scarcity, opportunity cost & the four factors of production

SCARCITY, SCARCITY, OPPORTUNITY COST & OPPORTUNITY COST & THE FOUR FACTORS OF THE FOUR FACTORS OF

PRODUCTIONPRODUCTION

OBJECTIVESOBJECTIVES 1. Define scarcity and explain how it 1. Define scarcity and explain how it

affects your daily lifeaffects your daily life 2. Explain why everybody has to make 2. Explain why everybody has to make

choiceschoices 3. Define opportunity cost and explain how 3. Define opportunity cost and explain how

it relates to your everybody lifeit relates to your everybody life 4. Identify & describe the four factors of 4. Identify & describe the four factors of

productionproduction 5. Identify the three basic economic 5. Identify the three basic economic

questions that every society must answerquestions that every society must answer 6. Explain the basic differences between 6. Explain the basic differences between

capitalism and socialismcapitalism and socialism

WHAT IS SCARCITY?WHAT IS SCARCITY?

Scarcity –Scarcity – The condition in which our wants The condition in which our wants are forever greater than the available are forever greater than the available supply of time, goods, and resourcessupply of time, goods, and resources

Wants – Wants – Things people desire to haveThings people desire to have People want things they expect will give People want things they expect will give

them them utility utility or satisfactionor satisfaction Some wants are tangible (able to be felt or Some wants are tangible (able to be felt or

touched) EX: Computer, Books, Clothes, touched) EX: Computer, Books, Clothes, Etc.Etc.

Some wants are intangible (cannot be felt Some wants are intangible (cannot be felt or touched) EX: Friendshipor touched) EX: Friendship

WHAT IS SCARCITY?WHAT IS SCARCITY?

Because of scarcity, it is impossible to Because of scarcity, it is impossible to satisfy every desire; wealth does not solve satisfy every desire; wealth does not solve the problem of scarcitythe problem of scarcity

Scarcity is a fact of life throughout the Scarcity is a fact of life throughout the worldworld

Wants are unlimited, resources are limitedWants are unlimited, resources are limited Resources – Resources – Anything that is used to Anything that is used to

produce goods or servicesproduce goods or services EX: Land, Labor, Capital, EntrepreneurshipEX: Land, Labor, Capital, Entrepreneurship

OPPORTUNITY COSTOPPORTUNITY COST

Because of scarcity, people must Because of scarcity, people must make make choiceschoices and each choice incurs and each choice incurs an opportunity costan opportunity cost

Once one option is chosen, another Once one option is chosen, another option is given upoption is given up

Trade-offs – Trade-offs – All the available All the available alternativesalternatives

Opportunity Cost – Opportunity Cost – The best The best opportunity or alternative forfeited or opportunity or alternative forfeited or given up when a choice is madegiven up when a choice is made

OPPORTUNITY COSTOPPORTUNITY COST

It is the next best thing you would like to doIt is the next best thing you would like to do EX: Every time you make a choice you incur EX: Every time you make a choice you incur

an opportunity costan opportunity cost EX: If you have to decide whether to buy a EX: If you have to decide whether to buy a

sweater or 2 CDs and you buy the sweater, sweater or 2 CDs and you buy the sweater, the opportunity cost is the 2 CDsthe opportunity cost is the 2 CDs

EX: The national gov’t decides to spend tax EX: The national gov’t decides to spend tax money on a space station. The opportunity money on a space station. The opportunity cost depends on the next best program cost depends on the next best program not not fundedfunded

Trade-offs and Opportunity Costs All economic decisions require us to make choices among alternatives. Trade-offs are all the available alternatives. The opportunity cost is the next-best alternative we give up.

DEFINITION OF ECONOMICSDEFINITION OF ECONOMICS

Economics – Economics – The study of scarcity & The study of scarcity & choicechoice

Examines how people choose to Examines how people choose to satisfy their wants in a world of satisfy their wants in a world of scarcityscarcity

FOUR FACTORS OF FOUR FACTORS OF PRODUCTIONPRODUCTION

Four factors of Four factors of production are also production are also called called resourcesresources

(1) (1) LandLand* All the natural * All the natural resources found in resources found in naturenature* EX: Water, * EX: Water, minerals, forests, minerals, forests, gold, diamonds, gold, diamonds, oil, air, animals, oil, air, animals, sun, moonsun, moon


(2) (2) LaborLabor

* The mental & physical talents that * The mental & physical talents that

people use to produce goods & people use to produce goods & services services


(3) (3) CapitalCapital* The physical * The physical plants, machinery, plants, machinery, and equipment and equipment used to produce used to produce goodsgoods* EX: Machinery, * EX: Machinery, tools, computers, tools, computers, trucks, trucks, buildings, buildings, factories (Each of factories (Each of these is used to these is used to produce some produce some other good)other good)


(4) (4) EntrepreneurshipEntrepreneurship* The creative ability that some people * The creative ability that some people

have for searching out & taking have for searching out & taking advantage of new business opportunitiesadvantage of new business opportunities and for developing innovative new and for developing innovative new products or new ways of doing thingsproducts or new ways of doing things

* EX: Bill Gates – Microsoft* EX: Bill Gates – Microsoft Sam Walton – Wal-MartSam Walton – Wal-Mart Donald TrumpDonald Trump

* Entrepreneurs are willing to take great * Entrepreneurs are willing to take great risksrisks

ENTREPRENEURSENTREPRENEURS

Bill Gates Sam Walton

Donald Trump

THREE FUNDAMENTAL THREE FUNDAMENTAL ECONOMIC QUESTIONSECONOMIC QUESTIONS

Every nation must answer the following Every nation must answer the following 3 questions:3 questions:

(1) (1) What goods will be produced?What goods will be produced?* Which goods are to be produced & in * Which goods are to be produced & in what quantitieswhat quantities* EX: Should society produce more CDs * EX: Should society produce more CDs and fewer computer software and fewer computer software programs?programs?* More of one good, leaves fewer * More of one good, leaves fewer resources to produce other goodsresources to produce other goods


(2) (2) How will the goods be produced?How will the goods be produced?* This question requires society to * This question requires society to decide the resource mix used to decide the resource mix used to produce goodsproduce goods* Will a production technique be more * Will a production technique be more or less capital-intensive? or less capital-intensive? * EX: Will farmers using modern farm * EX: Will farmers using modern farm tractors produce food, or will farmers tractors produce food, or will farmers using primitive tools produce it?using primitive tools produce it?


(3) (3) For whom will the goods be For whom will the goods be produced?produced?

* Will anyone who is able & willing to * Will anyone who is able & willing to pay the prices for the goods be able pay the prices for the goods be able to receive them, or will the gov’t to receive them, or will the gov’t decide who receives them? decide who receives them?

TWO MAJOR ECONOMIC TWO MAJOR ECONOMIC SYSTEMSSYSTEMS

Economic System – Economic System – The way in which a The way in which a society answers the society answers the What, How, What, How, and and For For WhomWhom to produce questions to produce questions

Two Major Economic SystemsTwo Major Economic Systems:: (1) Capitalism (1) Capitalism (2) Socialism(2) Socialism Economic goals (equity, efficiency, Economic goals (equity, efficiency,

freedom, growth, security, and stability) freedom, growth, security, and stability) influence the way in which a society influence the way in which a society answers the three economic questionsanswers the three economic questions

CHARACTERISTICS OF CHARACTERISTICS OF CAPITALISMCAPITALISM

Also known as a market or free-market Also known as a market or free-market economyeconomy

The three basic questions are answered by The three basic questions are answered by the individual and business owners who the individual and business owners who produce goods & services for those who produce goods & services for those who are willing & able to afford themare willing & able to afford them

Economic decisions are made by Economic decisions are made by producers & consumersproducers & consumers

Consumers “vote” on what to produce Consumers “vote” on what to produce through purchasesthrough purchases

Producers determine what to produceProducers determine what to produce

CHARACTERISTICS OF CHARACTERISTICS OF CAPITALISMCAPITALISM

Freedom of competitionFreedom of competition Private ownershipPrivate ownership Resources are privately ownedResources are privately owned Voluntary exchangeVoluntary exchange ChoiceChoice Income depends on incentives and profitIncome depends on incentives and profit Social goals include Social goals include efficiency, freedom efficiency, freedom

and and growthgrowth Results in unequal economic classesResults in unequal economic classes

ADAM SMITHADAM SMITH

Founder of capitalismFounder of capitalism Wrote Wrote The Wealth Of Nations The Wealth Of Nations in 1776in 1776

CHARACTERISTICS OF CHARACTERISTICS OF SOCIALISMSOCIALISM

Also known as a command economy or Also known as a command economy or communismcommunism

Answers the three basic economic Answers the three basic economic questions through government decisions in questions through government decisions in the interests of all the citizensthe interests of all the citizens

Economic decisions are made by the Economic decisions are made by the governmentgovernment

Resources are owned by the governmentResources are owned by the government Goal is to bring economic Goal is to bring economic equality equality & &

securitysecurity

CHARACTERISTICS OF CHARACTERISTICS OF SOCIALISMSOCIALISM

Aims for a classless societyAims for a classless society Filling the plan or quotas is a priorityFilling the plan or quotas is a priority Life-long employment & universal Life-long employment & universal

health carehealth care

KARL MARXKARL MARX

Founder of socialismFounder of socialism Wrote Wrote The Communist ManifestoThe Communist Manifesto

MIXED ECONOMYMIXED ECONOMY

Answers the Answers the what, how, & for whomwhat, how, & for whom questions through a mixture of questions through a mixture of market & command featuresmarket & command features

U.S. is a mixed economyU.S. is a mixed economy

scarcity, opportunity cost & the four factors of production

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