Chapter 1: What is Economics?

Section 1: Scarcity and Factors of Production

What is Economics?

What is Economics?• The study of scarcity and choices• Scarcity- limited resources for unlimited wants

“There is no such thing as a free lunch”

Choices• People need to decide how to use limited

resources– Need: necessary for survival– Want: desirable but not essential

Goods and Services• Goods: physical objects that are produced• Services: actions performed

Factors of Production

• Land• Labor• Capital (Physical & Human)

Land• Natural resources used to produce goods.– Oil, Trees, Iron-Ore

Labor

• Effort of people to create a product. – Manufacturers, managers, engineers, etc.

Capital

• Human made resources used to produce other goods.– Physical Capital– Human Capital

Physical Capital• Human-made goods used to produce other

goods.

Human Capital

• Skills and knowledge of a worker acquired through education and experience.

Entrepreneurship: The 4th Factor of Production

• Entrepreneur: someone who combines land, labor, and capital to creates and services

In groups…

• Choose an object• What was necessary for its creation?– Land?– Labor?– Capital (Physical and Human)?

– Report back to class

Section 2: Opportunity Cost

• Because of scarcity: we need to make decisions about how to manage resources.

Economics: Science of Decision Making

• Trade-offs are alternatives given up when making a decision

Guns or Butter?

• Countries need to decide how they will use their resources• If a country chooses to produce more military goods (“guns”)

they will have less consumer goods (“butter”)

Opportunity Cost• Opportunity cost is the most desirable alternative

given up in a decision.

Decision Benefit Opportunity CostGo to College Education, increased job

opportunityMoney earned/saved from

working

Work after High School Money earned/saved Education, increased job opportunity

Thinking at the Margin

• Black and White decisions in economies are rare, thinking at the margin considers compromises and multiple scenarios.

Decisions at the MarginOptions Benefit Opportunity Cost

1st hour of extra study time Grade of C on test One 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 A on test 3 hours of sleep

Decisions at the Margin

Options Benefit Opportunity Cost

Work for 1 hour $10 One hour of studying

Work for 2 hours $20 Two hours of studying

Work for 3 hours $30 Three hours of studying

Section 3: Production Possibilities Curves

Watermelons (millions of tons) Shoes (millions of pairs)0 158 14

14 1218 920 521 0

Production possibilities curves plot decision making on a graph, or curve

Production Possibilities Curve

0 5 10 15 20 250

2

4

6

8

10

12

14

16

Watermelons (millions of tons)

Shoe

s (m

illio

ns o

f pai

rs)Watermelon

s (millions of tons)

Shoes (millions of

pairs)0 15

8 14

14 12

18 9

20 5

21 0

Frontier

0 5 10 15 20 250

2

4

6

8

10

12

14

16

Watermelons (millions of tons)

Shoe

s (m

illio

ns o

f pai

rs)

The Frontier represents maximum efficiency: the full production capability of the economy

Underutilization

• Underutilization: economy is not producing at capability– WHY?

0 5 10 15 20 250

2

4

6

8

10

12

14

16

Watermelons (millions of tons)

Shoe

s (m

illio

ns o

f pai

rs)

Future Production Possibilities Curve

0 5 10 15 20 250

2

4

6

8

10

12

14

16

Watermelons (millions of tons)

Shoe

s (m

illio

ns o

f pai

rs)

Sometimes the entire curve shifts outwardWHY?

Examples of trade-offs: Soviet Union

• The former Soviet Union prioritized military development at the expense of consumer goods and development.