1 - 1 scarcity and the science of economics basic economic concepts economic choices and decision...

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Scarcity and the Science of Economics

Basic Economic Concepts

Economic Choices and Decision Making

What Is Economics?

1C H A P T E R

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ECONOMICS

The social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.

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ECONOMICS

The social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.

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WHY STUDY ECONOMICS• Most __________ decisions involve

economics. • An understanding of economics and

government are the keys to participatory citizenship.

• Learn analytical and observational skills that are important in the workplace.

• Business managers or owners need these skills and understanding.

• Make better financial decisions with your investments.

• Foundation for careers in accounting, business, finance, marketing, or public policy.

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THE FOUNDATION OF ECONOMICS

SOCIETY HAS VIRTUALLYUNLIMITED WANTS...

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BUT LIMITED OR SCARCERESOURCES!

SOCIETY HAS VIRTUALLYUNLIMITED WANTS...

THE FOUNDATION OF ECONOMICS

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GOODS & SERVICES PROVIDE...

UTILITY

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WANT


UTILITY

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WANT vs. NEED


UTILITY

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Scarcity• The world has limited

resources.• These resources are

desirable.• TINSTAAFL

–There is no such thing as a free lunch

The Economic Way of Thinking

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The Three Fundamental Questions...

How will the goods be produced?

What will be produced?

Who will get the goodsand services?

ECONOMICS AT WORK

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ECONOMIC PRODUCTS

• Consumer Goods• Capital Goods• Services

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Let’s see if you’re thinking like an economist yet

Take the true/false quiz in your packet

called Activity 1

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FACTORS OF PRODUCTION

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PROPERTY RESOURCES

LAND

SCARCE RESOURCESECONOMIC RESOURCES

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PROPERTY RESOURCES

LAND

CAPITAL


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PROPERTY RESOURCES

LAND

CAPITAL


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PROPERTY RESOURCES

LAND

CAPITAL

HUMAN RESOURCES


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PROPERTY RESOURCES

LAND

CAPITAL

HUMAN RESOURCES

LABOR


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PROPERTY RESOURCES

LAND

CAPITAL

HUMAN RESOURCES

LABOR

ENTREPRENEURIAL ABILITY


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ENTREPRENEURIAL ABILITY

Takes The Initiative

Makes Strategic Business Decisions

Innovator

The Risk Bearer

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RESOURCE PAYMENTS

RENT

INTEREST

WAGES

PROFIT &LOSS

PROPERTY RESOURCES

LAND

CAPITAL

HUMAN RESOURCES

LABOR

ENTREPRENEUR

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RESOURCES & SCARCITY

Let’s illustrate this with a challenge.

We need 4 teams. Group by seats.

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CIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

PRODUCTMARKET

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RESOURCEMARKET

RESOURCES INPUTS

PRODUCTMARKET

CIRCULAR FLOW MODEL

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RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

GOODS &SERVICES

GOODS &SERVICES

PRODUCTMARKET

CIRCULAR FLOW MODEL

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RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

CIRCULAR FLOW MODEL

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RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

CIRCULAR FLOW MODEL

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CIRCULAR FLOW MODEL


RESOURCEMARKET

RESOURCES INPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &SERVICES

GOODS &SERVICES

$ CONSUMPTION$ REVENUE

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What is the difference between a Trade-Off and

Opportunity Cost?

Trade-Off

An exchange of one or more thing(s) in return for another.

Opportunity Cost

The value of the next-highest valued alternative or the forgone cost.

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What is the difference between a Trade-Off and

Opportunity Cost?

Trade-Off

An exchange of one or more thing(s) in return for another.

Opportunity Cost

The cost of passing up the next best choice.

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FRIDAY NIGHT OPTIONS

• Go out with friends• Stay home and watch TV• Go on a date• Study economics• Attend the basketball game

The one we pick is our choice, the rest become Trade-offs.

The “next best” alternative becomes the Opportunity Cost.

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FRIDAY NIGHT OPTIONS

• Go out with friends

The one we pick is our choice, the rest become Trade-offs.

The “next best” alternative becomes the Opportunity Cost.

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GO OUT ON A DATE

• The Opportunity Cost of going out on a date is what you’ve lost by not going out with friends.– Excitement– Fun

• Your decision was based on getting more utility on your date.

• That’s the “incentive”

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ANY OTHER COSTS?

Dating is expensive. Let’s say you spend $30. You could have spent that $30 on something else.

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SO OUR OPPORTUNITY COST IS…?

• The lost fun you would have had with your friends.

• The cash you spent on your date.

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Marginal Analysis• Comparing benefits and costs.• Marginal – means “extra, additional, one

more”• Marginal Cost (MC) – What does it cost

to go to the next level or to get one more item?

• Marginal Benefit (MB) – What pleasure or “utility” do you get out of the next level or item?

• Incentive– Why do we act?– We do it when MB is greater than or equal to

MC.

The Economic Way of Thinking

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Marginal Analysis ExampleHours Econ Score Math Score

0 0 0

1 26 24

2 48 44

3 61 62

4 73 75

5 83 84

6 91 91

7 97 96

8 100 100

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PRODUCTION POSSIBILITIES

Assumes...

•Full Employment•Full Production•Fixed Resources•Fixed Technology•Two Goods

for example...

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PRODUCTION POSSIBILITIESAssumes...

Full Employmentand ProductiveEfficiency

Fixed ResourcesFixed TechnologyTwo Goods

for example...

PIZZA

A Consumer Good

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Two Goods

Fixed ResourcesFixed Technology

Assumes...

Full Employmentand ProductiveEfficiency


for example...

Robots

A Capital Good

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Using all of our resources, to get some pizza, we must giveup some robots!

for example...

What if we could only produce ...

10,000 Robotsor

400,000 Pizzas


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PIZZA 0 1 2 3 4(in hundred thousands)

ROBOTS 10 9 7 4 0(in thousands)

in table form


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in table form

graphical formR

obot

s(t

hou

san

ds)

Pizzas (hundred thousands)


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in table form

graphical formR

obot

s(t

hou

san

ds)



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in table form

graphical formR

obot

s(t

hou

san

ds)



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in table form

graphical formR

obot

s(t

hou

san

ds)



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in table form

graphical formR

obot

s(t

hou

san

ds)



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in table form

graphical formR

obot

s(t

hou

san

ds)



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Q

Q

Ro

bo

ts (t

ho

usa

nd

s)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

A B

C

D

E

W

Attainablebut

Inefficient

Unattainable

Attainable& Efficient


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Economic Choices and Decision Making An economy must

sacrifice some of product X to obtain more of product Y.


Limited Resources meansa limited output...

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Law of IncreasingOpportunity Cost

• Economic resources are not completely adaptable to other uses

• To make more of X it costs more and more of Y

• This makes the PPC:– Bowed out from the origin– Concave

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Q

Q

Rob

ots

(tho

usan

ds)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

U

Unemployment &Underemployment Shown by Point U

More of either orboth is possible


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Q

Q

Ro

bo

ts (t

ho

usa

nd

s)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

U

Unemployment &Underemployment Shown by Point U

More of either orboth is possible


Notes...Economic Growth1. Increase in

resource supplies 2. Better resource

quality 3. Technological

advances4. Capital Goods

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Economic Growth

Q

Q

Ro

bo

ts (t

ho

usa

nd

s)


1413121110 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

A’

B’

C’

D’

E’


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Let’s work with Production Possibility Curves

Open you course packet to Activity 1-2 and complete Parts A – D.

1 - 1 scarcity and the science of economics basic economic concepts economic choices and decision...

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