Unit 1: Foundations of Economics What comes to your mind when you hear the word SCARCE? (video about scarcity) What is Economics? “A science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants.” – Addison-Wesley OBJECTIVES 1.1 EXPLAIN why scarcity and choice are basic problems of economics IDENTIFY land, labor, and capital as the three factors of production, and identify the two types of capital EXPLAIN the role of entrepreneurs EXPLAIN why economists say all resources are scarce What is Economics? So then the big two concepts are that: Resources are scarce! Society has unlimited needs and wants! Economics decides the “best” way of providing one to the other VOCABULARY: Need Want Economics Goods Services Scarcity Definition A situation in which the amount of something actually available would not be sufficient to satisfy the desire for it, if it were provided free of charge. … MORE VOCABULARY Shortage Factors of Production Land Labor Capital Physical Capital Human Capital Factors of Production There are 4 factors that must all be used to produce anything Natural Resources (also referred to as “land”) Factors of Production There are 4 factors that must all be used to produce anything Labor – effort of a person for which they are paid Factors of Production There are 4 factors that must all be used to produce anything Capital – human-made resources used to create other goods Factors of Production 3 Kinds of Capital Physical Capital – Also called Capital Goods, objects that are used to produce other goods Factors of Production 3 Kinds of Capital Human Capital – knowledge or skills workers get from education and experience Factors of Production There are 4 factors that must all be used to produce anything Entrepreneurship – person who takes a risk in combining the other 3 factors to create a new good VOCABULARY CONTINUED… Entrepreneurs FACTORS of PRODUCTION Example of FRENCH FRIES … page 6 IN N OUT Making Economic Decisions Every decision we make involves trade-offs – alternatives that we must give up when we make a choice – “I could stay up for 3 hours playing Halo, study, or sleep.” Example PROFILE – Gary Becker! Read p. 7 about Gary Becker’s thoughts about the “marriage market”… hmmm… Then discuss with neighbor: 1. Do you agree or disagree that economics guides even life’s most personal decisions??? 1.1 QUIZ – get a partner! Number your paper 1 - 6 1. Which of the following are factors of production? a. b. c. d. Capital and Land Scarcity and shortages Technology and productivity economics and business decisions Answer is … a. capital and land Next question … 2. Which of the following is an example of using physical capital to save time and money? a. hiring more workers to do a job? b. building extra space in a factory to simplify production c. switching from oil to coal to make production cheaper d. lowering workers’ wages to increase profits Answer is … b. building extra space in a factory to simplify production next question … 3. To what part of an industry does a worker’s education contribute? a. b. c. d. technology physical capital human capital scarce resources Answer is … c. human capital next question … 4. Which of the following is an entrepreneur? a. a person who earns a lot of money as a singer or dancer b. a person who creates a game and sells it to a game manufacturer c. a person who starts an all-organic cleaning supplies business that employs others d. a person who works as a highly paid computer programmer Answer is … c. a person who starts an all-organic cleaning supplies business that employs others Next … 5. What is the difference between a shortage and scarcity? a. A shortage can be temporary or long-term, but scarcity always exists. b. A shortage results from rising prices; scarcity results from falling prices. c. A shortage is a lack of all goods and services; scarcity concerns a single item. d. There is no real difference between a shortage and scarcity answer … a. A shortage can be temporary or longterm, but scarcity always exists! next…. 6. What does an economist mean by the term LAND? a. farmland only b. food crops grown on farmland as well as the farmland itself c. goods and services that are produced form the land d. all natural resources used to produce goods and services answer … d. all natural resources used to produce goods and services! Section 1.2 – Opportunity Cost FIVE appealing VACATION Destinations… Hawaii Paris Dunns River Falls, Jamaica Ireland Alaska Volunteer: What is your first choice? What is your second choice? Making Economic Decisions The most desirable of the options you pass up is called the Opportunity Cost Rank sleep, studying, and playing video games 1st, 2nd, and 3rd on a list for what you value the most Making Economic Decisions 1st Place is what you would choose to do 2nd Place is your opportunity cost (you give it up to do option 1) Making Economic Decisions What other option do you have other than using 3 hours for one task? You could split your time among multiple activities! Thinking at the Margin – decision involving adding one unit and subtracting one unit, rather than all or nothing Making Economic Decisions Options Benefit Opportunity Cost 0 hours studying, 3 hours sleeping F on Test None 1 hours studying, 2 hours sleeping C on Test 1 hour of sleep 2 hours studying, 1 hour sleeping B on Test 2 hours of sleep 3 hours studying B+ on Test 3 hours of sleep Making Economic Decisions There is a point at which you are paying the same increase in cost, but seeing lower benefits You must make the decision as to whether the cost is worth it This same process is used by businesses and consumers to make decisions QUIZ time .. grab a partner! Number your paper 1 - 4 1. The economic concept of guns or butter means that … a. a person can spend extra money either on sports equipment or food. b. a company must decide whether to manufacture guns or butter c. a government must decide whether to produce more or less military or consumer goods d. a government can buy unlimited military and civilian goods if it is rich enough answer … c. a government must decide whether to produce more or less military or consumer goods … trade off …. due to scarcity! next.. 2. If a person who wants to buy a compact disc (CD) has just enough money to buy one, and chooses CD A instead of CD B, then CD B is the a. b. c. d. trade-off opportunity cost decision at the margin opportunity at the margin answer is … b. opportunity cost next… 3. A decision-making grid is a visual way of: a. b. c. d. examining opportunity costs selling goods or services making marginal decisions identifying shortages answer is .. a. examining opportunity costs! next … 4. A decision is made at the margin when each alternative considers a. a different trade-off than the others b. where the most costly alternative will be. c. what the “all or nothing” alternative will be. d. cost and benefit ranked in progressive units. answer … c. d. cost and benefit ranked in progressive units Section 1.3 – Production Possibilities Curves GRAPHS…. WHY do graphs sometimes show information more clearly than text or tables? Production Possibilities Possibilities Graph – shows alternatives to what an economy can produce Let’s say we can produce 2 things: Guns and Butter Production Production Possibilities Production Possibilities Possibilities Graph – shows alternatives to what an economy can produce The outer red line shows the maximum possible output with any given combination This is the Production Possibilities Frontier (or Curve) Production Production Possibilities To move from one point to another, the economy must make tradeoffs Production Possibilities Any point along the line shows the economy operating at maximum efficiency Any point below the line is underutilization – they are not getting all that they could Any point above the line is presently impossible, until new resources are available Production Possibilities Why does the graph curve instead of making a straight line? Law of Increasing Costs – as production increases for one item, more and more resources are necessary to increase production of the second item! The OPPORTUNITY COST increases… Production Possibilities Every resource is best suited for certain types of goods Farmland and cows make butter Metals and factories make guns and many times you hear about butter vs. guns due to military spending on weaponry using resources … To convert butter production to guns, you must sell the cows and build new factories on the land quiz time Number your paper 1 – 4 1. A production possibilities curve shows the relationship between the production of: a. b. c. d. farm goods and factory goods two types of farm goods two types of factory goods any two categories of goods answer d. any two categories of goods. next … 2. The line on a production possibilities curve showing the relative amounts of two types of goods produced using all resources is called the a. b. c. d. production possibilities frontier opportunity cost line utilization of resources maximum possible production line answer … a. production possibilities frontier question … 3. The law of increasing costs means that as production shifts from one item to another, a. the cost of production gets cheaper and cheaper. b. the cost of producing an item stays the same no matter how many are produced. c. more and more resources are necessary to increase production of the second item d. the land costs of increasing production rise much more steeply than do the labor costs answer is … c. more and more resources are necessary to increase production of the second item and last question … 4. The curve usually seen in a production possibilities frontier can be explained by: a. b. c. d. growth in the economy underutilization of resources increasing an economy’s efficiency the law of increasing costs final answer is … d. the law of increasing costs! An economy that is efficient is … producing the maximum amount of goods and services .. now that’s efficient!