• People cannot have everything they need and want– Need: air, food, shelter that is necessary for

survival– Want: item we desire by NOT essential for

survival• People must decide which choice will fill their

needs best

• Economics is the study of how people seek to satisfy their needs and wants by making choices

• Why must people make choices?– Scarcity- limited quantities of resources to meet

unlimited wants

– A shortage- when producers will not or cannot offer goods and services at the current prices- is different

• Ex: you visit a store one day to find a product sold out, but return a few days later to find it replenished

• Resources that are used to make all goods and services

• Land– All natural resources (found in nature) used to

produce goods and services• Ex: coal, water, etc.

• Labor– Efforts a person devotes to a task for which that

person is paid• Capital

– Any human-made resource that is used to produce other goods and services

• Physical and human capital

• Physical– Human-made objects used to create other

goods and services• Buildings and tools

– Important because it can save people and companies a great deal of time and money

• Which is more productive?– Washing dishes by hand OR– Buying a dishwasher?

• Human– Knowledge and skills a worker gains through

education and experience• Ex: medical school training

• Entrepreneurs– Pull these resources (land, labor, capital)

together– Ambitious leaders who decide how to combine

the factors of production to create new goods and services

• Scarce resources– No matter what good or service we look at—

• The supplies of land, labor, and capital used to produce it are scarce

• Because each resource has alternative uses

• All individuals, businesses, and groups make decisions that involve trade-offs– All alternatives that we give up whenever we

choose one course of action over another

• Individuals and Trade-offs– If you choose to spend more time at work,

what are you giving up?

• Businesses and Trade-offs– Decision to make one item may keep you form

making another

• Society and Trade-offs– Guns or butter

• A country that decides to produce more military goods (guns) has fewer resources to devote to consumer goods (butter) and vice versa

• The most desirable alternative given up as the result of a decision is called the opportunity cost.

• Thinking at the Margin– Deciding whether to do or use one additional unit

of some resource – For every additional hour of study, the benefit is a

better grade; opportunity cost- less sleep

• Decision makers need to compare opportunity costs and benefits

• When opportunity costs outweigh the benefits, then no more units should be added

• A Production Possibilities Curve shows alternative ways to use an economy’s resources

• Curve represents a point at which a country is using all of its resources to produce a maximum combination of the two products (ex: computers and space missions)

• At point e in this example, resources are devoted to the production of four space missions and 380 thousand computers.

© 2001 Prentice Hall Business PublishingEconomics: Principles and Tools, 2/eO’Sullivan & Sheffrin

To increase the number of space missions by one, 80 thousand computers will have to be sacrificed.

i

• Efficiency– Using resources in such a way as to maximize

the production or output of goods and services– Any point inside the line indicates and

underutilization of resources– Means using fewer resources than the

economy is capable of using

• When the economy is at point i, resources are not fully employed and/or they are not used efficiently.

© 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin

• Point h is desirable because it yields more of both goods, but not attainable given the amount of resources available.

© 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin

• Growth– If the quantity or quality of land, labor, or

capital changes, then the production curve will move

– Ex: more immigrants move to a country more labor available more production

• To increase the production of one good without decreasing the production of the other, the PPF curve must shift outward.

© 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin

From point f, an additional 150 thousand computers or two more space missions are now possible.

• Cost– Cost is not necessarily money– It is the alternative we give up when we

choose one option over the other– Law of increasing costs

• As production switches from one item to another, more land and more resources are necessary to increase production of the 2nd item. Therefore the opportunity costs increase

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

• Resources are not perfectly adaptable.– The PPF curve has a

concave shape because resources are not perfectly adaptable in production. As we increase the production of one good, we sacrifice progressively more of the other.

© 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/e O’Sullivan & Sheffrin