chapter 1 the economic way of thinking. key concepts economics study of how people use resources to...
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CHAPTER 1
The Economic Way of Thinking
KEY CONCEPTS Economics — study of how people use resources to
satisfy wants how individuals/societies choose to use resources organizes, analyzes, interprets data about
economic behaviors develops theories, economic laws to explain
economy, predict future
Scarcity: The Basic Economic Problem
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
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
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
Video Clip: Scarcity & Choice
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.
Three Basic Economics Questions
Question 1: What Will Be Produced?
Societies must decide on mix of goods to produce depends on their natural resources
Some countries allow producers and consumers to decide
In other countries, governments decide Must also decide how much to produce;
choice depends on societies’ wants
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
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?
The Factors of Production
Factors of production resources needed to
produce goods and services
1. land 2. labor 3. Capital4. entrepreneurship supply is limited
The Factors of Production
Factor 1: Land Land means all natural resources on or under the ground includes water, forests, wildlife, mineral deposits
The Factors of Production
Factor 2: Labor Labor is all the human time, effort, talent used to make products physical and mental effort used to make a good or provide a service
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 skills workers with more human capital are
more productive
The Factors of Production
Factor 4: Entrepreneurship Entrepreneurship — vision, skill,
ingenuity, willingness to take risks Entrepreneurs anticipate consumer wants,
satisfy these in new ways develop new products, methods of
production, marketing or distributing risk time, energy, creativity, money to
make a profit
Practice
Label the 4 Factors f Production(CL Lesson 5, pg 26)
Factors of Production CL Lesson 6 Activity in groups of 2 -3 .
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
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
Making Economic Choices
Factor 2: No Free Lunch
All choices have a cost choosing one thing
means giving up another, or paying a cost
cost can take form of money, time, other thing of value
Trade-Offs and Opportunity Cost
Trade-off is alternative
people give up when they make a choice usually means
giving up some, not all, of a thing to get more of another
Trade-Offs and Opportunity Cost
Example of a Trade Off Jessica wants to earn college credit over
summer semester-long university course offers
more credits six-week high school course leaves time
for vacation
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 Cost Dan chooses to work for six months so he can
travel for six months opportunity cost = six months of salary
Video Clip: Opportunity Cost
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?)
Analyzing Economic Choices
Cost-benefit analysis: examines the costs and expected benefits
of choices one of most useful tools for evaluating
relative worth of economic choices
Analyzing Economic Choices
Marginal Costs and Benefits
Marginal cost additional cost of using one more unit of a good
or service Marginal benefit
additional benefit of using one more unit of a good or service
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
Analyzing Production Possibilities
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
What We Learn from PPCs
Efficiency — producing the maximum amount of goods and services possible
Underutilization — producing fewer goods and services than possible
Why is the PPC a Curve?
Law of increasing opportunity costs as 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 product need new resources, machines, factories must retrain workers
Costs paid by making less and less of other product
Let’s Look at Some Examples
PPC Practice
Changing Production Possibilities
A country’s supply of resources changes over time Example: U.S. in 1800s grew, gained
resources, workers, new technology new resources mean new production
possibilities beyond frontierIncreased production shown on PPC as shift
of curve outwardIncrease in total output called economic
growth
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.
Video Clip: Individual and Society PPCs
CL Lesson 7 Activity pg. 35 – PPC Problems
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
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
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