Chapter 1
What is
Economics?
Economics:
• The study of how people
seek to satisfy their
needs and wants by
making choices about
how to use scarce
resources
Needs vs. Wants
• Needs: things
NECESSARY for
survival
• Wants: things we desire
but are NOT
ESSENTIAL to survival
Scarcity
•Limited quantities
of resources to
meet unlimited
wants
Shortage
•A situation in which a
good or service is
unavailable temporarily
Factors of Production
• Land
• Labor
• Capital
–Human
–Physical
Remember these!
You will hear them a
lot this semester!
Land
Natural resources
(land, coal, water,
forests, etc.)
Labor
The effort people
devote to a task for
which they are paid
Capital
–Physical: Human made objects
used to create other
goods and services
–Human: The skills and
knowledge gained by a worker
through education and
experience
Entrepreneurs
• Ambitious leaders who
combine land, labor, and
capital to create and market
new goods and services.
Factors of Production
Model
LAND - cotton
LABOR -seamstress
ENTREPRENEUR –designer,
business owner
CAPITAL – thread, sewing machine.
GOOD – t-shirt
Factors of Production Model
Opportunity Cost
There is no such thing
as a free lunch!
Spring Break…Which
would you choose?
Hawaii
Las Vegas
Paris
Vail
New York
Cancun
Tokyo
Tahiti
Trade-offs…options when
you make a choice.
• Individuals
–work or
free time
–study or
sleep
• Business
–Goods or
Services
–Produce or
Sell
Decision Making Grid
Alternatives
Go to College Take a year off
Benefits
Decision
Opportunity
Cost
Benefits
forgone
Go to College
right away
Take a year off
after grad.
Thinking at the Margin
Options
1 summer off
before college
1 semester off
before college
1 year off
before college
Benefit
Opportunity
Cost
Production
Possibilities Curves
• Graphs that show
alternative ways to use
an economy’s resources
Coffee
A
50
B
40
30
C
20
10
D
0
25
50
70
75
Tea
Efficiency
• Efficiency means using resources
in such a way as to maximize the
production of goods and services.
• An economy producing output
levels on the production
possibilities frontier is operating
efficiently.
Coffee
50
Productions
possibilities frontier
75
Tea
Efficiency
• Efficiency also means that in
order to produce more of one
good you must give up producing
some of the other good.
• This is because the line
represents the limits that scarce
resources place on our production
possibilities.
Coffee
Efficiency
Coffee
A
50
Tea
50
0
40
50
20
70
0
75
B
40
30
C
20
10
D
0
25
50
70
75
Tea
Underutilization
• Any point inside the line indicates an
underutilization of resources.
• This economy is not using all of the
resources that are available.
• This economy is not producing all the
goods and services it could be producing.
Coffee
50
75
Tea
Growth
• Growth If more resources
become available, or if technology
improves, an economy can
increase its level of output and
grow. When this happens, the
entire production possibilities
curve “shifts to the right.”
Coffee
50
75
Tea
Law of Increasing Costs
• As we shift resources from making one
good to another, the cost of producing the
second item increases.
• In other words, we have to give up more
and more of the first item for each
additional unit of the second item.
• This is because some resources are better
suited for one purpose over another.
Coffee
Law of Increasing Costs
Coffee
A
50
Tea
50
0
40
50
20
70
0
75
B
40
30
C
20
10
D
0
25
50
70
75
Tea
Chapter 1
Things to think about…
What is the
difference between
a good and a
service?
Why is the idea of
scarcity a starting
point for thinking
economically?
How is scarcity
different from
shortages?
What special
advantages does
physical capital
offer?
What role do
entrepreneurs
play in the
economy?
Name three
examples that
illustrate how all
decisions involve
trade-offs.
Why must the
opportunity cost of
a decision always
be something
desirable?
What does the term
“guns or butter”
mean?
What does it mean
to “think at the
margin”?
What are the
opportunity costs
involved in:
Eating pizza
Going to see a
movie on a Tuesday
Going to see a movie on a
Saturday
Watching TV
Studying for a test
Finishing High
School
Getting Married
Having a Kid
Create a decision
making grid to
defend a decision
you will make today
Decide whether to work 2, 4, or 6
hours at an after-school job by
comparing the opportunity cost and
benefit of each alternative.
Cost
2 hours
4 hours
6 hours
Benefit
Decide whether to finish the semester
and graduate by comparing the
opportunity cost and benefit for each
alternative
Cost
Graduate Now
Graduate later
Get a GED
Drop Out
Benefit
How is
underutilization
depicted on a
production
possibilities frontier?
How does a
production
possibilities curve
illustrate how efficient
an economy is?
How does a
production
possibilities curve
illustrate opportunity
cost?
Describe a specific
event that would
make each of the
following happen to
a production
possibilities curve:
•
A point moves down and to the left
•
The frontier shifts to the right
Describe three services that
the government provides to
its citizens then identify
some of the opportunity
costs of providing those
services.