Download Scarcity and the Science of Economics Chapter 1

Scarcity and the Science
of Economics
Chapter 1
Imagine…
A girl and her boyfriend get shipwrecked on a deserted
island. After surveying the island they are pleased to find
that it is full of plenty of fruits, nuts, small slow dumb
animals and even wild corn. There are no animals or
plants present that can threaten their health. They have
an axe, a needle, and even some fish hooks.
What is Economics in General?

Economics is the science of scarcity and choices.
Scarcity: the condition that results from society
not having enough resources to produce all the
things people would like to have
 Since we are unable to have everything we
desire, we must make choices on how we will
use our resources.
 In economics we will study the choices of
individuals, firms, and governments.

The Economic Problem

Scarcity… What is it?
 Limited

resources but unlimited wants
Unlimited wants VS Limited Resources
You can’t buy 10 candy bars if the store only has 5
candy bars to sell.
Can’t buy 3 burgers if you only have enough money
for 1.
What are some things that you “want” to have? Do
you have the resources to purchase them?
Needs VS Wants
What are some of your needs…wants
NEEDS vs WANTS
 NEEDS
Essentials…the
of life
Food
Clothing
Shelter
basics
NEEDS vs WANTS
(cont)
 WANTS
Simply
increase the quality of
living. We would like to have
but is not necessary
Goods, Services, and
Consumers

Goods are items that are economically useful
or satisfy an economic want. They are
tangible and can be classified as
consumer/capital and durable/nondurable

Services are work performed for someone and
are intangible

Consumers use goods and services to satisfy
wants and needs.
Types of Goods

Tangible: you can touch

Intangible: you can’t touch-services

Durable Goods-Last more than 3yrs. EX:
jewelry, appliances, cars, ect.

Non-Durable Goods-last less than 3yrs.Ex:
food, clothing, toothpaste, soap, ect.

Consumer Goods: for self-use, final use by
the individual

Capital Goods: used by businesses to
produce other products.
Value, Utility and Wealth




Value is worth expressed in dollars and cents.
Scarcity by itself is not enough to create
value. For something to have value, it must
also have utility.
Paradox of Value Example: diamonds & water
Utility is a good’s or service’s capacity to
provide satisfaction, which varies with the
needs and wants of each person.
Wealth is the accumulation of goods that are
tangible, scarce, useful, and transferable to
another person.
Wealth does not include services.
There is No Such Thing as a
Free Lunch
Because resources are scarce, trade-offs must be
made.
Opportunity Cost: The highest valued alternative
that must be sacrificed when choosing an option
Even if it is free to you, it is not free to society
There is No Such Thing as a
Free Lunch
With every choice you risk the life
you would have had; with every
decision, you lose it.” – Richard
Bach
3 Basic Economic Questions

What to produce?
 With limited resources, deciding what
is needed the most is often a factor in
determining what will be produced.
What is the need or want of this
product?
 What is the point of making a product
that no one is going to buy.
Businesses need to make money…so
they choose products that people
want.
3 Basic Questions (Cont)

How should it be produced?
 Technology,
labor, capital, etc.
 getting the lowest cost to make
the product.
 Are we going to make the product
from scratch or will a machine be
making the product.
What will each option cost?
 Will having new technology allow
us to lower our expenses?
3 Basic Questions

(Cont)
Whom should it be produced for?

Who is going to use this product?
 Did
Apple market the ipod to the large
population of elderly people in the U.S. or
the youth? Why?

Most goods and services are distributed to
individuals through a price system.
 If
you want it and can afford to buy it…you
will.

Products can also be distributed through
other means; force, first come, lottery,
majority, ect.
The Scope of Economics

Economics deals with the description of
economic activity—Gross Domestic Product,
unemployment rate, government spending,
tax rates, etc. 

Analysis looks at the “why” and “how” of
economic activity—why prices go up and
down, for example, or how taxes affect
savings.
The Scope of Economics
(cont)

Explanation refers to how economists communicate
knowledge of the economy and its activities to the
society’s population.

Prediction refers to how yesterday’s and today’s
economic activities advise us of potential future
activity.
Factors of Production

Land = All natural resources that are used to
produce goods and services. Anything that
comes from “mother nature.” (Water, Sun,
Plants, Oil, Trees, Stone, Animals, etc.)
Labor = Any effort a person devotes to a
task for which that person is paid.
(manual laborers, lawyers, doctors, teachers,
waiters, etc.)
Factors of Production(cont)
Two Types of Capital:
1. Physical Capital- Any human-made resource
that is used to create other goods and services
(tools, tractors, machinery, buildings,
factories, etc.)
2. Human Capital- Any skills or knowledge gained
by a worker through education and
experience (college degrees, vocational
training, etc.)
Factors of Production (cont)

Entrepreneurship= ambitious leaders that combine
the other factors of production to create goods and
services.

Examples-Henry Ford, Bill Gates, Steven Jobs,
Inventors, Store Owners, etc.

Entrepreneurs:
1. Take
The Initiative
2. Innovate
3. Take

the Risk of Failure
Profit= Revenue - Costs
Classify the Factors of Production
in the following scenario:


You decide to order a pizza to satisfy the munchies. First, you
picked up the telephone and gave your order to the owner that
entered it into her computer. This information came up on the
chief baker’s monitor in the kitchen and he assigned it to one of
his cooks. The cook was busy mixing dough out of salt, flour,
eggs, and milk.
The cook finished mixing dough, washed his hands in the sink,
and prepared your pizza using tomato sauce, cheese, and
sausage. He then placed the pizza in the oven. Within 10 minutes
the pizza was cooked and placed in a cardboard box. The delivery
person then grabbed your pizza, jumped in the company car, and
delivered it to your door.
Classify the different Factors of
Production in the following
scenario
You decide to order a pizza to satisfy the munchies.
First, you picked up the telephone and gave your
order to the owner that entered it into her computer.
This information came up on the chief baker’s monitor
in the kitchen and he assigned it to one of his cooks.
The cook was busy mixing dough out of salt, flour,
eggs, and milk.
The cook finished mixing dough, washed his hands in
the sink, and prepared your pizza using tomato sauce,
cheese, and sausage. He then placed the pizza in the
oven. Within 10 minutes the pizza was cooked and
placed in a cardboard box. The delivery person then
grabbed your pizza, jumped in the company car, and
delivered it to your door.

The Production Possibilities
Model

Every decision has an opportunity cost – the cost in
foregone opportunities.

A production possibility curve is used to illustrate
opportunity cost.

The production possibilities curve shows the tradeoffs among choices we make.

A production possibility curve measures the
maximum combination of outputs that can be
achieved from a given number of inputs.

It slopes downward from left to right.
Therefore, all the combinations
on the curve meet these
assumptions

Combinations that lie inside (below)
the curve represent an inefficient
use of resources

Combinations that lie outside
(above) the curve represent
production impossibilities, giving
existing technologies
Production Possibilities
(cont.)

Considering different ways to fully
employ its resources allows an economy
to analyze the combination of goods and
services that leads to maximum output.

An economy pays a high cost if any of it
resources are idle. It cannot produce on
its frontier and it will fail to reach its full
production potential. 

Economic growth made possible by more
resources, a larger labor force, or
increased productivity causes a new
frontier for the economy.
Production Possibilities
(cont.)
Production Possibilities
(cont.)
Trade-offs and Opportunity
Cost

ALL decisions involve trade-offs.

Trade-offs are all the alternatives that we give up
whenever we choose one course of action over others.


(Examples: going to the movies or going to a game
The most desirable alternative given up as a result of
a decision is known as opportunity cost.
What are trade-offs of deciding to go to college?
 What is the opportunity cost of going to college?
Consumer Rights
In 1960, President John F. Kennedy told Congress that
consumers were entitled to four kinds of
protections:
1.
The right to safety: to be protected against the
marketing of goods that are hazardous to health or
life.
2.
The right to be informed: to be protected against
fraudulent, deceitful, or grossly misleading
information, advertising, labeling, or other
practices, and to be given the facts to make an
informed choice.
3. The right to choose: to be assured, wherever
possible, access to a variety of products and services
at competitive prices.
Consumer Right
(cont)
4. The right to be heard: to be assured that consumer
interests will receive full and sympathetic consideration
in the formulation of government policy, and fair and
expeditious treatment in its administrative tribunals.
President Nixon added the fifth consumer right:
5. The right to redress- to receive adequate payment
from producers if they are harmed by their products.
The Consumer Bill
of Rights
Economic Growth
Nations that invest in the health, education, &
training of their people will have a more valuable
workforce that produces more goods & services.
People that have training are more likely to
contribute to technological advances, which leads to
finding better uses of natural resources & producing
more goods.
Economic growth in a country is measured by the
country’s Gross Domestic Product (GDP) in one year.
o
It measures only what has been produced within
the country--this doesn’t include products that
are imported. It is much better for the economy of
a country to produce its own goods and services
(this increases the country’s GDP).
Economic Growth
(cont)

To encourage economic growth and raise the living
standards of its citizens, there must be investment
in human capital and capital goods.

Human capital refers to the knowledge and
acquired skills a person has that increase his or her
ability to conduct activities with economic value
 Workers add to their stock of human capital
throughout their lives, especially via education and
job experience
Specialization




Attempting to produce everything you
want to consume yourself limits both
your production and consumption
possibilities.
To specialize, you must figure out what
you “do best.” Economists define “best”
as that which you produce at the lowest
opportunity cost.
“Trading for the rest” by “selling” the
goods or services you can produce at low
opportunity costs and then “buying”
things you would produce at a high
opportunity cost requires division of
labor.
Specialization and trading goods and
services with others can help everyone.
Specialization (cont)

Division of labor is the breaking down of a job into
separate, smaller tasks performed by different
workers.

It is a form of specialization, making use of
differences in skills.

Because of specialization, the American economy
displays a high degree of economic
interdependence.
We rely on others, and others rely on us, to provide
the goods and services we consume.
•
•
As a result, events in one part of the world can have
an economic impact on other parts of the world.
The Circular Flow of
Economic Activity

Markets are locations/mechanisms for
buyers and sellers to trade. They are
classified as local, regional, national, global,
and cyberspace. 

A factor market is where people earn their
incomes. Factor markets center on the four
factors of production: land, capital, labor,
and entrepreneurs. 

A product market is where people use their
income to buy from producers. Product
markets center on goods and services.
The Circular Flow of Economic
Activity (cont.)
Economists
* Economists use models to simplify reality in order
to improve our understanding of the world.
* As simplifications of reality, models need
assumptions.
* Cost-benefit analysis helps economists evaluate
alternatives by looking at each choice’s cost and
benefit.
* Taking small, incremental steps in implementing an
economic decision helps economists test whether the
estimated cost of the decision was correct.
Why Study Economics?
1.Studying economics will help us know how the
economy works on a daily basis.
2. It helps us understand a free enterprise
economy, where people and privately owned
businesses rather than the government make the
majority of the economic decisions.
3. The study of economics helps us to become
better decision makers.
4. The world of economics is complex and dynamic,
as is our society.