Download The Economic Problem Scarcity Opportunity Cost Production

The Economic Problem
Scarcity
Opportunity Cost
Production Possibility Frontiers
 
Primary idea: We can’t have everything we need
and want!
Unlimited Wants
  Scarce Resources –
Land, Labour,
Capital
  Resource Use
  Choices
 
A wind farm. Copyright: iStock.com
 
What is economics?
•  The study of how people satisfy their unlimited wants and needs
with limited resources (people have to make choices)
• 
Wants vs. Needs:
•  Wants are anything other than what is needed for basic survival
•  New car, video games, or a stereo system
•  Needs are things required for basic survival
•  Food, clothing, and shelter
Economics is the study of how people seek to
satisfy their needs and wants by making choices.
  Why, oh why, must we make these difficult
choices, you ask??...
 
...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 – 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.
 
 
 
What goods and services should an economy
produce? – should the emphasis be on agriculture,
manufacturing or services, should it be on sport and
leisure or housing?
How should goods and services be produced? –
labour intensive, land intensive, capital intensive?
Efficiency?
Who should get the goods and services produced? –
even distribution? more for the rich? for those who work
hard?
 
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
• 
Scarcity
•  All resources are limited.
•  Income, time, natural resources
•  People compete for limited resources
•  Scarcity- not being able to have all of the goods and services
one wants- an item is scarce even if the store shelves are fullthat is why we pay for things (different from shortages)
 
Scarcity always exists because of competing
alternative uses for resources. (Why can’t
everyone have a big house?)
Land All natural resources that are used to
produce goods and services.
  Labor Any effort a person devotes to a task for
which that person is paid.
  Capital Any human-made resource that is used to
create other goods and services.
 
 
Natural resources (Land)– “free gifts of nature”
◦  Land, minerals, oil, forests, air, and timber
 
Human Resources (Labor)– “mankind’s physical and mental
talent”
◦  These are the skills people have that are used to produce goods and
services.
 
Capital Resources –(Capital) “manufactured aids to production”
◦  Tools, machines, equipment, factories
◦  Things used in producing goods and services and getting them to
consumers.
 
Entrepreneur – the individual who combines the factors of
production in order to produce a good or service.
◦  Risk taker, policy maker, and innovator
 
If you would create any type of business you
wanted what would it be and what would you need
to get started?
Land
Labor
Capital
Popping Corn
The human effort needed
to pop the corn
Corn-Popping
Device
Vegetable Oil
• 
Two parts of economics
•  Microeconomics: the branch of economic theory that deals with
behavior and decision making by small units-individuals and
firms
•  Macroeconomics: the branch of economic theory that deals with
the economy as a whole and decision making by large units (ex.
Governments)
• 
Economy: activity that affects the production and
distribution of goods and services in a society
 
 
Micro
◦  Micro comes from Greek
word mikros, meaning
“small”
◦  Study of behavior of
individual households,
firms, and governments
Focuses on individual
parts of an economy,
rather than the whole
Macro
◦  Macro comes from Greek
word, makros, meaning
“large”
Microeconomics
  Choices they make
  Interaction in specific
markets
 
 
 
Macroeconomics
◦  Study of the economy as
a whole
 
Focuses on big picture
and ignores fine details
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• 
Schools of Economic Thought
•  Economists are influenced by personal opinions, beliefs, and the
government under which they live
•  This leads to different economic theories
•  Different schools of thought can have an impact on laws and
government policies.
•  Judgments about economic policies depend on a person’s values
•  Values are beliefs or characteristics that a person or group
considers important
•  Economists inform us to the possible short and long term outcomes
of policies.
Study of how economy works
  Statements about how the economy works are
positive statements, whether they are true or not
  Accuracy of positive statements can be tested by
looking at the facts—and just the facts
 
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 
Study of what should be
◦  Used to make value judgments, identify problems, and
prescribe solutions
◦  Statements that suggest what we should do about economic
facts, are normative statements
  Based on values
◦  Normative statements cannot be proved or disproved by the
facts alone
 
Positive Statements:
◦  Capable of being verified
or refuted by resorting to
fact or further investigation
 
Normative Statements:
◦  Contains a value
judgement which cannot
be verified by resort to
investigation or research
•  Health care can be
improved with more tax
funding
•  Pollution control is
effective through a
system of fines
•  Society ought to provide
homes for all
•  Any strategy aimed at
reducing factory closures
in deprived areas would
be helpful
 
In some cases, the disagreement may be positive in
nature because
◦  Our knowledge of the economy is imperfect
◦  Certain facts are in dispute
 
In most cases, the disagreement is normative in nature
because
◦  While the facts may not be in dispute
  Differing values of economists lead them to dissimilar conclusions
about what should be done
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  To
understand the world better
◦ You’ll begin to understand the cause of
many of the things that affect your life
  To
gain self-confidence
◦ You’ll lose that feeling that mysterious,
inexplicable forces are shaping your life
for you
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 
To achieve social change
◦  You’ll gain tools to understand origins of social problems and
design more effective solutions
 
To help prepare for other careers
◦  You’ll discover that a wide range of careers deal with economic
issues on many levels
 
To become an economist
◦  You’ll begin to develop a body of knowledge that could lead you
to become an economist in the future
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 
Economics relies heavily on modeling
◦  Economic theories must have a well-constructed model
 
While most models are physical constructs
◦  Economists use words, diagrams, and mathematical statements
 
What is a model?
◦  Abstract representation of reality
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 
Guiding principle of economic model building
◦  Should be as simple as possible to accomplish its purpose
Level of detail that would be just right for one purpose
will usually be too much or too little for another
  Even complex models are built around a simple
framework
 
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• 
Economic Models
•  Economic models are used to predict behavior in the real
world
•  Models:
•  some factors remain constant
•  shows basic factors, not every detail
•  Models may not always be accurate due to the inability to
predict human behavior.
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
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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