economics chapter 1 all of the basics. scarcity the fundamental economic problem is… scarcity…...
TRANSCRIPT
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EconomicsChapter 1
All of the Basics
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Scarcity• The Fundamental Economic Problem is…Scarcity… the condition all societies confront where unlimited human wants face limited resources.
• Economics… the study of how people satisfy wants with scarce resources—the study of how we deal with scarcity.
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• Needs are required for survival.• Wants are desired for
satisfaction.• We need food but we want
___________? –Why do you think scarcity is an issue with the rich as well as the poor?
Needs vs. Wants
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Scarcity forces us to make Choices
Three Basic Economic Questions help us make Choices.
1. What must/will we produce? • Society must choose based on its
needs. 2. How should we produce it?
• Society must choose based on its resources.
3. For whom should we produce? • Society must choose based on its
population and other available markets (trade).
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Scarcity forces us to make Choices
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The GOLDEN RULE—T I N S T A A F L???
• There is no such thing as a free lunch.– Someone has to pay for production
costs– What about “buy one get one free” and
other “free” stuff?
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The Factors of Production• There are four factors of production:
– Factors of production are resources necessary to produce what people want or need Figure 1.2Figure 1.2Figure 1.2
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Adam Smith
• Wrote The Wealth of Nations (1770’s)• Basic idea of Capitalism• “Laissez-Faire”
– Governments should not interfere in economic affairs of people or businesses
• “Invisible Hand”– People/Businesses don’t need to be told
what to do with resources– There is an “invisible hand” that guides
the resources to the right places
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Goods, Services, and Consumers
• Economic products are goods and services that are useful, scarce, and transferable to others.
• Goods are items that are economically useful or satisfy an economic want.
• Goods are tangible and can be classified in 4 ways:1) Consumer goods are intended for final use
by individuals• food, clothing, video games, cars, etc.2) Capital goods are used to create other goods • bulldozer, hammer and nails, robots, etc.
3) Durable goods are intended to last more than 3 years • cars, washing machines, silverware, etc. 4) Nondurable goods are intended to last less
than 3 years• paper products, personal hygiene products,
food
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• Consumer goods
• Capital goods
• Durable goods
• Nondurable goods
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• Services are work performed for someone and are intangible
• doctor visit, haircut, hiring a lawyer, housecleaning service
• Consumers use goods and services to satisfy wants and needs.
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The Circular Flow of Economic Activity
• Markets are locations/mechanisms for buyers and sellers to trade.
• A factor market is where people earn their incomes. Factor markets center on the four factors of production: land, capital, labor, and entrepreneurs.
• A product market is where people use their income to buy from producers. Product markets center on goods and services.
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The Circular Flow of Economic Activity
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Productivity and Economic Growth
• Productivity is a measure of the amount of output produced by the amount of inputs within a certain time. Productivity increases with efficient use of scarce resources.
• Specialization and division of labor may improve productivity because they lead to greater efficiency (and greater economic interdependence). Know the difference.
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• Investing in human capital improves productivity because when people’s skills, abilities, health, and motivation advance, productivity increases.
• How do we invest in human capital? Know examples
• Economic growth depends on high productivity. Yet, an economy’s productivity may be affected by its interdependence—reliance on others and their reliance on us to provide goods and services.
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Making Decisions—or—Beginning to think Economically (don’t write this)
• The process of making a choice is not always easy.
• Because resources are scarce, consumers AND producers need to make wise choices.
• Finally, you have to make your choice in a way that carefully considers the costs and benefits of each possibility.
• This is called cost-benefit analysis
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Choices Involve Trade Offs and Opportunity Cost
• Trade-offs are the alternative choices people face in making an economic decision.
• Study for a quiz or pizza with friends?
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• Opportunity cost is the cost of the next best alternative among a person’s choices. The opportunity cost is the money, time, or resources a person gives up, or sacrifices, to make his final choice.
• (What is the opportunity cost of going out for pizza with friends vs. studying for your econ. quiz?)
• Trade offs (choices) always cost the person an opportunity to do something else
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Lists the advantages and disadvantages of each choiceProvides an efficient way of looking at a problemForces you to look at the trade offsForces you to set criteria for making your decisionForces you to evaluate each possible choice
A Decision-Making Grid
(don’t write this)
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Production Possibilities
• Production Possibilities Frontiers (PPF) examine the opportunity costs of producing one item over another.
• The production possibilities frontier illustrates the concept of opportunity cost.
• The line on the graph represents the full potential—the frontier—when the economy uses all of its resources efficiently. – Identifying possible alternatives allows an
economy to examine how it can best put its limited resources into production.
– Considering different ways to fully use its resources allows an economy to analyze the combination of goods and services that leads to maximum output.
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Lem-Lem’s PPF
footballs
bask
etb
alls
24
18
12
6
6 12 18 240
A
B
C D
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Lem-Lem’s PPF
footballs
bask
etb
alls
24
18
12
6
6 12 18 240
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Production Possibilities
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GUNS AND BUTTER• Classic economic example/model shows
the relationship between a nation's investment in military and consumer goods
• Illustrates a nation’s choose between two options when spending its limited resources
• Nations buy either guns (invest in defense/military) or butter (invest in production of goods), or a combination of both
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GUNS AND BUTTER
A
B
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GUNS AND BUTTER• At point A, a nation produces 20 guns
& 900 butters• At point B, a nation produces 180
guns & 100 buttersA
B
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GUNS AND BUTTER• What is the opportunity cost of shifting
resources from A to B?
A
B
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