CHAPTER ONE:
WHAT IS ECONOMICS?
SECTION ONE:
SCARCITY AND THE SCIENCE OF ECONOMICS
OBJECTIVES: FUNDAMENTAL ECONOMIC CONCEPTS
SSEF1: THE STUDENT WILL EXPLAIN WHY LIMITED PRODUCTIVE
RESOURCES AND UNLIMITED WANTS RESULT INSCARCITY,
OPPORTUNITY COSTS, AND TRADE-OFFS FOR INDIVIDUALS,
BUSINESSES, AND GOVERNMENTS.
A. DEFINE SCARCITY AS A BASIC CONDITION THAT EXISTS WHEN
UNLIMITED WANTS EXCEED LIMITED PRODUCTIVE RESOURCES.
B. DEFINE AND GIVEN EXAMPLES OF PRODUCTIVE RESOURCES (E.G.
LAND (NATURAL), LABOR (HUMAN), CAPITAL (CAPITAL GOODS),
ENTREPRENEURSHIP (RISKTAKERS).
C. LIST A VARIETY OF STRATEGIES FOR ALLOCATING SCARCE
RESOURCES.
BASIC ECONOMIC PROBLEM
(SG #1)
•
SCARCITY OF RESOURCES, WHICH RESULTS FROM
SOCIETY NOT HAVING ENOUGH RESOURCES TO
PRODUCE ALL OF THE THINGS PEOPLE WOULD LIKE
TO HAVE. SCARCITY IS THE CONDITION WHERE
UNLIMITED HUMAN WANTS FACE LIMITED
RESOURCES.
•
ECONOMICS IS THE STUDY OF HOW PEOPLE
SATISFY WANTS WITH SCARCE RESOURCES.
(SG#2)
•
NEEDS ARE THE BASIC REQUIREMENT FOR
SURVIVAL AND INCLUDES FOOD, SHELTER,
AND CLOTHING; WANTS A WAY OF
EXPRESSING A NEED AND ARE DESIRED FOR
SATISFACTION.
•
SCARCITY IS AN ISSUE WITH THE RICH AS WELL AS
THE POOR BECAUSE IT IS A HUMAN TRAIT THAT FEW
PEOPLE, REGARDLESS OF THEIR ECONOMIC STATUS,
ARE SATISFIED WITH WHAT THEY HAVE.
(SG #3)
•
THERE IS NO SUCH THING AS A FREE LUNCH
(TINSTAAFL), THIS MEANS THAT MOST THINGS IN LIFE
ARE NOT FREE BECAUSE SOMEONE HAS TO PAY FOR
PRODUCTION COSTS.
(SG #4)
•
ECONOMICS DESCRIBES ECONOMIC ACTIVITY AND
THE ECONOMIC CONCEPTS CAN HELP PEOPLE FIND
THE BEST WAYS TO MEET THEIR NEEDS AND WANTS
WITH LIMITED RESOURCES. PEOPLE SHOULD
UNDERSTAND ECONOMICS BECAUSE THE UNITED
STATES IS A FREE SOCIETY, ALL OF ITS CITIZENS
MAKE DECISIONS THAT AFFECT THE ECONOMY. IN
ADDITION, THE CITIZENS NEED AN UNDERSTANDING
OF ECONOMICS IN ORDER TO MAKE WISE DECISIONS.
THREE BASIC QUESTIONS
(SG #5)
–
–
–
WHAT MUST WE PRODUCE? SOCIETY MUST CHOSE
BASED ON ITS NEEDS.
HOW SHOULD WE PRODUCE? SOCIETY MUST
CHOOSE BASED ON ITS RESOURCES.
FOR WHOM SHOULD WE PRODUCE? SOCIETY MUST
CHOOSE BASED ON ITS POPULATION AND OTHER
AVAILABLE MARKETS.
HOW MIGHT THE ECONOMIC DECISIONS OF A
MOUNTAINOUS ISLAND SOCIETY DIFFER FROM THOSE
OF A MOUNTAINOUS LANDLOCKED SOCIETY? AN
ISLAND SOCIETY HAS WATER RESOURCES TO
CONSIDER AND LIKELY A MORE LIMITED
POPULATION.
THE FACTORS OF PRODUCTION
FACTORS OF PRODUCTION ARE RESOURCES NECESSARY TO
PRODUCE WHAT PEOPLE WANT OR NEED.
(SG #6)
•
•
•
•
LAND IS THE SOCIETY’S LIMITED NATURAL RESOURCES
NOT CREATED BY HUMANS—LANDFORMS, MINERALS,
VEGETATION, ANIMAL LIFE, AND CLIMATE.
CAPITAL IS THE MEANS BY WHICH SOMETHING IS
PRODUCED SUCH AS MONEY, TOOLS, EQUIPMENT,
MACHINERY, AND FACTORIES USED IN PRODUCTION.
LABOR IS THE WORKERS WHO APPLY THEIR EFFORTS,
ABILITIES, AND SKILLS TO PRODUCTION.
ENTREPRENEURS ARE RISK-TAKERS WHO COMBINE
THE LAND, LABOR, AND CAPITAL INTO NEW PRODUCTS
IN ORDER TO MAKE A PROFIT; ANYONE WHO DOES
SOMETHING NEW WITH EXISTING RESOURCES; THEY
ORGANIZE THE FACTORS OF PRODUCTION.
•
ENTREPRENEURS ARE AN ECONOMY’S DRIVING
FORCE BECAUSE OF THEIR ABILITIES TO START
NEW BUSINESSES AND INTRODUCE NEW
PRODUCTS MAY RE-ENERGIZE A SLUGGISH
ECONOMY OR STRENGTHEN A SUCCESSFUL
ECONOMY.
(SG #7)
•
PRODUCTION IS CREATING GOODS AND
SERVICES—THE RESULT OF LAND, CAPITAL,
LABOR, AND ENTREPRENEURS.
THE SCOPE OF ECONOMICS
(SG #8)
•
•
•
ECONOMICS DEALS WITH THE DESCRIPTION OF
ECONOMIC ACTIVITY—GROSS DOMESTIC PRODUCT,
UNEMPLOYMENT RATE, GOVERNMENT SPENDING, TAX
RATES, ETC.: KNOWING WHAT THE WORLD AROUND
US LOOKS LIKE.
ANALYSIS HELPS US TO DISCOVER (LOOK) AT THE
“WHY” THINGS WORK AND “HOW” THINGS HAPPEN OF
ECONOMIC ACTIVITY—WHY PRICES GO UP AND DOWN,
FOR EXAMPLE, OR HOW TAXES AFFECT SAVINGS.
EXPLANATION REFERS TO HOW ECONOMISTS
COMMUNICATE KNOWLEDGE OF THE ECONOMY AND
ITS ACTIVITIES TO THE SOCIETY’S POPULATION. FOR
EXAMPLE, IF WE ALL HAVE A COMMON UNDERSTANDING
OF THE WAY OUR ECONOMY WORKS SOME ECONOMIC
PROBLEMS WILL BE MUCH EASIER TO ADDRESS OR EVEN
FIX IN THE FUTURE.
THE SCOPE OF ECONOMICS
•
PREDICTION REFERS TO HOW YESTERDAY’S AND
TODAY’S ECONOMIC ACTIVITIES ADVISE US OF
POTENTIAL FUTURE ACTIVITY. IT CAN HELP PREDICT
WHAT MAY HAPPEN AS WELL AS THE LIKELY
CONSEQUENCES OF DIFFERENT COURSES OF ACTION.
•
ECONOMICS IS A SOCIAL SCIENCE
BECAUSE IT IS THE STUDY OF HUMAN
BEHAVIOR DUE TO IT LOOKING AT THE
DECISIONS PEOPLE MAKE AND HOW
THEY REACT TO THOSE DECISIONS.
IN THE DIAGRAM, WHAT SHOULD APPEAR IN PLACE OF THE QUESTION
MARK?
For Whom to Produce
WHAT FACTOR OF PRODUCTION DO THESE IMAGES
ILLUSTRATE?
A. LABOR
B. LAND
C. CAPITAL
D. ENTREPRENEURSHIP
ANS: B
WHAT FACTOR OF PRODUCTION DO THESE
IMAGES ILLUSTRATE?
A.
LAND
C.
CAPITAL
B.
LABOR
D.
ENTREPRENEURSHIP
ANS: C
WOULD AN ECONOMIST THINK THAT THE TEENAGER IN
THE CARTOON IS EXPRESSING A NEED OR A WANT?
EXPLAIN.
THE TEENAGER IS EXPRESSING A WANT, NOT A NEED. TO ECONOMISTS,
NEEDS ARE THINGS REQUIRED TO SURVIVE, SUCH AS FOOD, CLOTHING, AND
SHELTER. A WANT IS A WAY OF EXPRESSING A NEED.
SECTION 2: BASIC ECONOMIC CONCEPTS
• SCARCITY IN AN ECONOMIC SENSE—ONE
CANNOT GET ENOUGH ECONOMIC
PRODUCTS TO SATISFY INDIVIDUAL
WANTS AND NEEDS.
• DIFFERENCE BETWEEN A CONSUMER
GOOD AND CAPITAL GOOD
• CONSUMER GOOD IS INTENDED FOR FINAL
USE BY INDIVIDUALS.
• CAPITAL GOOD IS USED TO PRODUCE
OTHER GOODS AND SERVICES.
• DIFFERENCE BETWEEN A DURABLE GOOD
AND NON-DURABLE GOOD—
• DURABLE GOOD IS ANY GOOD THAT LASTS OVER 3
OR MORE YEARS WHEN USED ON A REGULAR
BASIS AND COULD BE USED OVER TIME.
• NON-DURABLE GOOD IS ANY GOOD THAT LASTS
FOR LESS THAN 3 YEARS WHEN USED ON A
REGULAR BASIS.
• A SERVICE IS WORK PERFORMED FOR
SOMEONE.
• A CONSUMER IS A PERSON WHO USES
GOODS AND SERVICES TO SATISFY
WANTS AND NEEDS.
• VALUE REFERS TO WORTH THAT CAN BE
EXPRESSED IN DOLLARS AND CENTS.
• THE PARADOX OF VALUE IS WHEN THE
SITUATION IN WHICH SOME NECESSITIES
(WATER) HAVE LITTLE MONETARY VALUE WHILE
SOME NON-NECESSITIES (DIAMONDS) HAVE A
MUCH HIGHER VALUE.
• IN ORDER FOR SOMETHING TO HAVE VALUE IS
MUST HAVE UTILITY.
• WEALTH IS THE ACCUMULATION OF THOSE
ECONOMIC PRODUCTS THAT ARE TANGIBLE,
SCARCE, USEFUL, AND TRANSFERABLE.
– REMEMBER: WEALTH IS USUALLY BASED ON
LIMITED NATURAL RESOURCES, WHEREAS
LABOR CAN PRODUCE MORE GOODS AND
SERVICES.
CIRCULAR FLOW OF ECONOMIC ACTIVITY
•
PRODUCT MARKET—WHERE GOODS AND SERVICES ARE
PURCHASED. INDIVIDUALS—PEOPLE LIVING IN
HOUSEHOLDS—BUSINESSES—GOODS AND SERVICES
ARE SOLD. FACTOR MARKET—DEVELOPMENT OF
GOODS.
•
THE WEALTH THAT AN ECONOMY GENERATES IS
MADE POSSIBLE BY THE CIRCULAR FLOW OF ECONOMIC
ACTIVITY. THE KEY FEATURE OF THIS CIRCULAR
FLOW IS THE MARKET, A LOCATION OR MECHANISM
THAT ALLOWS BUYERS AND SELLERS TO EXCHANGE A
CERTAIN ECONOMIC PRODUCT.
MARKETS ARE LOCATIONS (MECHANISMS) FOR
BUYERS AND SELLERS TO TRADE. THEY ARE
CLASSIFIED AS LOCAL, REGIONAL, NATIONAL,
GLOBAL, AND CYBERSPACE.
•
• THE FLOW OF PAYMENTS IN AN ECONOMY IS A CIRCULAR
FLOW.
• INDIVIDUALS—PEOPLE LIVING IN HOUSEHOLDS—WORK
FOR BUSINESSES, RENT THEIR PROPERTY (OR THEIR
CAPITAL) TO BUSINESSES, AND MANAGE AND OWN THE
BUSINESSES.
• ALL THESE ACTIVITIES GENERATE INCOMES– FLOWS OF
PAYMENTS FROM BUSINESSES.
• BUT HOUSEHOLDS THEN SPEND THEIR INCOMES– ON
CONSUMPTION GOODS, TAXES PAID TO GOVERNMENTS
(THAT THEN SPEND THE MONEY ON GOODS AND
SERVICES), AND ON ASSETS LIKE STOCK CERTIFICATES
AND BANK CDS THAT FLOW THROUGH THE FINANCIAL
SECTOR AND ARE THEN USED TO BUY INVESTMENT AND
OTHER GOODS. ALL THESE ARE EXPENDITURES.
FACTOR MARKETS
IINDIVIDUALS EARN THEIR INCOMES IN FACTOR MARKETS,
THE MARKETS WHERE PRODUCTIVE RESOURCES ARE
BOUGHT AND SOLD. THIS IS WHERE ENTREPRENEURS HIRE
LABOR FOR WAGES AND SALARIES, ACQUIRE LAND IN
RETURN FOR RENT, AND BORROW MONEY FOR INTEREST.
A FACTOR MARKET IS WHERE PEOPLE EARN THEIR
INCOMES. FACTOR MARKETS CENTER ON THE FOUR
FACTORS OF PRODUCTION: LAND, CAPITAL, LABOR,
AND ENTREPRENEURS.
NOTE: A TOY FACTORY IS A FACTOR MARKET BECAUSE
EMPLOYERS BUY AND WORKERS SELL LABOR THERE.
NOTE: LANDLORDS ARE PART OF A FACTOR MARKET BECAUSE THEY
PROVIDE LAND OR PROPERTY {A FACTOR OF PRODUCTION} TO
CONSUMERS IN EXCHANGE FOR RENT MONEY, WHICH IS THE
LANDLORD’S SOURCE OF INCOME.
PRODUCT MARKETS
AFTER INDIVIDUALS RECEIVE THEIR INCOME FROM THE
RESOURCES THEY SELL, THEY SPEND IT IN PRODUCT
MARKETS, WHERE PRODUCERS SELL THEIR GOODS AND
SERVICES TO CONSUMERS. THE MONEY THAT
INDIVIDUALS RECEIVE FROM BUSINESSES IN THE FACTOR
MARKETS RETURNS TO BUSINESSES IN THE PRODUCT
MARKETS. BUSINESS USE THIS MONEY TO PRODUCE MORE
GOODS AND SERVICES AND THE CYCLE, THROUGH
ECONOMIC ACTIVITY REPEATS ITSELF.
A PRODUCT MARKET IS WHERE PEOPLE
USE THEIR INCOME TO BUY FROM
PRODUCERS. PRODUCT MARKETS
CENTER ON GOODS AND SERVICES.
Product Markets
Businesses
Consumer
Spending
Individuals
Land
Capital
Labor
Entrepreneurs
Factor Markets
Income from
resources
• The circular flow diagram show the high degree of economic
interdependence in our economy. In the diagram, the factors of
production and the products made from them flow in one
direction. The payments for the factors, which consumers
spend on goods and services, flow in the opposite direction.
• IT IS USEFUL TO THINK OF THE ECONOMY AS BEING MADE
UP OF SEVERAL DIFFERENT PARTS, OR SECTORS. THESE
SECTORS RECEIVE VARIOUS COMPONENTS OF THE
NATIONAL INCOME, AND THEY USE THIS INCOME TO
PURCHASE THE TOTAL OUTPUT.
• SECTORS, ARE CRITICAL LINKS IN THE CIRCULAR FLOW OF
ECONOMIC ACTIVITY.
• THE THREE SECTORS ARE CONSUMER, INVESTMENT
(BUSINESS), AND GOVERNMENT.
• THE THREE SECTORS OF THE ECONOMY--- COMBINE IN
PURCHASING THE NATION’S GDP.
• SECTORS ARE CRITICAL LINKS IN CIRCULAR FLOW.
• CONSUMER SECTORS- IT IS THE BASIC UNIT, THE
HOUSEHOLD, IS MADE UP OF ALL PERSONS WHO OCCUPY A
HOUSE, APARTMENT, ETC. THIS IS THE MOST IMPORTANT
SECTOR.
• INVESTMENT/BUSINESS SECTORS- IT IS MADE UP OF
PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS.
IT IS THE PRODUCTIVE SECTOR RESPONSIBLE FOR
BRINGING THE FACTORS OF PRODUCTION TOGETHER TO
PRODUCE OUTPUT.
• GOVERNMENT SECTORS- INCLUDES ALL LOCAL, STATE,
AND FEDERAL LEVELS OF GOVERNMENT, RECEIVES
INCOME FROM SOURCES SUCH AS INDIRECT BUSINESS
TAXES, CORPORATE INCOME TAXES, SOCIAL SECURITY
CONTRIBUTIONS, AND PERSONAL INCOMES TAXES FROM
THE CONSUMER SECTOR.
•
PRODUCTIVITY—THE AMOUNT OF OUTPUT PRODUCED
BY A GIVEN AMOUNT OF INPUTS IN A SPECIFIC PERIOD OF
TIME. PRODUCTIVITY INCREASES WITH EFFICIENT
USE OF SCARCE RESOURCES.
•
IT IS IMPORTANT TO ECONOMIC GROWTH IN THAT
ECONOMIC GROWTH OCCURS WHEN A NATION’S
TOTAL OUTPUT OF GOODS AND SERVICES INCREASES
OVER TIME.
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.
•
•
PRODUCTIVITY INCREASES WHENEVER MORE GOODS
AND SERVICES ARE PRODUCED WITH THE SAME
AMOUNT OF RESOURCES IN THE SAME PERIOD OF
TIME.
DIVISION OF LABOR—WORK THAT IS DIVIDED UP SO THAT EACH
WORKER DOES JUST A FEW JOBS RATHER THAN A LOT OF DIFFERENT
JOBS.
SPECIALIZATION—TAKES PLACE WHEN WORKERS, ROBOTS, OR
REGIONS OF THE COUNTRY PERFORM ONLY THOSE TASKS THAT THEY
CAN DO BETTER AND MORE QUICKLY THAN OTHERS.
SPECIALIZATION AND DIVISION OF LABOR MAY IMPROVE
PRODUCTIVITY BECAUSE THEY LEAD TO MORE PROFICIENCY AND
GREATER ECONOMIC INTERDEPENDENCE.
SINCE SOME WORKERS DO FEWER TASKS AND OTHERS DO ONLY
THOSE TASKS THAT THEY PERFORM MORE EFFICIENTLY, EVERYONE
MUST RELY ON OTHERS TO PRODUCE WHOLE PRODUCTS THAT
SATISFY NEEDS AND WANTS WHICH IS HOW DIVISION OF LABOR AND
SPECIALIZATION HAVE MADE AMERICANS MORE ECONOMICALLY
DEPENDENT.
•
WHAT IS HUMAN CAPITAL?
–
•
IT IS ANOTHER IMPORTANT THING THAT
CONTRIBUTES TO PRODUCTIVITY. HUMAN CAPITAL
IS THE TOTAL ABILITY AND EAGERNESS OF A GROUP
OF PEOPLE TO DO THEIR JOB.
INVESTING IN HUMAN CAPITAL
–
INVESTING IN HUMAN CAPITAL IMPROVES
PRODUCTIVITY BECAUSE WHEN PEOPLE’S SKILLS,
ABILITIES, HEALTH, AND MOTIVATION ADVANCE,
PRODUCTIVITY INCREASES. FOR INSTANCE, THE
GOVERNMENT CAN HELP PROVIDE EDUCATION AND
HEALTH CARE; BUSINESSES CAN PROVIDE TRAINING;
INDIVIDUALS CAN FURTHER THEIR OWN EDUCATION.
NOTE: PRODUCTIVITY IS ALSO HELPED BY ECONOMIC
INTERDEPENDENCE WHICH IS THE FACT THAT WE
DEPEND ON ONE ANOTHER FOR GOODS AND
SERVICES.
ECONOMIC INTERDEPENDENCE AS A STRENGTH
WILL SHOW A LARGER, MORE DIVERSE MARKET
WHICH WILL LEAD TO A GREATER INCOME AND
PRODUCTIVITY.
ECONOMIC INTERDEPENDENCE AS A WEAKNESS
WILL CAUSE PROBLEMS WITH THOSE ADDITIONAL
MARKETS (CUSTOMERS OR SUPPLIERS) MAY
ADVERSELY AFFECT THE ECONOMY’S PRODUCTION
OUTPUT OR CUSTOMER BASE.
ALEX AND DYLAN MOW AND TRIM LAWNS. CURRENTLY,
EACH MAN MOWS AND TRIMS A LAWN BY HIMSELF, BUT
THE PROCESS TAKES A LONG TIME. THEY WOULD MOST
LIKELY IMPROVE THEIR EFFICIENCY IF
A. ALEX AND DYLAN MOW A LAWN AND THEN TRIM IT
TOGETHER.
B. ALEX MOWS A LAWN WHILE DYLAN TRIMS THE SAME
LAWN.
C. ALEX TRIMS DYLAN’S LAWN WHILE DYLAN TRIMS
ALEX’S LAWN.
D. ALEX AND DYLAN REDUCE THE NUMBER OF LAWNS
THEY MOW AND TRIM.
ANS: B
USE THE CHART TO ANSWER THE QUESTION.
WHAT TYPE OF RESOURCE DOES THE DATA IN THE CHART
REPRESENT?
A. CAPITAL
C. HUMAN
B. FINANCIAL ANS. C
D. NATURAL
WORKERS CONCENTRATING THEIR EFFORTS ON
A LIMITED NUMBER OF TASKS, THEREBY
INCREASING PRODUCTIVITY IS CALLED
A. ENTREPRENEURSHIP. C. SEQUESTRATION.
B. HOMOGENIZATION.
D. SPECIALIZATION.
ANS. D
DITCH DIGGER
COMPUTER PROGRAMMER
INTERNATIONAL FINANCIER
ALL OF THESE ARE EXAMPLES OF
A. SKILLED LABOR.
C. UNSKILLED LABOR.
B. HUMAN RESOURCES
D. CAPITAL RESOURCES.
ANS. B
OVER 80% OF THE PEOPLE LIVING IN THE APAC DISTRICT IN UGANDA
ARE FARMERS. HOWEVER, PROFITS ARE MINIMAL DUE TO THE HIGH
COSTS OF FARMING WITH POOR TOOLS AND MANUAL LABOR. APAC
WOULD BENEFIT FROM A STIMULATION OF WHICH TYPE OF
RESOURCE?
A. CAPITAL
C. MARKETING
B. HUMAN
D. NATURAL
ANS. A
IF A GOVERNMENT WANTED TO IMPROVE THE PRODUCTIVITY OF
ITS HUMAN RESOURCES IT COULD
A. LOWER INTEREST RATES TO MAKE BORROWING MONEY
EASIER.
B. INVEST MORE MONEY IN DEVELOPING SOLAR AND WIND
ENERGY.
C. COMMIT TO DRILLING FOR OIL IN PROTECTED WILDLIFE
AREAS.
D. EXPAND FUNDING AND OPPORTUNITIES FOR VOCATIONAL
TRAINING.
ANS. D
•
THE RELATIONSHIP BETWEEN TRADE-OFFS
AND OPPORTUNITY COST
– TRADE-OFFS ARE THE ALTERNATIVE CHOICES
PEOPLE FACE IN MAKING AN ECONOMIC
DECISION (THAT YOU GIVE UP). A DECISIONMAKING GRID LISTS THE ADVANTAGES AND
DISADVANTAGES OF EACH CHOICE.
– 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.
• MANY ECONOMISTS BELIEVE OPPORTUNITY
COST IS AN IMPORTANT FACTOR TO
CONSIDER IN ADDITION TO MONETARY
COST BECAUSE THE MONEY, TIME, OR
RESOURCES GIVEN UP WHEN ONE CHOICE
IS MADE RATHER THAN ANOTHER ARE JUST
AS IMPORTANT AS THE MONETARY COST OF
THE CHOICE THAT WAS MADE.
• EXAMPLE #2
– CAMILLE’S OPPORTUNITY COST IS
MEASURED IN TIME LOST PRACTICING FOR
THE PLAY.
•
•
•
THE PRODUCTION POSSIBILITIES FRONTIER DIAGRAM
ILLUSTRATES THE CONCEPT OF OPPORTUNITY COST.
– IT SHOWS THE COMBINATIONS OF GOODS AND/OR
SERVICES THAT CAN BE PRODUCED WHEN ALL
PRODUCTIVE RESOURCES ARE USED. THE LINE ON
THE GRAPH RESPRSENTS FULL POTENTIAL—THE
FRONTIER—WHEN THE ECONOMY EMPLOYS ALL
OF THESE PRODUCTIVE RESOURCES.
– IDENTIFYING POSSIBLE ALTERNATIVES ALLOWS AN
ECONOMY TO EXAMINE HOW IT CAN BEST PUT ITS
LIMITED RESOURCES INTO PRODUCTION.
CONSIDERING DIFFERENT WAYS TO FULLY EMPLOY ITS
RESOURCES ALLOWS AN ECONOMY TO ANALYZE THE
COMBINATION OF GOODS AND SERVICES THAT LEADS
TO MAXIMUM OUTPUT.
AN ECONOMY PAYS A HIGH COST IF ANY OF ITS
RESOURCES ARE IDLE. IT CANNOT PRODUCE ON ITS
FRONTIER AND IT WILL FAIL TO REACH ITS FULL
PRODUCTION POTENTIAL.
•
ECONOMIC GROWTH MADE POSSIBLE BY
MORE RESOURCES, A LARGER LABOR FORCE, OR
INCREASED PRODUCTIVITY CAUSES A NEW
FRONTIER FOR THE ECONOMY.
•
AN ECONOMIC GROWTH WOULD STIMULATE
GREATER PRODUCTION POSSIBILITIES
BECAUSE IT WOULD INDICATE A LARGER
LABOR FORCE, MORE GOODS AND SERVICES
ARE CREATED; NEWLY DISCOVERED NATURAL
RESOURCES OPEN UP NEW PRODUCTS AND
SERVICES.
THE GRAPH SHOWS HOW MANY BASKETBALLS AND HOW
MANY WHOOPEE CUSHIONS CAN BE PRODUCED GIVEN A
LIMITED SUPPLY OF RESOURCES. SUCH A GRAPH IS
CALLED
A. PRICE GRAPH.
C. SUPPLY CURVE.
B. DEMAND CURVE.
D. PRODUCTION POSSIBILITIES
GRAPH
ANS. D
THE GRAPH IS A PRODUCTION POSSIBILITIES CHART.
WHICH OF THE FOLLOWING MIGHT CAUSE THE LINE TO
MOVE TO THE RIGHT?
A. HIGHER LABOR COSTS
B. AN INCREASE IN PRICES
C. SHORTAGE OF REQUIRED RESOURCES
D. IMPROVED TECHNOLOGY IN WHOOPEE CUSHION
PRODUCTION
ANS. D
IN THE PRODUCTION POSSIBILITIES FRONTIER SHOWN IN
THIS GRAPH, WHAT COULD CAUSE PRODUCTION TO MOVE
FROM POINT B TO POINT D?
A.
A STRIKE BY INDUSTRY WORKERS
B.
INCREASED PRODUCTIVITY
C.
AN INCREASE IN BUTTER PRODUCTION WHILE GUN
PRODUCTION REMAINS THE SAME
D.
AN INCREASE IN GUN PRODUCTION WHILE BUTTER
PRODUCTION REMAINS THE SAME
ANS: B
IN THIS PRODUCTION POSSIBILITIES FRONTIER, WHAT COULD CAUSE
PRODUCTION TO MOVE FROM POINT A TO POINT E?
A.
B.
C.
D.
FACTORIES THAT ARE AVAILABLE BUT IDLE
INCREASED PRODUCTIVITY
THE AVAILABILITY OF ADDITIONAL RESOURCES
ECONOMIC GROWTH
ANS: A
IN THE TIME PERIOD COVERED BY THE PRODUCTION POSSIBILITIES
CURVE, THE COMPANY DECIDES TO MAKE 3 GALLONS OF RED PAINT.
HOW MANY GALLONS OF BLUE PAINT CAN THE COMPANY MAKE WITH
THE AVAILABLE TIME AND RESOURCES?
A.
2
C.
6
B.
4
D.
8
ANS: B
BUILDING SIMPLE MODELS HELPS
ECONOMISTS ANALYZE OR DESCRIBE
ACTUAL ECONOMIC SITUATIONS.
•
•
•
•
ECONOMIC MODEL IS A SIMPLIFIED PICTURE OF WHAT
SOMETHING IS LIKE OR HOW IT WORKS.
ECONOMIC MODELS ARE USEFUL BECAUSE THEY
REDUCE A SITUATION TO ITS BASIC ELEMENTS AND
ALLOW ECONOMISTS TO FOCUS ON THOSE
ELEMENTS.
THE CIRCULAR FLOW DIAGRAM AND A PRODUCTION
POSSIBILITIES FRONTIER ARE TWO EXAMPLES OF
ECONOMIC MODELS.
IF THE ECONOMIC MODELS TURNS OUT TO BE
INCORRECT, THE MODEL IS REVISED OR DISCARDED.
•
•
COST-BENEFIT ANALYSIS HELPS
ECONOMISTS EVALUATE ALTERNATIVES
BY LOOKING AT EACH CHOICE’S COST AND
BENEFIT.
TAKING SMALL, INCREMENTAL STEPS IN
IMPLEMENTING AN ECONOMIC DECISION
HELPS ECONOMISTS TEST WHETHER THE
ESTIMATED COST OF THE DECISION WAS
CORRECT.
–
THE COST AND BENEFIT OF BUYING A
BATTERY-OPERATED CD PLAYER IS…THERE IS
A COST IN BUYING THE BATTERIES TO
OPERATE THE CD PLAYER AND A BENEFIT IN
LISTENING TO MUSIC WHEREEVER YOU GO.
•
•
•
STUDYING ECONOMICS WILL HELP US KNOW HOW THE
ECONOMY WORKS ON A DAILY BASIS. THE STUDY OF
ECONOMICS HELPS US TO BECOME BETTER DECISION
MAKERS (WHAT, HOW, AND FOR WHOM DECISIONS).
IT HELPS US UNDERSTAND A FREE ENTERPRISE
ECONOMY, WHERE PEOPLE AND PRIVATELY OWNED
BUSINESSES RATHER THAN THE GOVERNMENT MAKE
THE MAJORITY OF THE ECONOMIC DECISIONS.
– IN ADDITION, ECONOMICS LOOKS AT THE ROLES OF
BUSINESS, LABOR, AND GOVERNMENT IN THE
AMERICAN ECONOMY. THESE ROLES AFFECT
AMERICANS’ STANDARD OF LIVING.
IT PROVIDES AN UNDERSTANDING OF A NUMBER OF
FACTORS THAT HAVE A BEARING ON OUR STANDARD OF
LIVING, WHICH IS THE QUALITY OF LIFE BASED ON
THE POSSESSION OF THE NECESSITIES AND LUXURIES
THAT MAKE LIFE EASIER (MEANING HOW WELL
PEOPLE LIVE BASED ON THE THINGS THEY OWN THAT
MAKE LIFE EASIER).
–
FOR EXAMPLE, A SUPERMARKET AFFECTS MY STANDARD OF LIVING
BY OFFERING A VARIETY OF FOODS, AND A DEPARMENT STORE
AFFECTS MY STANDARD OF LIVING BY OFFERING A VARIETY OF
CLOTHING.
THIS CARTOONIST WOULD LIKE GOVERNMENT TO
A.
SET HIGHER ERGONOMIC STANDARDS FOR THE WORKPLACE.
B. INTERFERE WITH BUSINESS LESS.
C. PROTECT BUSINESS MORE.
D. PROVIDE MORE PUBLIC SERVICES.
ANS: B