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Chapter 1: What is Economics?. Here we go! Get ready! Section 1: Scarcity and the Factors of Production. What is Economics?. What do you know about the subject of economics?. Scarcity and Choice. Primary idea: We can’t have everything we need and want!. Needs: necessary for survival

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Chapter 1 what is economics

Chapter 1: What is Economics?

Here we go! Get ready!

Section 1: Scarcity and the Factors of Production

What is economics
What is Economics?

  • What do you know about the subject of economics?

Scarcity and choice
Scarcity and Choice

  • Primary idea: We can’t have everything we need and want!

  • Needs: necessary for survival

    • Air, food, shelter

  • Wants: item we desire but do not NEED to survive

  • If we cannot have everything, how do we make decisions???

Scarcity! needs and wants by making

  • ...because of the idea economists call scarcity

  • Scarcity means that we have limited quantities of resources to meet our unlimited wants.

  • Economics is about solving the problem of scarcity.

Goods and services
Goods and Services needs and wants by making

  • Goods – physical objects

    • Shoes and shirts

  • Services – actions or activities that one person performs for another

    • Haircuts, dental checkups, tutoring

  • Although these goods and services are abundant in the U.S., they are still scarce because there is always a limit.

Scarcity versus shortages
Scarcity Versus Shortages needs and wants by making

  • Scarcity≠ Shortage

  • Shortage – when producers will not or cannot offer goods or services at the current prices (more on this later)

    • Temporary or long term

  • Scarcity – always exists b/c our needs and wants are always greater than our resources

Factors of production
Factors of Production needs and wants by making

  • The resources that are used to make all goods and services are factors of production.

  • There are 3.

  • They are land, labor, and capital.

Land needs and wants by making

  • Land – all natural resources (found in nature) used to produce goods and services

    • Fertile land for farming

    • Products in or on the land

      • Coal, water, forests

Labor needs and wants by making

  • Labor – the effort that a person devotes to a task for which that person is paid

    • Medical aid provided by a doctor

    • Tightening of a clamp by an assembly line worker

    • Artist’s creation of a painting

    • Repair of a television

Capital needs and wants by making

  • Capital – any human-made resource used to produce other goods and services

  • There are two kinds:

    • Physical


    • Human

Capital needs and wants by making

  • Physical Capital

    • Human made objects used to create other goods and services

      • Buildings and tools

    • Benefits of physical capital:

      • Extra time

      • More knowledge

      • More productivity

Capital needs and wants by making

  • Human Capital

    • Knowledge and skills a worker gains through education and experience

Who pulls these resources together
Who pulls these resources together? needs and wants by making

  • Entrepreneurs – ambitious leaders who decide how to combine land, labor, and capital resources to create new goods and services

    • Take risks to develop original ideas, start businesses, create new industries, and fuel economic growth

Scarce resources
Scarce Resources needs and wants by making

  • No matter what good or service, the supplies of land, labor, and capital used to produce it are scarce.

Section 2
Section 2 needs and wants by making

  • Opportunity Cost

Trade offs
Trade-Offs needs and wants by making

  • Trade-offs – all the alternatives we give up whenever we choose one course of action over another

  • All individuals, businesses, and groups of people make decisions involving trade-offs.

Trade offs who makes them
Trade-Offs: Who makes them? needs and wants by making

  • Individuals

  • Businesses

    • How to use land, labor, and capital resources

  • Society

    • Guns or butter?

Opportunity cost
Opportunity Cost needs and wants by making

  • Opportunity cost – the most desirable alternative given up as the result of a decision

    • What we trade for what we choose

  • Decision-making grids – weighing two alternatives

    • What alternative offers the most desirable benefits?

Thinking at the margin
Thinking at the Margin needs and wants by making

  • Economists always think “at the margin” when deciding how much more or less to do

  • It involves thinking about using ONE additional unit

  • Look at the opportunity costs and benefits of each additional unit

Section 3
Section 3 needs and wants by making




It’s your first

graph in Econ.

Get excited.

Historical example
Historical Example needs and wants by making

  • U.S. faced urgent task when entering W.W. II…

    • How could we create the weapons and equipment needed to defeat Hitler?

    • (We didn’t just have all that stuff sitting around!)

Now that you know some economic concepts
Now that you know some economic concepts… needs and wants by making

  • …you probably realize that we can’t just suddenly make a bunch of military stuff without giving up something! (ahhemm…trade-offs)

To create what we needed
To create what we needed… needs and wants by making

  • …we had to switch our production focus as a country from consumer goods (like food and clothing) to wartime goods (like guns, aircraft, and uniforms)

And that s what production possibilities in econ is all about
And that’s what Production Possibilities in Econ is all about

  • Excited yet? Well, here’s a definition for you:

  • Production Possibilities curve – shows alternative ways to use an economy’s productive resources

What does a production possibilities curve look like you ask
What does a Production Possibilities Curve look like, you ask?

  • Axes of the graph

    • Show different kinds of goods and services

      • Farm goods vs. factory goods

      • Capital goods vs. consumer goods

      • “guns and butter”

    • Show any pair of specific goods or services

      • Hats vs. shoes

The classic example is guns v butter what the heck does that mean
The classic example is “Guns v. Butter” What the heck does that mean?

  • It’s supposed to show that every society has to choose what to produce.

  • Guns represent military expenditures.

  • Butter represents money spent on domestic (consumer) things.

Now you get to learn how to draw a production possibilities curve
Now you get to learn how to draw a Production Possibilities Curve!

  • We’re going to use the creative example that your book provides on page 15. The authors have chosen to examine the production possibilities of:

    • Shoes and watermelons

  • Label your axes

    • Vertical axis: shoes

    • Horizontal axis: watermelons

Drawing a production possibilities curve
Drawing a Production Possibilities Curve Curve!

  • Determine points of possible production

    • If this country devoted ALL resources to making shoes (and produced NO watermelons), how many shoes could it produce?

    • If this country devoted ALL resources to making watermelons, how many watermelons could it produce?

Drawing a production possibilities curve1
Drawing a Production Possibilities Curve Curve!

  • So this country can produce:

    • 15 million pairs of shoes


    • 21 million tons of watermelons

  • Do they have any other choices of production?...

Drawing a production possibilities curve2
Drawing a Production Possibilities Curve Curve!

  • Now determine points of production in between these two extremes

    • A country can produce a number of combinations of both goods

    • Do you think it’s usually a good idea to be producing at one of the extremes or somewhere in between? Why?

Drawing a production possibilities curve3
Drawing a Production Possibilities Curve Curve!

  • Options of production for this country

  • What is the best combination??

  • Hmmm…well, that takes some analyzing!

Production possibilities frontier
Production Possibilities Frontier Curve!

  • Plot all of the points on the curve and connect them to draw a line (curve)

  • Production possibilities frontier – the line on a production possibilities graph that shows the maximum possible output (think of the word frontier – as far out as you can see)

    • any point on this line means a country is using all of its resources to produce a maximum combination of those two goods

Trade offs1
Trade-Offs Curve!

  • Each point on the curve represents a trade-off

    • When we move along the curve, we are trading some of one product to make more of the other product

    • top of the curve: factories produce more shoes, but farms grow fewer watermelons

    • Moving down the curve: farms grow more watermelons, but factories make fewer shoes

    • Why??

Trade offs2
Trade-Offs Curve!

  • …because of scarcity!

  • Land, labor, and capital are scarce

  • Using factors of production to make one product leaves fewer resources to make something else

  • It’s all about making decisions!

Efficiency growth and cost
Efficiency, Growth, and Cost Curve!

  • Why are production possibility curves important?

    • Show how efficient an economy is

    • Show whether an economy has grown or shrunk

    • Show the opportunity cost of a decision to produce more of one good or service

Efficiency Curve!

  • Efficiency – using resources in such a way as to maximize the production or output of goods and services

  • Production possibilities frontier represents economy operating at full efficiency

Efficiency Curve!

  • When economies are inefficient, they are operating somewhere inside the frontier

  • This represents an underutilization of resources

    • Using fewer resources than the economy is capable of using

Efficiency Curve!

  • Anywhere on the PPF: the economy is operating at full efficiency

  • Somewhere inside the PPF: achievable but the economy is inefficient (not using their resources completely)

  • Outside the PPF: an economy can’t get there with current land, labor, and capital

Growth Curve!

  • Production possibilities curves represent only a country’s current possibilities. Right now, we cannot produce at X.

  • But things are always changing!

  • If quantity or quality of available land, labor, or capital changes, then the curve will move.

Growth Curve!

  • If immigrants pour into a country, then more labor becomes available

    • The maximum amount of goods the nation can produce increases

  • New inventions allow workers to produce more goods at lower costs

Growth Curve!

  • When an economy grows, the entire curve “shifts to the right”

    • Why???

Growth Curve!

  • A country’s production capacity can decrease, too

    • When a country goes to war and loses land as a result

    • If a country’s population ages, supply of labor and human capital decreases

  • When this happens, the curve shifts to the left.

Cost Curve!

  • Cost does NOT EQUAL money in economics

    • It is the alternative we give up when we choose one option over another

    • Cost always means opportunity cost

  • Production possibilities curves are used to see opportunity cost in a decision

Cost Curve!

  • How many shoes do we have to give up to go from producing no watermelons to 8 million watermelons?

Cost Curve!

  • How many shoes do we have to give up to jump to the next level (producing 14 million watermelons – only 6 million more)?

Law of increasing costs
Law of increasing costs Curve!

  • Each time we grow watermelons, the sacrifice in terms of shoes increases

  • This is called the law of increasing costs – as production switches from one item to another, more and more resources are necessary to increase production of the second item.

    • So the opportunity cost increases

Law of increasing costs1
Law of increasing costs Curve!

  • Why??

  • Moving resources from factory to farm production means farmers must use resources that are not as suitable for farming

    • Ex: at first, use most fertile land to be growing watermelons

    • Over time, have to use poorer land that can produce less

Shape of the curve
Shape of the curve Curve!

  • Law of increasing costs explains why production possibilities frontiers usually curve.

  • As we move along the curve, we trade off more and more to get less and less additional output.