The Economic Way of Thinking
CHAPTER 1
Scarcity: The Basic Economic Problem
 KEY CONCEPTS

Economics — study of how people use resources to satisfy
wants
 how individuals/societies choose to use resources
 organizes, analyzes, interprets data about economic
behaviors
 develops theories, economic laws to explain economy,
predict future
Scarcity: The Basic Economic Problem
 Scarcity

is the economic problem of
having seemingly
unlimited human
needs and wants, in a
world of limited resources.
 Why does it exist?

It exists because wants are
unlimited and resources
are limited
Basic Economic Principles
Principle 1: People Have Wants
Wants — desires that can be
met by consuming products
 Needs — things necessary
for survival
 Scarcity — lack of resources
available to meet all human
wants, not a temporary
shortage



People make choices about all
their needs and wants
Wants are unlimited, ever
changing
Basic Economic Principles
Principle 2: Scarcity Affects Everyone
 Scarcity affects which goods and services are
provided
Goods — physical objects that can be bought
 Services — work one person does for another for
pay
 Consumer — person who buys good or service for
personal use
 Producer — person who makes a good or
provides a service

Video Clip: Scarcity & Choice
Three Basic Economic Questions
 Every society must answer three basic
economic questions because of scarcity.
 Societies answer these questions differently,
leading to a variety of economic systems.
Three Basic Economics Questions
 Question 1: What Will Be Produced?
 Societies
must decide on mix of goods to produce
depends on their natural resources
 Some countries allow producers and consumers
to decide
 In other countries, governments decide
 Must also decide how much to produce; choice
depends on societies’ wants
Three Basic Economics Questions
 Question 2:
How Will It Be
Produced?

Production decisions involve
using resources efficiently


Influenced natural resources
Societies adopt different
approaches

labor-intensive methods
versus capital-intensive
methods depends on
availability
Three Basic Economics Questions
 Question 3:
For Whom Will It Be
Produced?

How goods and services are
distributed involves two
questions
how should each person’s
share be determined?
 how will goods and services be
delivered to people?

The Factors of Production
Factors of production
 resources needed to
produce goods and
services
1. land
2. labor
3. Capital
4. entrepreneurship
supply is limited
The Factors of Production
 Factor 1: Land
Land means all natural resources on
or under the ground
includes water, forests, wildlife,
mineral deposits

The Factors of Production
Factor 2: Labor
Labor is all the human time,
effort, talent used to make
products
physical and mental effort used
to make a good or provide a
service

The Factors of Production
 Factor 3: Capital
Capital is a producer’s physical resources
includes tools, machines, offices, stores, roads,
vehicles
sometimes called physical capital or real capital
 Workers invest in human capital — knowledge
and skills
workers with more human capital are more
productive

The Factors of Production
 Factor 4: Entrepreneurship
Entrepreneurship — vision, skill, ingenuity,
willingness to take risks
 Entrepreneurs anticipate consumer wants, satisfy
these in new ways
develop new products, methods of production,
marketing or distributing
risk time, energy, creativity, money to make a
profit

Practice
 Label the 4 Factors f Production
(CL
Lesson 5, pg 26)
 Factors of Production CL Lesson 6
Activity in groups of 2 -3 .
Making Economic Choices
 Two factors affect economic decisions:
1.
2.
Incentives — benefits that encourage people
to act in certain ways
Utility — benefit or satisfaction gained from
using a good or service
 Choices vary between individuals based on what is
best for him / her
Making Economic Choices
 Factor 1: Motivations for
Choice
 People motivated by
incentives, expected
utility, desire to
economize

They weigh costs against
benefits to make
purposeful choices

Motivated by self-interest
Making Economic Choices
 Factor 2: No Free Lunch

All choices have a cost
 choosing one thing
means giving up
another, or paying a
cost
 cost can take form of
money, time, other
thing of value
Trade-Offs and Opportunity Cost
 Trade-off
 is
alternative people
give up when they
make a choice
usually means
giving up some, not
all, of a thing to get
more of another
Trade-Offs and Opportunity Cost
 Example of a Trade Off
 Jessica
wants to earn college credit over summer
semester-long university course offers more
credits
six-week high school course leaves time for
vacation
Trade-Offs and Opportunity Cost
 Opportunity cost is value of next-best alternative a
person gives up
 not
the value of all possible alternatives
Example of Opportunity Cost
 Dan chooses to work for six months so he can travel for
six months
 opportunity cost = six months of salary

Video Clip: Opportunity Cost
Opportunity Cost Activity
 In
a group of 2 -3 consider this scenario:
 You have won $1,000. Create a chart with these
columns:
What will you buy?
What will you gain from each choice?
What do you give up with each choice? (What’s
the opportunity cost?)
Analyzing Economic Choices
 Cost-benefit analysis:

examines the costs and expected benefits of
choices
one of most useful tools for evaluating relative
worth of economic choices
Analyzing Economic Choices
 Marginal Costs and Benefits
Marginal cost
 additional cost of using one more unit of a good or
service
 Marginal benefit
 additional benefit of using one more unit of a good or
service

Analyzing Production Possibilities
 KEY CONCEPTS
 Production possibilities curve (PPC) is one model (graph)
PPC shows the maximum goods or services that can be produced
from limited resources
 also called production possibilities frontier

 PPC
 PPC based on assumptions:
resources are fixed
 all resources are fully employed
 only two things can be produced
 technology is fixed

Graphing the Possibilities
 Production Possibilities Curve
 PPC runs between extremes of
producing only one item or the other
 Data is plotted on a graph; lines
joining points is PPC


shows maximum number of one item
relative to other item
PPC shows opportunity cost of each
choice

more of one product means less of the
other
What We Learn from PPCs

Efficiency — producing the maximum amount of goods
and services possible

Underutilization — producing fewer goods and
services than possible
Why is the PPC a Curve?
 Law of increasing opportunity costs
as
production switches from one product to
another, more resources needed to increase
production of second product
Reasons for increasing cost of making more of one
product
 need new resources, machines, factories
 must retrain workers
 Costs paid by making less and less of other product

Let’s Look at Some Examples
 PPC Practice
Changing Production Possibilities
 A country’s supply of resources changes over time
 Example:
U.S. in 1800s grew, gained resources,
workers, new technology
 new resources mean new production possibilities
beyond frontier
 Increased production shown on PPC as shift of curve
outward
 Increase in total output called economic growth
PPF—The Curve
 What Does Guns And
Butter Curve Mean?


In a theoretical
economy with only two
goods, a choice must be
made between how much
of each good to produce.
As an economy produces
more guns (military
spending) it must reduce
its production of butter
(food), and vice versa.
Video Clip: Individual and Society PPCs
 CL Lesson 7 Activity pg. 35 – PPC Problems
Microeconomics and Macroeconomics
 Microeconomics
 Microeconomics examines specific, individual elements in an
economy


prices, costs, profits, competition, consumer and producer
behavior
Some Topics of Interest: business organization, labor markets,
environmental issues
Microeconomics and Macroeconomics
 Macroeconomics
 Macroeconomics studies sectors — combination of all
individual units


Includes consumer, business, public or government sectors
Macroeconomics studies national or global topics:

monetary system, business cycle, tax policies, international trade
Examples of Macro and Micro
 Which is it?
1.
2.
3.
4.
5.
National Unemployment Figures Rise
World Trade Organization Meets
Shipbuilder Wins Navy Contract
Cab Drivers on Strike!
Gasoline Prices Jump 25 Cents