FUNDAMENTAL ECONOMIC CONCEPTS
Scarcity and Factors of Production
INTRODUCING ECONOMICS AND COSTS
FACTORS OF PRODUCTION
WHAT IS ECONOMICS?
PRODUCTIVE RESOURCES
The study of how people, businesses, and government
seek to meet wants and needs by making decisions.
Factors of production are economic resources used
to produce goods and services to satisfy wants.
THE FOUR FACTORS
THE BASIC ECONOMIC PROBLEM = SCARCITY
Unlimited
Wants
limited
Resources
Choices
and
Trade‐
Offs
 Scarcity: a basic condition that exists when
unlimited wants exceed limited resources.
1. Land: the natural resources
2. Labor: the human effort required to produce a good
3. Capital: the tools (physical capital) and skills (human
capital) used to produce goods
4. Entrepreneurship: the risk taker who combines the
other three factors of production to produce a good
Factor
Payment
Examples
COSTS OF ECONOMIC DECISIONS
Land
Rent
Coal, oil, trees
Any decision that we make entails a sacrifice. These
sacrifices are known as opportunity costs.
Labor
Wages
Cashier, waiter, teacher
Capital
Interest
Oven, hammer, knowledge
Entrepreneur‐
ship
Profit
Opportunity Cost: the next best alternative given up when
individuals, businesses, and governments confront
scarcity by making choices.
*the 2nd choice*
Costs in Action!
Billy is taking Cindy on a date. In Troup County his options
are: a movie, dinner at Longhorn, or dirt road riding.
Billy thinks Cindy would like dinner more than a movie,
and he knows she hates dirt. What is the opportunity
cost of his decision to take Cindy to dinner at Longhorn?
Put 1 by Billy’s choice and circle the
opportunity cost.
Steve Jobs (Apple),
Bill Gates (Microsoft)
MISCELLANEOUS NOTES
 The productivity of labor can be increased by investing
in human capital through education or training
 Entrepreneurship involves risk‐taking, since businesses
may fail. It is different than labor because labor does
not have anything invested in the business.
CHECK YOURSELF
1. An individual decides to pay $8 to see a movie instead of
buying an $8 meal. What is the opportunity cost of the movie?
A) the satisfaction missed by not eating the meal
B) the $8 paid to see the movie
C) the time spent watching the movie
D) the satisfaction received by going to the movie
2. Entrepreneurship and labor interact in which of the following
ways?
A) Entrepreneurship makes decisions about use of labor.
B) Labor makes decisions about use of entrepreneurship.
C) Both receive payment in the form of interest.
D) Both receive payments in the form of rent
FUNDAMENTAL ECONOMIC CONCEPTS
Production Possibilities Frontier
EXPLAINING THE PPF
GRAPH IT: A NATION’S PPF
Because resources are scarce, producers face trade‐
offs/opportunity cost in deciding what to produce. The
production possibilities frontier helps us visualize these
trade‐offs graphically.
THE PRODUCTION POSSIBLITIES FRONTIER
 The basic concept: when a person/nation/business
chooses to produce more of Good A, he must produce
less of Good B
Purpose
•Illustrates opportunity costs
•Graphs different quantities of two goods
that firm or government can produce
with fixed resources
Common
Names
•PPF -Production Possibility Frontier
•PPC -Production Possibility Curve
Terms
Point of efficiency, underutilization, impossible
Which of the following is MOST important for economic
growth?
A) efficient use of resources B) ample tax revenues
C) availability of resources
D) a large labor force
A. Moving from point X to point Y incurs and opportunity cost of
butter.
B. Moving from point X to point Y incurs an opportunity cost of
guns.
C. At point X, this country is producing more butter than guns.
D. This country does not have to give up any guns to produce
more butter.
In this production possibilities graph, what might cause the
frontier to move to the left?
A) a shortage of needed raw materials
B) an increase in the number of workers
C) increased efficiency because of new technology
D) increased demand for butter
 Points A and B all represent outputs that are 100%
efficient. They are called Points of Efficiency.
 Point C is unattainable because it is outside the
production possibilities frontier. It is called
Impossible because New Zealand does not have
enough resources to reach this point.
 Point E indicates that productive resources are not
being utilized as efficiently as possible. It is called
Underutilization.
 2 things cause the PPC to grow: Technology and
Resources
 IRDL – Increase Right Decrease Left
ASSUMPTIONS
MARIGNAL DECISIONS
It is assumed that Producers and Consumers make rational
decisions through using a cost‐ benefit analysis, and will
choose to produce or consume a good when the benefits
of doing so exceed the costs.
COST < BENEFIT
FUNDAMENTAL ECONOMIC CONCEPTS
Economic Systems
ECONOMIC SYSTEM BASICS
PLANNED/COMMAND AND MIXED ECONOMIES
INTRODUCING ECONOMIC SYSTEMS
PLANNED/COMMAND ECONOMIES
An economic system addresses the allocation of scarce
resources for a given economy. Economic systems are
classified based on who answers the three fundamental
economic questions.
The Bottom Line
Central planners answer the basic economic questions.
THE THREE BASIC ECONOMIC QUESTIONS
1. What to produce?
2. How to produce?
3. For whom to produce?
The Economic Systems
COMMAND
MIXED
MARKET
Main Characteristics
The government owns the means of production.
The government determines resource allocation and
prices.
Other Details
The elimination of economic incentives creates market
inefficiencies and results in shortages and rationing.
Types
If the political system is authoritarian, it is referred to as a
command economy; if the political system is democratic, it
is referred to as a planned economy.
Examples
Most famously, the Soviet Union.
MIXED ECONOMIES
GOALS
All systems adhere to certain goals which align to how
the systems answer the basic questions:
Freedom
Security
Equity
Stability
Growth
Full Employment
Efficiency
The Bottom Line
The state and market answer the basic questions.
Main Characteristics
A mixed economy tries to preserve the market economy’s
efficiency while correcting the inequality it creates.
Examples
Almost all modern economies.
MARKET ECONOMIES
The Bottom Line
Individual actors answer the basic economic questions.
Main Characteristics
Individuals own the means of production.
Supply and demand guide resource allocation and prices.
Other Details
Also known as “laissez‐faire” capitalism. Based on the ideas
of Adam Smith; in his book The Wealth of Nations, Smith
writes of an “invisible hand” that guides the seemingly
chaotic actions of individual producers and consumers to
an efficient equilibrium.
Examples
No pure market economies exist, but Hong Kong and
Singapore come the closest to the pure market ideal.
COMPARING ECONOMIC SYSTEMS
Type of
Economy
Command
Mixed
Market
How are
questions
answered?
By the
government
By the government
and individuals
By the Individuals
Which goals?
MACROECONOMICS
The Circular Flow Model
INTRODUCING THE CIRCULAR FLOW MODEL
THE FLOW, ILLUSTRATED
PURPOSE
The circular flow model shows the relationships between
different sectors of the economy (households,
businesses, government)
THE GROUPS
Households
Own the factors of production; purchase
goods and services from firms
Firms
Produce goods and services using the
factors of production purchased from
households
Government
Provides services to households and
businesses in exchange for taxes.
THE FACTOR AND PRODUCT MARKETS
Factor market:
 Households provide the factors of
production (Land, labor, capital,
entrepreneurship) to firms.
 Firms pay households (rent, wages, interest,
profit)
Product market:
 Firms sell goods and services to households
 Households pay for goods and services
Money flows in the opposite direction as
factors, goods, and services.
TEST YOURSELF!!
Which transaction below will take place in the product
market on a circular flow diagram?
A. Smithville Farm's purchase of 3 new tractors.
B. The Pencil Company's paying yearly taxes.
C. Jenny's posting of her resume on a website.
D. Chris' purchase of a new video game.
Use the diagram above to answer the question –
Arrows 4 and 7 demonstrate
A. labor
B. taxes
C. money flow
D. goods and services