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What is Economics?
The study of how individuals and countries make choices about how to fulfill their wants.
Scarcity
the 4 factors of production
the relationship between trade-offs and opportunity costs
how economists use economic data to test economic models they formulate.
Chapter 1 standards E.1.1 Define and identify each of the productive resources
(natural, human, capital) and explain why each is necessary
for the production of goods and services.
E.1.2 Explain that entrepreneurs combine productive
resources to produce goods and services with the goal of
making a profit.
E.1.3 Identify incentives and explain how they influence
decisions.
E.1.5 Define scarcity and explain how choices incur
opportunity costs and tradeoffs.
E.1.6 Use a production possibilities curve to explain the
concepts of choice, scarcity, opportunity cost, tradeoffs,
unemployment, productivity, and growth.
The basic problem in economics
A. Wants vs. Needs 1.) People use need and want interchangeably –
but economists see it differently.
a.) need = a basic requirement for survival – food, clothes, shelter, love, communication, education, health care, etc.
b.) want = a way of expressing a need. We need food to survive – but the need can be met in many ways: pizza, hamburger, chicken etc. The term “want” is much broader than the term “need”
2.) All societies (individuals, countries,
governments, businesses etc.) share a
common problem = how to use the limited
resources available to them to satisfy the
unlimited wants of the people.
B. Choices 1.) Societies satisfy their unlimited wants in a world
of limited resources by making choices (decisions)
2. ) ex = individuals making decisions on how they will spend their income – each choice competes with every other available choice.
3. ) ex = businesses make decisions on what to produce now, what to produce later and what to stop producing. Also these decisions will affect worker’s income and people’s ability to buy.
4. ) ex = elected officials make decisions – how much to spend on defense versus higher education.
Choices must be made because resources are limited!
C) Scarcity – the basic problem in Economics
1. ) Choices are necessary because all resources are limited and people compete for these limited resources.
2.) Scarcity exists because people can’t satisfy their every want a.) even if everyone in the world were rich – scarcity
would continue to exist in the form of time. There is no such thing as unlimited time.
3.) Don’t confuse scarcity with shortage:
a.) Scarcity – exists because of competing uses for resources
b.) Shortage – usually temporary and often occur after some severe event destroys goods or property or demand exceeds supply at a particular price
What is the basic problem of all
economics? A. Supply
B. Limited Resources
C. Money
D. Government
[Default]
[MC Any]
[MC All]
This problem exists because of
competing uses for resources - A. Scarcity
B. Shortage
[Default]
[MC Any]
[MC All]
D) Factors of Production
1.) Economists list four factors of production
– the resources needed to produce goods and
services
Land
Labor
Capital
Entrepreneurship
Factors of production
a.) Land
1.) Natural resources (not created by human
effort – “gifts of nature” and their location
a.) ex = surface land and water, fish animals,
mineral deposits, sunshine, rain and forests, etc.
2.) Economists tend to think of land as being fixed or
in limited supply – there is only so much water,
land, oil, etc.
Written response
What do you believe is the greatest use of
land?
What do you believe is the biggest waste of
land?
b.) Labor – the work people do
1. ) Human resources – anyone who works to
produce goods and services
a.) Good = tangible items that people buy – a
book, car, stereo, computer, shampoo, etc.
b.) Service = actions/work that is done for
others for a fee – doctors, repairmen, hair stylists,
teacher, lawyer, entertainer, etc.
c. ) Capital
1.) The manufactured goods used to make other goods and services.
a.) ex = machines, factories and tools used in the production of goods and services
b.) Capital goods are distinguished from financial capital – the money used to buy the tools and equipment
1. ) Bulldozer – capital good
2.) The money used to buy the materials needed to produce the bulldozer = financial capital
2.) Capital also increases productivity – the ability to produce greater quantities of goods and services in better and faster ways (manual vs. mechanical)
d. ) Entrepreneurship
1.) The risk takers in search of profit
a.) They are thought to be the diving force in the
American economy because they start new businesses
or create new products
b.) They also incur the costs of failed efforts. About
30% of new businesses fail and of the 70% that do
survive only a small few become very successful
c.) starting new businesses, introducing new products
and improving techniques
e.) Technology
1.) Some economists add technology to the
list of factors of production
a. ) The use of science to develop new products
and productive methods – ex = a computer
keyboard was a technological advance over the
typewriter
Which is not a factor of production? A. Land
B. Capital
C. Work
D. Entrepreneurship
[Default]
[MC Any]
[MC All]
Which factor of production deals with
gifts of nature A. Labor
B. Entrepreneurship
C. Land
D. Capital
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[MC Any]
[MC All]
A. ) Trade offs
1.) Exchanging one thing for another is called
a trade-off
2.) Individuals, families, businesses and
societies are forced to make trade-offs every
time they use their resources in one way and
not another
3.) Involves sacrifice, can’t have everything
all the time
Trade offs cont.
3.) Trade-offs involve opportunity costs – choosing
one alternative means you lose the next best
alternative.
a.) Trade-Off – the choice a person makes between
alternatives
b.) Opportunity cost – the next best alternative
given up when we make a choice
c.) when economists talk in terms of costs, they are
talking about alternatives given up – people tend to think
of costs in terms of dollars and cents
Written response
Discuss two trade offs you must
consider to be a high school
graduate.
4.) Considering the opportunity cost can help people
make economic decisions at all levels.
a.) ex = businesses must consider trade-offs and
opportunity costs when they choose to invest money or to
hire workers to produce one good or another
b.) ex = Government spending. The gov’t decides to
spend tax money to build new highways. They could
have used the money to build new schools. The
opportunity cost of the highways is a few new schools
B.) Production possibilities curve
1.) The production possibilities curve shows the
maximum combination of goods and services that
can be produced from a given amount of resources in
a specific period of time
2. ) Classic example = Guns vs. Butter (military
spending vs. domestic programs/ civilian goods)
3. ) By using a production possibilities curve, a
country, business or individual can decide how to
best use their resources
Marginal analysis
An examination of the additional benefits of an
activity compared to the additional costs of that
activity. Companies use marginal analysis as a
decision-making tool to help them maximize their
profits. Individuals unconsciously use marginal
analysis to make a host of everyday decisions.
Marginal analysis is also widely used in
microeconomics when analyzing how a complex
system is affected by marginal manipulation of its
comprising variables.
Written response
How can a high school student use marginal
analysis to determine whether or not to attend
college?
What other factors besides cost will be used?
What do economists do?
Economists study what is, or tends to be and
how it came to be. They do not in any way
pretend to tell what ought to be. The study of
economics will not lead to ethical judgments
for economic problems, but it will help us to
be more informed citizens and better decision
makers.
A. ) Economic models 1. ) These are theories economists use that are
simplified representations of the real world.
2. ) Models show how people behave economically – it’s visual representations of consumer, business or other economic behavior a.) ex = the production possibilities curve is an economic
model that shows opportunity cost.
3.) When using a model, assume that some factors remain constant.
a.) ex = economists realize, in the real world, several things may be changing at once. Using a model holds everything steady except the variables assumed to be related. A model will show only the basic factors needed to analyze the problem at hand
4.) When creating a model, show basic factors not
every detail
5.) Testing models verifies how accurately the
models represent reality under certain conditions,
helps to analyze the way the world works
6. ) Models may not always be accurate due to the
inability to predict human behavior.
A. ex = the belief that cutting taxes will help stimulate the
economy. The idea is that people will have more money
to spend – but some people fear the economy may
continue to be weak, so they will save the money (for
future use) instead of spending it.
B.) Schools of economic thought
1.) Economists are influenced by personal
opinions, beliefs, and the government under
which they live and this leads to different
economic theories.
2.) These different schools of thought can
have an impact on laws and government
policies.
3.) Judgments about economic policies depend on a person’s values:
a.) values are beliefs or characteristics that a person or group considers important.
b.) Having the same values doesn’t mean that people will agree about solutions to problems, strategies, or interpretation of data.
4.) The science of economics is not used to judge whether a certain policy is good or bad. Economists only try to inform us of the likely short-term and long-term outcomes of the policies used.
Economic models always
accurately predict human behavior
A. True
B. False
The best alternative given up when
making a choice is:
A. Trade off
B. Opportunity Cost
[Default]
[MC Any]
[MC All]
The production possibilities curve
shows how much of any good
could be produced.
A. True
B. False
Why can’t goods be produced
outside of the production
possibilities curve? A. Limited resources
B. Limited time
C. Limited money
D. Limited energy
[Default]
[MC Any]
[MC All]
Written response
How could a company use the production
possibilities curve to ensure they were
producing at the highest rate possible?
What else could they learn from this curve?