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What is
It is
•The study of how things are made,
bought, sold and used
•The study of how people make choices
to satify their wants
For Example
– You must choose how to spend your time
– Businesses must choose how many people to hire
Chapter 1
The study of ECONOMICS begins with the idea
that people cannot have everything they need
and want
NEED
• Something like air,
food, shelter that is
necessary for
survival
WANT
• An item that we
desire but is not
essential to survival
Chapter 1
• To look at the world economically we can focus on the
decisions people make.
• Because people cannot have everything they need or
want, they must consider their options and decide
which choice will fill their needs best.
• Why must people make choices?
•Scarcity
• Living in America – a relatively wealthy country, many
citizens find this hard to understand because store
shelves brim with goods.
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Goods
• Anything that can
be grown or
manufactured
–Food
–Clothing
–Cars
–Tools
–Jewelry
–Televisions
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Services
• Actions or activities
people do for others in
exchange for money or
something else of value
• Barbers, doctors,
waiters, and entertainers
all provide services
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Resources
• Factors of production that are used in
the promotion of goods and services
• Types
–Natural
–Human
–Capital
–entrepreneurship
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• A country with many
resources is capable
of satisfying its
people’s wants and
needs better than a
country with few
resources
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• No country has all the
resources it needs
• Scarcity is a problem
all countries must face.
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Scarcity
• The inability to
satisfy all wants at
the same time
• All resources and
goods are limited
• This requires that
choices be made
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Scarcity
• Economics is about solving the
problem of scarcity
• Scarcity affects the economic
decisions a country and its
people will make concerning
what and how much to produce,
how goods and services will be
produced and who will get what
is produced
Chapter 1
Choice
• Selecting an item or action
from a set of possible
alternatives
• individuals must
choose/make decisions about
desired goods and services
because these are limited
Chapter 1
Scarcity vs. Shortages
• Scarcity occurs when
there are limited
quantities of resources
to meet unlimited needs
or desires
• Shortages occur when
producers will not or
cannot offer goods or
services at current prices
• Always exists because
our needs and wants are
always greater than our
resources
• Can be temporary or
long term
• Goods and services are
scarce because they are
made from resources
that are scarce.
• Example:
–Christmas demand
–Wars & droughts
• STOP
Chapter 1
The Factors of Production – resources that are
used to make all goods and services
• Land All natural resources (materials found in nature)
that are used to produce goods and services. Includes
fertile land for farming, and products that are in the or
on the land such as coal, water and forests.
• Labor Any effort a person devotes to a task for which
that person is paid. Includes medical aid, artist’s
creation, repair of a product, installation of a product.
• Capital Any human-made resource that is used to
create other goods and services. Two kinds:
– Physical capital
– Human capital
Chapter 1
Physical Capital
• Human-made objects used to create
other goods and services
• Includes buildings and tools
• Important factor of production
• Can save people and companies a
great deal of time and money
• When we create or buy physical
capital we usually become more
productive
• Typical benefits
–Extra time
–More knowledge
–More productivity
Chapter 1
Human Capital
• People can invest in themselves
• Knowledge and skills a worker gains through education and
experience
• Economy requires both human and physical to produce
goods and services
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Entrepreneurs
• The ambitious leaders
who decide how to
combine land, labor and
capital resources to create
new goods and services
• Individuals who take risks
to develop original ideas,
start businesses, create
new industries and fuel
economic growth
Chapter 1
Scarce Resources
• Economists say all goods and
services are scarce because the
land, labor, and capital used to
create them are scarce.
• The combining of human, natural,
capital, and entrepreneurship
resources to make goods or
provide services
• Resources available and
consumer preferences determine
what is produced.
• Supplies of land, labor and capital
are all limited and have many
alternative uses.
Chapter 1
The Factors of Popcorn Production
Land
Labor
Capital
Popping Corn
The human effort needed
to pop the corn
Corn-Popping
Device
Vegetable Oil
Chapter 1
Section 1 Assessment
1. What is the difference between a shortage and scarcity?
(a) A shortage can be temporary or long-term, but scarcity always exists.
(b) A shortage results from rising prices; a scarcity results from falling prices.
(c) A shortage is a lack of all goods and services; a scarcity concerns a single
item.
(d) There is no real difference between a shortage and a scarcity.
2. Which of the following is an example of using physical capital to save time and
money?
(a) hiring more workers to do a job
(b) building extra space in a factory to simplify production
(c) switching from oil to coal to make production cheaper
(d) lowering workers’ wages to increase profits
Chapter 1
Section 1 Assessment
1. What is the difference between a shortage and scarcity?
(a) A shortage can be temporary or long-term, but scarcity always exists.
(b) A shortage results from rising prices; a scarcity results from falling prices.
(c) A shortage is a lack of all goods and services; a scarcity concerns a single
item.
(d) There is no real difference between a shortage and a scarcity.
2. Which of the following is an example of using physical capital to save time and
money?
(a) hiring more workers to do a job
(b) building extra space in a factory to simplify production
(c) switching from oil to coal to make production cheaper
(d) lowering workers’ wages to increase profits
Chapter 1
Activity!!
Think About it:
• Land, labor and capital, also known as factors of
production, are the ‘inputs’ or resources, used to create
all goods and services.
• What role do entrepreneurs play in producing goods
and services?
Do it:
• Create your own diagram or chart that demonstrates
what entrepreneurs do.
Chapter 1
Section 2 - Opportunity Cost
• Does every decision you make involve trade-offs?
• How can a decision-making grid help you identify the
opportunity cost of a decision?
• How will thinking at the margin affect decisions you
make?
Chapter 1
Trade-offs and Opportunity Cost
• Trade-offs are all the alternatives that we give up whenever we
choose one course of action over others.
– An alternative that we sacrifice when we make a decision
• The most desirable alternative given up as a result of a decision is
known as opportunity cost.
Chapter 1
All individuals, businesses and large groups of
people make decisions that involve trade-offs.
•
If a you choose to spend time at work, you give up watching a movie or
going to a baseball game.
•
Choosing to play soccer might prevent you from working on the
yearbook or from having a part-time job.
•
Farmers who want to plant broccoli cannot use the same land at the
same time to grow cauliflower.
•
A manufacturer who uses all their equipment to build chairs eliminates
the possibility of building tables or desks at the same time.
•
A country that decides to produce more military goods (“guns”) has
fewer resources to devote to consumer goods (“butter”) and vice versa.
•Phrase that refers to the trade-offs that nations
face when choosing whether to produce more or
Chapter
1 military or consumer goods
less
Opportunity Cost
• What is given up when a choice
is made-the highest valued
alternative forgone
• Individuals, businesses or
governments must consider the
value of what is given up when
making a choice
• The most desirable alternative
given up as a result of a
decision is called opportunity
cost.
Chapter 1
What would you do???
Even ordinary decisions that we make every day have an opportunity cost!
•
Sleep late or wake up early for a ski trip?
•
Sleep late or wake up early to eat your breakfast?
•
Sleep late or wake up early to study for a test?
•
Most likely you would not choose sleep late for all 3 decisions. Your
decision would depend on the opportunity cost – whatever you were
willing to sacrifice!
Chapter 1
The Decision-Making Grid
•
Economists encourage us to consider the benefits and costs of our
decisions.
•
The grid can help you determine whether you are willing to accept the
opportunity cost of a choice you are about to make.
•
Karen is trying to decide whether to sleep late or get up early to study for
a test. Obviously, she cannot do both.
Karen’s Decision-making Grid
Alternatives
Sleep late
Wake up early to study
Benefits
• Enjoy more sleep
• Have more energy during the day
• Better grade on test
• Teacher and parental approval
• Personal satisfaction
Decision
• Sleep late
• Wake up early to study for test
Opportunity cost
• Extra study time
• Extra sleep time
Benefits forgone
• Better grade on test
• Teacher and parental approval
• Personal satisfaction
• Enjoy more sleep
• Have more energy during the day
Chapter 1
Thinking at the Margin
• When you decide how much more or less to do, you are thinking at
the margin.
• Example, each additional hour of study would yield a higher test
score.
• Cost/Benefit Analysis – comparing opportunity costs and benefits
at the margin to enable you to make a decision, comparing what
you will sacrifice to what you will gain.
– Once opportunity cost outweighs the benefits, no more units
should be added
Chapter 1
Options
Benefit
Opportunity Cost
1st hour of extra
study time
Grade of C on
test
1 hour of
sleep
2nd hour of extra
study time
Grade of B on
test
2 hours of
sleep
3rd hour of extra
study time
Grade of B+ on
test
3 hours of
sleep
Section 2 Assessment
1. Opportunity cost is
(a) any alternative we sacrifice when we make a decision.
(b) all of the alternatives we sacrifice when we make a decision.
(c) the most desirable alternative given up as a result of a decision.
(d) the least desirable alternative given up as a result of a decision.
2. Economists use the phrase “guns or butter” to describe the fact that
(a) a person can spend extra money either on sports equipment or food.
(b) a person must decide whether to manufacture guns or butter.
(c) a nation must decide whether to produce more or less military or consumer
goods.
(d) a government can buy unlimited military and civilian goods if it is rich enough.
Chapter 1
Section 2 Assessment
1. Opportunity cost is
(a) any alternative we sacrifice when we make a decision.
(b) all of the alternatives we sacrifice when we make a decision.
(c) the most desirable alternative given up as a result of a decision.
(d) the least desirable alternative given up as a result of a decision.
2. Economists use the phrase “guns or butter” to describe the fact that
(a) a person can spend extra money either on sports equipment or food.
(b) a person must decide whether to manufacture guns or butter.
(c) a nation must decide whether to produce more or less military or consumer
goods.
(d) a government can buy unlimited military and civilian goods if it is rich enough.
Chapter 1
Section 3 - Production Possibilities Graphs
• What is a production possibilities graph?
• How do production possibilities graphs show
efficiency, growth, and cost?
• Why are production possibilities frontiers curved lines?
Chapter 1
Production Possibilities
•
A production possibilities graph shows alternative ways that an
economy can use its productive resources.
•
The production possibilities frontier is the line that shows the
maximum possible output for that economy.
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
10
b (8,14)
c (14,12)
d (18,9)
5
0
Chapter 1
a (0,15)
A production
possibilities frontier
e (20,5)
f (21,0)
5
10
15
20
25
Watermelons (millions of tons)
Production Possibilities
•
Axes can show and compare categories of goods. (farm v factory)
•
Axes can display any pair of specific goods or services.
(watermelons v shoes)
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
10
b (8,14)
c (14,12)
d (18,9)
5
0
Chapter 1
a (0,15)
A production
possibilities frontier
e (20,5)
f (21,0)
5
10
15
20
25
Watermelons (millions of tons)
Production Possibilities
•
Economists begin by deciding which goods or services to examine
(farm v factory – again).
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
10
b (8,14)
c (14,12)
d (18,9)
5
0
Chapter 1
a (0,15)
A production
possibilities frontier
e (20,5)
f (21,0)
5
10
15
20
25
Watermelons (millions of tons)
Production Possibilities
•
The graph also helps economists determine if they can produce
BOTH goods (shoes AND watermelons).
•
Using made-up data (like below), points can be plotted and connected
to draw a line that shows combinations of production of these goods
or the PRODUCTION POSSIBILITIES FRONTIER.
Production Possibilities Graph
0
15
Watermelons
Shoes
(millions of tons) (millions of pairs)
8
14
12
18
9
20
5
21
0
a (0,15)
Shoes (millions of pairs)
14
25
20
c (14,12)
15
10
d (18,9)
A production
possibilities frontier
e (20,5)
f (21,0)
5
0
Chapter 1
b (8,14)
5
10
15
20
25
Watermelons (millions of tons)
Production Possibilities
•
Any point on the line represents a point in which all resources are
being used to maximize a combination of the two products.
•
Opportunity Cost on the FRONTIER – look at any point on the curve
and compare it to another and compare production of the goods to
each other. What is the opportunity cost of producing the
combination of goods at Point C instead of at Point D?
Production Possibilities Graph
0
15
Watermelons
Shoes
(millions of tons) (millions of pairs)
8
14
12
18
9
20
5
21
0
a (0,15)
Shoes (millions of pairs)
14
25
20
c (14,12)
15
10
d (18,9)
A production
possibilities frontier
e (20,5)
f (21,0)
5
0
Chapter 1
b (8,14)
5
10
15
20
25
Watermelons (millions of tons)
•3 million
pairs of
shoes
Trade-Offs
•
Each point on the graph represents a trade-off
•
The more shoes produced meant fewer watermelons were grown.
•
Why? Because the factors of production are limited.
•
Land, labor & capital are all scarce.
•
Using the factors of production to make one product means that fewer resources
are left to make something else.
Chapter 1
Efficiency, Growth, & Cost
• Production possibilities graphs can show us how
efficient an economy is, whether an economy has
grown or shrunk, and the opportunity cost of a decision
to produce more of one good or service.
Chapter 1
Efficiency
• An economy
producing output
levels on the
production
possibilities frontier
is operating
efficiently.
Chapter 1
Production Possibilities Graph
25
Shoes (millions of pairs)
• Efficiency means
using resources in
such a way as to
maximize the
production or output
of goods and
services.
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
g (5,8)
5
d (18,9)
e (20,5)
A point of
underutilization
0
5
10
f (21,0)
15
20
Watermelons (millions of tons)
25
Underutilization
• This would be represented
by a point INSIDE the line.
• Any point inside the line
indicates underutilizationusing fewer resources
than the economy is
capable of using; much
less than the maximum
possible production.
Chapter 1
Production Possibilities Graph
25
Shoes (millions of pairs)
• IF the economy weakens
and leads to lay-offs,
farms and factories will
produce fewer goods.
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
g (5,8)
5
d (18,9)
e (20,5)
A point of
underutilization
0
5
10
f (21,0)
15
20
Watermelons (millions of tons)
25
Growth
• When this happens,
the entire production
possibilities curve
“shifts to the right,”
indicating growth
Production Possibilities Graph
25
Future production
Possibilities frontier
T
Shoes (millions of pairs)
• If more resources
become available, or if
technology improves,
an economy can
increase its level of
output and grow.
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
d (18,9)
5
e (20,5)
f (21,0)
0
5
10
15
20
Watermelons (millions of tons)
Chapter 1
25
Growth
• Possible reasons:
– Country goes to war
– Land is lost
– Population ages,
becomes less
healthy, less
educated labor
supply resulting in
decreased human
Chapter 1
capital
Production Possibilities Graph
25
Future production
Possibilities frontier
T
Shoes (millions of pairs)
• By contrast, if a
country’s production
capacity decreases
the curve shifts to the
left.
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
d (18,9)
5
e (20,5)
f (21,0)
0
5
10
15
20
Watermelons (millions of tons)
25
Cost
• Cost - the alternative we give up when we choose one option
over another (to an economist cost = opportunity cost)
• Increasing cost – each time we increase the production of a
particular good, the sacrifice in terms of the goods given up
increases
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
d (18,9)
15
10
5
0
Chapter 1
c (14,12)
5
10
15
20
25
Watermelons (millions of tons)
Law of Increasing Costs
• States that as we shift factors of production from making one
good or service to another, the cost of producing the second item
increases.
• Reasons? Some resources may be suited better for farming than
for manufacturing
• Explains why production possibilities frontiers curve – as we
move along the curve, we trade off more and more to get less and
less output
Production Possibilities Graph
Shoes
(millions of pairs)
15
8
14
14
12
18
9
20
5
21
0
25
d (18,9)
Shoes (millions of
pairs)
Watermelons
(millions of
tons)
0
c (14,12)
20
15
10
5
Chapter 1
0
5
10
15
20
25
Watermelons (millions of tons)
Resource and Technology
• In order to create production possibility curves, the
goods and services a country can produce must be
determined, given its current resources.
– Land/natural resources
– Work force (labor)
– Physical & human capital
• Physical & Human resources reflect a vital ingredient
– TECHNOLOGY
• A country’s production possibilities depend on both its
technological level and the resources it has available.
Chapter 1
Section 3 Assessment
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by an economy.
(b) the maximum possible output of an economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
2. An economy that is using its resources to produce the maximum number of goods
and services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.
Chapter 1
Section 3 Assessment
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by an economy.
(b) the maximum possible output of an economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
2. An economy that is using its resources to produce the maximum number of goods
and services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.
Chapter 1