THE STUDY OF THE STUDY OF CHOICE!CHOICE!

WHAT IS WHAT IS ECONOMICS?ECONOMICS?

ECONOMICSECONOMICS is the study of how people use limited is the study of how people use limited

(scarce) resources to satisfy unlimited (scarce) resources to satisfy unlimited wants.wants.

People simply cannot have everything they People simply cannot have everything they need and wantneed and want

What is the difference between What is the difference between needsneeds & & wantswants??Needs Needs are necessary for survivalare necessary for survivalWantsWants are simply ways of expressing are simply ways of expressing

needs.needs.

So…. If our wants are unlimited, but So…. If our wants are unlimited, but they can’t all be satisfied because our they can’t all be satisfied because our resourcesresources are limited ….. are limited …..

What is a What is a resourceresource??anything people can use to make or anything people can use to make or

obtain what they wantobtain what they want

SCARCITY

Define “scarcity” --- and give an example. In economics, scarcity “not plentiful” Scarcity exists in 2 situations:

1. When resources are limited and human wants are unlimited

2. When a resource has more than one valuable use.

“Is it Scarce?” – partners, review examples, determine if “S” or “NS”

Scarcity and Abundance

Are NOT mutually exclusive How is it possible that scarcity & abundance can exist

together? For example, water……

It seems abundant in a large lake or river BUT it is still scarce.

Why? Explain. Widespread evidence of abundance, however,

may cause people to treat scarce resources as if they were not scarce What would this lead to?

“Are People Treating Resources as Scarce?” – partners, review examples, determine if “S” or “NS”

Assessment Check!Assessment Check!1.1. Which of the following statements is Which of the following statements is NOTNOT

consistent with the economic concept of consistent with the economic concept of scarcity?scarcity?

a)a) People are scarce because they have many People are scarce because they have many valuable uses in the world.valuable uses in the world.

b)b) Trash is scarce because you rarely see much of it Trash is scarce because you rarely see much of it around unless you go to a landfill.around unless you go to a landfill.

c)c) Knowledge is scarce because what we wish to know Knowledge is scarce because what we wish to know is so great relative to what we do know at this time.is so great relative to what we do know at this time.

d)d) Electricity is scarce because it has many valuable Electricity is scarce because it has many valuable uses.uses.

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION The economic resources used by producers to make goods The economic resources used by producers to make goods

and services.and services. FACTORS OF PRODUCTIONFACTORS OF PRODUCTION::

LANDLAND = natural resources (land, mineral deposits, etc.) = natural resources (land, mineral deposits, etc.) LABORLABOR = human resources (physical & mental work) = human resources (physical & mental work) CAPITALCAPITAL = building, tools, equipment, machinery, $, = building, tools, equipment, machinery, $,

etc. used to make goods or provide servicesetc. used to make goods or provide services Human capital Human capital – knowledge & skills of workers (education, – knowledge & skills of workers (education,

experience)experience) Physical capital Physical capital – objects used to make goods/services– objects used to make goods/services

ENTREPRENEURSENTREPRENEURS = those willing to take the risk of = those willing to take the risk of forming or managing a businessforming or managing a business

Production of Production of GoodsGoods or or ServicesServices??

Factors of production are used to produce goods and services.

A good or service produced by the following?

Newspaper Publisher? Reporter? Google? Blockbuster?

TYPES OF GOODS

What type(s) of goods are these?

Consumer Capital Durable Non-durable

TRADE-OFFS & OPPORTUNITY COSTS

TINSTAAFL! Due to scarcity, there are alternatives & costs to

everything we do

TRADE-OFF: Act of giving up one benefit in order to gain another benefit (individuals, businesses, gov’ts all make them.) … the alternatives you have when you are making a

choice. In government…guns vs. butter

OPPORTUNITY COST: This is the next best, most desirable alternative that

you gave up – the one you did NOT choose What would be the opportunity cost of choosing to work 20 hours

per week while in high school?

Opportunity Cost

I Want Items A & B

Trade-Off Decision Need

I chose item A

I didn’t choose item B

Next best choicebut…

This is the

OpportunityCost

The Basic Trilogy of The Basic Trilogy of Economics:Economics:

1.1. ScarcityScarcity

2.2. ChoiceChoice

3.3. CostCost

Costs

PRODUCTION POSSIBILITIES CURVE

Is a graph typically used to show a business’ alternatives in production possibilities Compares possibilities & costs of different

categories of production

Used to illustrate the opportunity costs a producer has --- his “production possibilities frontier”

Governments go through the same process Classic “Guns” vs. “Butter” analysis i.e., defense vs. consumer products

I can produce this much of item A

more

more

Production Possibilities Curve

I can produce this much of item B

I can produce any combination of A and B inside or on this curve

more

more

Production Possibilities Curve

item A

item B

.(A,B)

. (A1,B1)

.(A2,B2)

.

.

Production Possibilities Curve

Chairs

Tables

100 300

300

150

350

400

(100,300)..(300,150)

What is the total # of tables possible to produce?What is the total # of chairs possible to produce?If I produce 100 chairs, how many tables can I produce?If I produce 300 chairs, how many tables can I produce?What is the opportunity cost in tables if I choose to produce 300 instead of 100 chairs?

Production Possibilities Curve

Chairs

Tables

As long as I am operating on curve, I am 100% efficient and using all my resources

. . ..

.

Production Possibilities Curve

Chairs

Tables

As soon as I fall inside the curve,I am inefficient – underutilization is occurring.

.100 300

100

300350

400

Production Possibilities Frontier

Chairs

Tables

I can’t produce out here. It’s beyondmy resources

.

.

Production Possibilities Frontier

Chairs

Tables

In order to produce out here, I would have todo something different. Like what?

.

•Add more people•Add more machinery•Enlarge my factory

.

Productivity/Efficiency

Most efficient use of scarce

resources – can be improved by: Division of Labor:

Organizing work so individuals do fewer tasks

Specialization: Proficiency at a task – can become more

proficient if have less overall tasks

Prime Example? Query: What is the greatest single factor for

improving the productivity of human capital? EDUCATION & TRAINING