Chapter 1- Introduction to Economics

Economics: The study of how society chooses to allocate its scarce resources in order to satisfy unlimited wants

Microeconomics: Branch of economics that studies decision-making by a single individual, household, firm, industry or level of government.

Macroeconomics: Branch of economics that studies decision-making for the economy as a whole

Definition

Chapter 1- Introduction to Economics

Economics

Money, Power, Respect

By

Ms. C. Ibena-Berry

Modified for East High - Period 5!

Chapter 1- Introduction to Economics

Economics• Outline for the semester• Materials • Requirements• Ticket out• Song just for you….• ”Money, Power, Respect

http://www.youtube.com/watch?v=_K4lZBxGTnM&feature=player_detailpage

Chapter 1- Introduction to Economics

Problem of Scarcity

Scarcity: The condition in which human wants are forever greater than the available supply of time, goods, and resources.

What will be Produced?

How will it be Produced?

For whom will it be produced?

3 Economic Questions

Chapter 1- Introduction to Economics

Positive Economics: An analysis limited to statements that are verifiable

Normative Economics: An analysis based on value judgment

Positive vs. Normative

Chapter 1- Introduction to Economics

Scarce Economic Resources

Factors of Production (FOP): The resources used to create goods and services

Land: Any natural resource provided by nature.

Labor: The mental and physical capacity of workers to produce goods and services.

Capital: Any physical man-made good used to produce other goods.

Entrepreneurship: Vision, skills, and risk-taking needed to create and run a business.

Chapter 1- Introduction to Economics

Opportunity Cost

Opportunity Cost: The best alternative sacrificed for a chosen alternative

Trade-off: Any alternative that could be chosen

Chapter 1- Introduction to Economics

Adam Smith: Scottish Economist (1723-1790)

The Invisible Hand Theory

“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest

Chapter 1- Introduction to Economics

Production Possibilities Curve — Marginal Analysis

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PPC

U

Underutilization

Z

Unattainable point

Production Possibilities Curve

A curve that shows the maximum combinations of two outputs that an economy can produce, given available LLC.

Assumptions about the PPC

• Fixed Resources

• Fully Employed Resources

• Technology Unchanged

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Guns

Butter

Chapter 1- Introduction to Economics

Production Possibilities Curve — Law of Increasing Opportunity cost

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B

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PPC20

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Guns

Butter

The Law of Increasing Opportunity Costs

The principle that the opportunity cost increases as production of one output expands.

This is responsible for the “bowed shape” of the PPC.

Reasoning

• not all workers are equally suited to producing one good , compared to another.

• as we shift production levels of butter, we gradually tap into the best gun-making resources

Marginal Analysis

An examination of the effects of additions to or subtractions from a current situation.

Chapter 1- Introduction to Economics

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Guns

Butter

PPC2

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PPC1

Production Possibilities Curve — Movements and Shifts

Shifts in the PPC

Changes (increases) in the levels of a country’s LLC will cause the PPC to shift from PPC1 to PPC2

Movements along the PPC

Changes in the needs and wants cause a country to choose a different point along an existing PPC

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C