societies do not have enough productive resources to satisfy everyone’s wants and needs, so they must make choices about what, how, and for whom to produce. • The value of a good or service depends on its scarcity and utility Students will be able to: • Explain why all societies face the problem of scarcity. • Categorize the various types of goods and services. • Identify three basic choices that are faced by all societies. • Summarize the four reasons people study economics.

3. Lesson 1: Scarcity and the Science of Economics • Economics is the social science dealing with how people satisfy seemingly unlimited and competing wants and needs with the careful use of limited resources. • Scarcity is the fundamental problem of meeting people’s virtually unlimited needs and wants with limited resources. Not enough resources available on this earth to meet all the wants we have. • What effect do limited resources and unlimited wants have on the economy? • They create scarcity. • Get with a partner and look at figure 1.1 on page 7 of your textbook. Answer the question under Critical Thinking: How does this picture illustrate scarcity?

4. Lesson 1: Scarcity and the Science of Economics • Needs vs. Wants • A need is a basic requirement for survival, such as food, water, clothing, and shelter. • A want is something we would like to have, but is not necessary for survival.

9. Lesson 1: Scarcity and the Science of Economics • Goods vs. Services • A good is a useful, tangible item that can be used to satisfy a need or want. (ex: books, cars, MP3 player, Iphone) • A service is work performed for someone to satisfy a need or want. (ex: haircuts, home repairs, car repairs, doctors, lawyers, and teachers) • The difference between a good and a service is that a good is tangible and a service is not.

10. Lesson 1: Scarcity and the Science of Economics • Types of Goods • Durable goods are tangible items that are designed to last three years or more when used on a regular basis. (ex: tools, tractors, cars, washing machines, clothes dryer, refrigerator) • Nondurable goods are tangible items that last for fewer than three years when used on a regular basis. (ex: food, writing paper, clothes) • Consumer goods are tangible items intended for final use by individuals. (ex: clothes, shoes, food, car) • Capital goods are tangible items intended for final use by businesses. (ex: machinery, equipment that is used by businesses to produce other products or services) • Most goods and services have value, a term that refers to a worth that can be expressed in dollars and cents.

11. Lesson 1: Scarcity and the Science of Economics • Paradox of Value is an apparent contradiction between the necessity of an item and its value. • Necessities such as water and air have very low monetary value • Non Necessities such as diamonds have a very high monetary value • Utility is the capacity a good or service has to be useful and provide satisfaction. • Discuss with a partner: Why do you think some goods and services are more valuable than others? • To have monetary value, a good must be scarce and have utility for the person purchasing it. Some goods that have utility are more scarce than others, which makes them more valuable (more expensive).

12. Lesson 1: Scarcity and the Science of Economics • Wealth is the accumulation of items that are tangible, are scarce, have utility, and are transferable from one person to another. • A nation’s wealth comprises all tangible items--including natural resources, factories, stores, houses, motels, theaters, furniture, clothing, books, highways video games, and even basketballs--that can be exchanged. • Wealth excludes services because they are not tangible. • TINSTAAFL--There is no such thing as a free lunch! • Because resources are limited, everything we do has a cost--even when it seems as if we are getting something “for free.” • Discuss with a partner: Do you really get a free meal when you use a “buy one get one free” coupon? • The business that gives it away still has to pay for the resources that went into the meal, so it usually tries to recover these costs by charging more for its other products.

14. Lesson 1: Scarcity and the Science of Economics • The Three Basic Economic Questions • What to Produce • Should a society direct its resources to make capital goods or consumer goods? • A society cannot produce everything its people want. • In some countries this decision is made by the government. • In other countries, spending decisions made by consumers largely determine where resources are directed. • How to Produce • Should a factory owner use automated production methods that require more machines and fewer workers, or should they use fewer machines and more workers? • Automation can lower production costs making the price of goods less • If unemployment is too high there is no one who can afford the cheaper goods • For Whom to Produce • Does a society produce items for the wealthy, the middle class, or the poor? • If the supply of an item is too low, who will receive the existing supply?

15. Lesson 1: Scarcity and the Science of Economics • The Scope of Economics • Economics is the study of human efforts to satisfy seemingly unlimited and competing wants through the careful use of relatively scarce resources. • Economics is a social science because it deals with the behavior of people as they deal with this basic issue. • The four key elements of this study are description, analysis, explanation, and prediction.

16. Lesson 1: Scarcity and the Science of Economics • The Scope of Economics • The four key elements of this study are description, analysis, explanation, and prediction. • Description: • One part of economics describes economic activity • Gross Domestic Product is the monetary value of all final goods, services, and structures produced within a nation’s borders in a 12 month period. • Economics also describes jobs, prices, trade, taxes, and government spending • Analysis: • Economics analyzes the economic activity that it describes. • Why are prices for some items higher than others? Why do some people earn higher incomes than others? • Explanation: • After economists analyze a problem and understand why and how things work, they need to communicate this knowledge to others. • Prediction: • Economics studies both what is happening now and what might happen in the future.

17. Lesson 1: Scarcity and the Science of Economics • With a partner read and discuss the cartoon on page 12. Explain how this man’s lunch may not have been truly “free,” even if he didn’t have to hand over any money today.

18. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • What effect do limited resources and unlimited wants have on the economy?

19. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • What effect do limited resources and unlimited wants have on the economy? • They create scarcity

20. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • Why do all societies face the problem of scarcity?

21. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • Why do all societies face the problem of scarcity? • All people want more than they have

22. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • What is the difference between a need and a want?

23. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • What is the difference between a need and a want? • A need is a basic requirement for survival. A want is something we would like to have, but it is not necessary for survival.

24. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • Who is credited with being the “Father of Economics”?

25. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • Who is credited with being the “Father of Economics”? • Adam Smith, who wrote The Wealth of Nations in 1776. He believed that an economy would function optimally if the government did not control the economy and individuals were allowed to act in his or her own “rational self-interest”, which would act as an invisible hand in shaping the market.

26. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • What effect do limited resources and unlimited wants have on the economy?

27. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • What effect do limited resources and unlimited wants have on the economy? • They create scarcity and force societies to make choices

28. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • Why are societies faced with the three basic questions of WHAT, HOW, and FOR WHOM?

29. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • Why are societies faced with the three basic questions of WHAT, HOW, and FOR WHOM? • We live in a world or relatively scarce resources and we have to make choices regarding how to use those resources

30. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • Why is economics considered to be a social science?

31. Lesson 1: Scarcity and the Science of Economics • Lesson 1 Review: • Why is economics considered to be a social science? • Economics deals with the behavior of people as they deal with the basic issue of scarcity

32. Chapter 1: What is Economics? Lesson 2: Our Economic Choices Students will know: • Land, labor, capital, and entrepreneurship are the four factors necessary to produce goods and services. • Entrepreneurs take the risk to combine productive resources (land, labor, capital, entrepreneurship) to produce goods and services. • How a production possibilities curve can be used to determine the most efficient allocation of resources. Students will be able to: • Explain the four basic factors of production. • Identify production alternatives using a production possibilities curve. • Explain the concept of opportunity cost, including the opportunity cost of idle resources. • Evaluate trade-offs and opportunity costs to choose wisely or make the best decision. • List the rights and responsibilities of consumers.

33. Lesson 2: Our Economic Choices • The economy is made up of two broad groups: • Producers - those who use the factors of production to produce goods and services • Consumers - those who buy goods and services for final use • The Factors of Production (CELL) - Often referred to as resources • Capital - sometimes called capital goods: tools, machinery, equipment, and factories used in the production of goods and services • Entrepreneurs- risk-takers in search of profits who do something new with existing resources • Often thought of as being the driving force in an economy because they are the ones who start new businesses, or bring new products to market • Land- “gifts of nature”, or natural resources not created by people • Soil, sand, plants, trees, mineral deposits, livestock, sunshine, air, climate • Labor - People with all their efforts, abilities, and skills • What would happen if one of the factors of production were missing?

34. Lesson 2: Our Economic Choices • Production Possibilities • Since all resources are limited, choices have to be made as to how an economy will utilize their resources. • Production Possibilities Curve • Also called the frontier, is a diagram that represents possible combinations of goods and services an economy can produce when all its resources are in use (full employment does not actually mean all resources, more on this later)

35. Lesson 2: Our Economic Choices • Production Possibilities • Since all resources are limited, choices have to be made as to how an economy will utilize their resources. • Production Possibilities Curve • Also called the frontier, is a diagram that represents possible combinations of goods and services an economy can produce when all its resources are in use (full employment does not actually mean all resources, more on this later) Capital Goods Consumer Goods

36. Lesson 2: Our Economic Choices • Production Possibilities • Since all resources are limited, choices have to be made as to how an economy will utilize their resources. • Production Possibilities Curve • Also called the frontier, is a diagram that represents possible combinations of goods and services an economy can produce when all its resources are in use (full employment does not actually mean all resources, more on this later) Capital Goods A inefficient Consumer Goods Any point inside the frontier represents an economy that is inefficient, not utilizing its resources to their fullest extent

37. Lesson 2: Our Economic Choices • Production Possibilities • Since all resources are limited, choices have to be made as to how an economy will utilize their resources. • Production Possibilities Curve • Also called the frontier, is a diagram that represents possible combinations of goods and services an economy can produce when all its resources are in use (full employment does not actually mean all resources, more on this later) Capital Goods B A Efficient Inefficient Consumer Goods Any point on the frontier represents an economy at “full employment” of its resources (approximately 5% unemployment of labor and 20% unemployment of other resources

38. Lesson 2: Our Economic Choices • Production Possibilities • Since all resources are limited, choices have to be made as to how an economy will utilize their resources. • Production Possibilities Curve • Also called the frontier, is a diagram that represents possible combinations of goods and services an economy can produce when all its resources are in use (full employment does not actually mean all resources, more on this later) Capital Goods C B Overextended A Efficient Inefficient Consumer Goods Any point just outside the frontier represents an economy that is overextended. An economy can produce outside the frontier for a short period of time, but puts undue pressure on its resources and can cause damage to itself.

39. Lesson 2: Our Economic Choices • Production Possibilities • Since all resources are limited, choices have to be made as to how an economy will utilize their resources. • Production Possibilities Curve • Also called the frontier, is a diagram that represents possible combinations of goods and services an economy can produce when all its resources are in use (full employment does not actually mean all resources, more on this later) Capital Goods C B Overextended A Efficient D Inefficient Unattainable for now Consumer Goods A point at which all of an economy’s resources are employed is as far as an economy can theoretically produce. Any point beyond that is called unattainable for now. Once new resources are discovered, new technology is introduced, or new efficiencies are discovered and implemented, the frontier shifts to the right and a new frontier is established.

40. Lesson 2: Our Economic Choices • Opportunity Cost • The value of the next best alternative given up • Opportunity cost applies to all activities and is not always measured in dollars and cents • For example, you need to balance the amount of time you spend doing homework and the time you spend with your friends. • If you decide to spend an extra hour on your homework, the opportunity cost will be the time you could have spent with your friends • If you have a number of “trade-offs” available whenever you make a decision, the opportunity cost is always the value of the next best alternative that you give up Get with a partner and look at figure 1.3 on page 16. Discuss the answer to the Critical Thinking question. A production possibilities frontier indicates the maximum combinations of goods and services that can be produced. However, a firm will eventually have to choose a combination of two points. Choosing only two points on or inside the frontier must be decided because a firm’s resources are limited.

41. Lesson 2: Our Economic Choices • Opportunity Cost • The value of the next best alternative given up • Opportunity cost applies to all activities and is not always measured in dollars and cents • For example, you need to balance the amount of time you spend doing homework and the time you spend with your friends. • If you decide to spend an extra hour on your homework, the opportunity cost will be the time you could have spent with your friends • If you have a number of “trade-offs” available whenever you make a decision, the opportunity cost is always the value of the next best alternative that you give up Get with a partner and look at figure 1.4 on page 17. Discuss the answer to the Critical Thinking question.

42. Lesson 2: Our Economic Choices Get with a partner and look at figure 1.4 on page 17. Discuss the answer to the Critical Thinking question. When the production of one item increases, the production of another must decrease. At point c, production is all clothing and no cars, thus the opportunity cost is what was given up in order to produce the additional units of clothing. For example, if the initial point was point a, and clothing production moved to point c, the opportunity cost of clothing at point c is 70 units of cars

43. Lesson 2: Our Economic Choices The economy represented in this Production Possibilities Schedule produces only guns and bombs. Draw a Production Possibilities Curve using the data in this table

44. Lesson 2: Our Economic Choices Guns 12 10 8 6 4 2 0 1 2 3 4 5 6 Bombs If this economy is currently producing 12 guns and 0 bombs: • The opportunity cost of increasing production of bombs from 0 to one bomb is the loss of ________ guns.

45. Lesson 2: Our Economic Choices Guns 12 10 8 6 4 2 0 1 2 3 4 5 6 Bombs If this economy is currently producing 12 guns and 0 bombs: • The opportunity cost of increasing production of bombs from 0 to one bomb is the loss of ___2_____ guns.

46. Lesson 2: Our Economic Choices Guns 12 10 8 6 4 2 0 1 2 3 4 5 6 Bombs If this economy is currently producing 12 guns and 0 bombs: • The opportunity cost of increasing production of bombs from 0 to one bomb is the loss of ___2_____ guns. • The opportunity cost of increasing production of bombs from 1 to 2 bombs is the loss of ________ guns.

47. Lesson 2: Our Economic Choices Guns 12 10 8 6 4 2 0 1 2 3 4 5 6 Bombs If this economy is currently producing 12 guns and 0 bombs: • The opportunity cost of increasing production of bombs from 0 to one bomb is the loss of ___2_____ guns. • The opportunity cost of increasing production of bombs from 1 to 2 bombs is the loss of ___2_____ guns.

48. Lesson 2: Our Economic Choices Guns 12 10 8 6 4 2 0 1 2 3 4 5 6 Bombs If this economy is currently producing 12 guns and 0 bombs: • The opportunity cost of increasing production of bombs from 0 to one bomb is the loss of ___2_____ guns. • The opportunity cost of increasing production of bombs from 1 to 2 bombs is the loss of ___2_____ guns. • The opportunity cost of increasing production of bombs from 2 to 3 bombs is the loss of ________ guns.

49. Lesson 2: Our Economic Choices Guns 12 10 8 6 4 2 0 1 2 3 4 5 6 Bombs If this economy is currently producing 12 guns and 0 bombs: • The opportunity cost of increasing production of bombs from 0 to one bomb is the loss of ___2_____ guns. • The opportunity cost of increasing production of bombs from 1 to 2 bombs is the loss of ___2_____ guns. • The opportunity cost of increasing production of bombs from 2 to 3 bombs is the loss of ___2_____ guns.

50. Lesson 2: Our Economic Choices Guns 12 10 8 6 4 2 0 1 2 3 4 5 6 Bombs If this economy is currently producing 12 guns and 0 bombs: • The opportunity cost of increasing production of bombs from 0 to one bomb is the loss of ___2_____ guns. • The opportunity cost of increasing production of bombs from 1 to 2 bombs is the loss of ___2_____ guns. • The opportunity cost of increasing production of bombs from 2 to 3 bombs is the loss of ___2_____ guns. • The opportunity cost of increasing production of guns from 6 to 8 guns is the loss of _________ bombs.