t he e conomic w ay of t hinking chapter 1. key concepts economics study of how people use resources...
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THE ECONOMIC WAY OF THINKINGChapter 1
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KEY CONCEPTSEconomics — study of how people use resources to
satisfy wantshow individuals/societies choose to use resourcesorganizes, analyzes, interprets data about economic behaviors
develops theories, economic laws to explain economy, predict future
Scarcity: The Basic Economic Problem
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SCARCITY: THE BASIC ECONOMIC PROBLEM
Scarcity is the economic
problem of having seemingly unlimited human needs and wants, in a world of limited resources.
Why does it exist?
It exists because wants are unlimited and resources are limited
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BASIC ECONOMIC PRINCIPLESPRINCIPLE 1: PEOPLE HAVE WANTS
Wants — desires that can be met by consuming products
Needs — things necessary for survival
Scarcity — lack of resources available to meet all human wants, not a temporary shortage
People make choices about all their needs and wants
Wants are unlimited, ever changing
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BASIC ECONOMIC PRINCIPLESPRINCIPLE 2: SCARCITY AFFECTS EVERYONE
Scarcity affects which goods and services are provided Goods — physical objects that can be
bought Services — work one person does for
another for pay Consumer — person who buys good or
service for personal use Producer — person who makes a good or
provides a service
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THREE BASIC ECONOMIC QUESTIONS
Every society must answer three basic economic questions because of scarcity.
Societies answer these questions differently, leading to a variety of economic systems.
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THREE BASIC ECONOMICS QUESTIONS
Question 1: What Will Be Produced?
Societies must decide on mix of goods to producedepends on their natural resources
Some countries allow producers and consumers to decide
In other countries, governments decideMust also decide how much to produce;
choice depends on societies’ wants
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THREE BASIC ECONOMICS QUESTIONS
Question 2: How Will It Be
Produced? Production decisions
involve using resources efficiently Influenced natural
resources
Societies adopt different approaches labor-intensive methods
versus capital-intensive methods depends on availability
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THREE BASIC ECONOMICS QUESTIONS
Question 3: For Whom Will It Be
Produced?
How goods and services are distributed involves two questions how should each person’s
share be determined? how will goods and services
be delivered to people?
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THE FACTORS OF PRODUCTIONFactors of production resources needed to
produce goods and services
1. land 2. labor 3. Capital4. entrepreneurship supply is limited
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THE FACTORS OF PRODUCTION
Factor 1: Land Land means all natural resources on or under the groundincludes water, forests, wildlife, mineral deposits
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THE FACTORS OF PRODUCTION
Factor 2: Labor Labor is all the human time, effort, talent used to make productsphysical and mental effort used to make a good or provide a service
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THE FACTORS OF PRODUCTION
Factor 3: Capital Capital is a producer’s physical
resources includes tools, machines, offices, stores, roads, vehicles
sometimes called physical capital or real capital
Workers invest in human capital — knowledge and skillsworkers with more human capital are more productive
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THE FACTORS OF PRODUCTION
Factor 4: Entrepreneurship Entrepreneurship — vision, skill,
ingenuity, willingness to take risksEntrepreneurs anticipate consumer
wants, satisfy these in new waysdevelop new products, methods of production, marketing or distributing
risk time, energy, creativity, money to make a profit
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Two factors affect economic decisions:1. Incentives — benefits that encourage
people to act in certain ways2. Utility — benefit or satisfaction gained
from using a good or service
Choices vary between individuals based on what is best for him / her
Making Economic Choices
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MAKING ECONOMIC CHOICES
Factor 1: Motivations for Choice People motivated by
incentives, expected utility, desire to economize
They weigh costs against benefits to make purposeful choices
Motivated by self-interest
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MAKING ECONOMIC CHOICES
Factor 2: No Free Lunch
All choices have a costchoosing one
thing means giving up another, or paying a cost
cost can take form of money, time, other thing of value
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TRADE-OFFS AND OPPORTUNITY COST
Trade-off is alternative
people give up when they make a choiceusually means giving up some, not all, of a thing to get more of another
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TRADE-OFFS AND OPPORTUNITY COST
Example of a Trade OffJessica wants to earn college credit
over summersemester-long university course offers more credits
six-week high school course leaves time for vacation
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TRADE-OFFS AND OPPORTUNITY COST
Opportunity cost is value of next-best alternative a person gives up
not the value of all possible alternatives
Example of Opportunity CostDan chooses to work for six months so he
can travel for six monthsopportunity cost = six months of salary
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VIDEO CLIP: OPPORTUNITY COST
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OPPORTUNITY COST ACTIVITY
In a group of 2 -3 consider this scenario:
You have won $1,000. Create a chart with these columns:What will you buy?What will you gain from each choice?
What do you give up with each choice? (What’s the opportunity cost?)
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ANALYZING ECONOMIC CHOICES
Cost-benefit analysis: examines the costs and expected
benefits of choicesone of most useful tools for evaluating relative worth of economic choices
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ANALYZING ECONOMIC CHOICES
Marginal Costs and Benefits
Marginal cost additional cost of using one more unit of a good or service
Marginal benefitadditional benefit of using one more unit of a good or service
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ANALYZING PRODUCTION POSSIBILITIES
KEY CONCEPTS Production possibilities curve (PPC) is one model (graph)
PPC shows the maximum goods or services that can be produced from limited resources
also called production possibilities frontier
PPC PPC based on assumptions:
resources are fixed all resources are fully employed only two things can be produced technology is fixed
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GRAPHING THE POSSIBILITIES Production Possibilities Curve
PPC runs between extremes of producing only one item or the other
Data is plotted on a graph; lines joining points is PPC shows maximum number of one
item relative to other item PPC shows opportunity cost of
each choice more of one product means less of
the other
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WHAT WE LEARN FROM PPCS
Efficiency — producing the maximum amount of goods and services possible
Underutilization — producing fewer goods and services than possible
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WHY IS THE PPC A CURVE?
Law of increasing opportunity costsas production switches from one product to another, more resources needed to increase production of second product
Reasons for increasing cost of making more of one productneed new resources, machines, factoriesmust retrain workers
Costs paid by making less and less of other product
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LET’S LOOK AT SOME EXAMPLES
PPC Practice
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CHANGING PRODUCTION POSSIBILITIES
A country’s supply of resources changes over timeExample: U.S. in 1800s grew, gained
resources, workers, new technologynew resources mean new production
possibilities beyond frontier Increased production shown on PPC as shift
of curve outward Increase in total output called economic
growth
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PPF—THE CURVE
What Does Guns And Butter Curve Mean? In a theoretical
economy with only two goods, a choice must be made between how much of each good to produce.
As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa.
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MICROECONOMICS AND MACROECONOMICS
Microeconomics Microeconomics examines specific, individual
elements in an economy prices, costs, profits, competition, consumer and
producer behavior Some Topics of Interest: business organization,
labor markets, environmental issues
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MICROECONOMICS AND MACROECONOMICS
Macroeconomics Macroeconomics studies sectors — combination
of all individual units Includes consumer, business, public or government
sectors Macroeconomics studies national or global
topics: monetary system, business cycle, tax policies,
international trade
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EXAMPLES OF MACRO AND MICRO
Which is it?1. National Unemployment Figures
Rise2. World Trade Organization Meets3. Shipbuilder Wins Navy Contract4. Cab Drivers on Strike!5. Gasoline Prices Jump 25 Cents