Chapter 1:
What Is Economics?
Chapter 1: What Is Economics?
•
•
•
•
Scarcity
Factors of Production
Decision Making
Opportunity Cost
– Production Possibilities Curves
Chapter 1: What Is Economics?
•
•
•
•
Scarcity
Factors of Production
Decision Making
Opportunity Cost
– Production Possibilities Curves
Section 1: Scarcity & Factors of Production
• People make choices
– How to spend time & money
• Needs
– Things necessary for survival
• Air, food, shelter
• Wants
– Things desired, but not essential to survival
Section 1: Scarcity & Factors of Production
• Scarcity requires people to make choices
– Resources are limited
• money and time
• goods and services
• Economics
– The study of how people seek to satisfy their needs &
wants by making choices
Section 1: Scarcity & Factors of Production
• Scarcity
– Limited quantities of resources to meet unlimited
wants
• Supply and demand
• Scarcities always exist
• Economics is about solving the problem of
scarcity
Section 1: Scarcity & Factors of Production
• Scarcity and shortage are not the same
• Shortage
– When a good or a service is unavailable
• Because producers cannot or will not offer them at
current prices
• Can be temporary or long-term
Section 1: Scarcity & Factors of Production
• Factors of production
– Resources that are used to make all goods and
services
• Land
– All natural resources used to produce goods
and services
• Labor
– Effort that people devote to a task for which
they are paid
• Capital
– Any human-made resource that is used to
create other goods and services
Section 1: Scarcity & Factors of Production
• 2 Categories of capital
– Physical capital
– Human capital
Section 1: Scarcity & Factors of Production
• 2 Categories of capital
1) Physical capital
• Human-made goods that are used to produce
other goods or services
– Such as tools, machinery, and buildings
– Important factor of production because it can save time
and money (for people and businesses)
» Typical benefits: extra time, more knowledge, more
productivity
– Sometimes referred to as Capital Goods
Section 1: Scarcity & Factors of Production
• 2 Categories of capital
2) Human capital
• Skills and knowledge gained by a worker through
education and experience
Section 1: Scarcity & Factors of Production
• Entrepreneurs
– Ambitious leaders who combine land, labor, and
capital (factors of production) to create and market
new goods and services
• Fuel economic growth
• Take risks
Chapter 1: What Is Economics?
• Section 1 Review
– Scarcity
– Factors of Production
Chapter 1, Section 1 Review:
1. 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; a
scarcity results from falling prices.
(c) A shortage is a lack of all goods and
services; a scarcity concerns a single item.
(d) There is no real difference between a
shortage and a scarcity.
Chapter 1, Section 1 Review:
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
Chapter 1: What Is Economics?
• Section 1 Review
– Scarcity
– Factors of Production
• Assignment
– Chapter 1, Section 1 – Review
Chapter 1: What Is Economics?
•
•
•
•
Scarcity
Factors of Production
Decision Making
Opportunity Cost
– Production Possibilities Curves
Section 2: Opportunity Cost
• People make choices
– How to spend time & money
• When we decide on one alternative, we gain one
thing but lose something else
– Decisions involve trade-offs
Section 2: Opportunity Cost
• Trade-offs
– Alternatives that we sacrifice when we make
decisions
• Individual
• Business
• Society
– Government
Section 2: Opportunity Cost
• Trade-offs
– Government
• Guns or butter
– A phrase that refers to trade-offs that nations
face when choosing whether to produce more
or less military or consumer goods
Section 2: Opportunity Cost
• Opportunity cost
– The most desirable alternative given up as the result
of a decision
• Your “2nd choice” is given up for your 1st choice
• Which would you choose?
– Sleep late or wake up early to study for a test?
– Sleep late or wake up early to eat breakfast before
school?
– Sleep late or wake up early to leave for your dream
vacation?
Section 2: Opportunity Cost
Decision-making Grid
Alternatives
Sleep late
Wake up early to study
Benefits
• Enjoy more sleep
• Have more energy during the
day
• Better grade on test
• Teacher and parental
approval
• Personal satisfaction
Decision
• Sleep late
• Wake up early to study for
test
• Extra study time
• Extra sleep time
• Better grade on test
• Teacher and parental
approval
• Personal satisfaction
• Enjoy more sleep
• Have more energy during the
day
Opportunity
cost
Benefits
forgone
Section 2: Opportunity Cost
• Thinking at the margin
– Deciding whether to do or use one additional unit of
some resource
• Deciding how much more or less to do
Section 2: Opportunity Cost
Thinking at the Margin
Options
Benefit
Opportunity Cost
1st hour of extra
study time
Grade of C on
test
1 hour of
sleep
2nd hour of extra
study time
Grade of B on
test
2 hours of
sleep
3rd hour of extra
study time
Grade of B+ on test
3 hours of
sleep
Section 2: Opportunity Cost
• Cost and benefit at the margin
– Compare opportunity costs and benefits at the margin
when making decisions
– What will you sacrifice? What will you gain?
– Once the opportunity cost outweighs the benefits, no
more units should be added
– The decision-making process is sometimes called
cost/benefit analysis
Chapter 1: What Is Economics?
• Section 2 Review
– Decision Making
– Opportunity Cost
Chapter 1, Section 2 Review:
1. Opportunity cost is
(a) any alternative we sacrifice when we make a
decision.
(b) all of the alternatives we sacrifice when we
make a decision.
(c) the most desirable alternative given up as a
result of a decision.
(d) the least desirable alternative given up as a
result of a decision.
Chapter 1, Section 2 Review:
2. Economists use the phrase “guns or
butter” to describe the fact that
(a) a person can spend extra money either on
sports equipment or food.
(b) a person must decide whether to
manufacture guns or butter.
(c) a nation 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.
Chapter 1: What Is Economics?
• Section 2 Review
– Decision Making
– Opportunity Cost
• Assignments
– Economic Cartoons, pg. 12 of Unit 1 book
– Textbook pg. 11, Applying Economic
Concepts, #7 decision-making grid
Chapter 1: What Is Economics?
•
•
•
•
Scarcity
Factors of Production
Decision Making
Opportunity Cost
– Production Possibilities Curves
Section 3: Production Possibilities Curves
• Economists use tools to analyze opportunity
costs and trade-offs
• Graphs easily help us to see how one value
relates to another value
• Production possibilities curve
– A graph that shows alternative ways to use an
economy’s resources
• Show efficiency, growth, and cost
Section 3: Production Possibilities Curves
• Drawing a Production Possibilities Curve
– Decide which goods or services to examine
• Horizontal and vertical axes
– Plot points on a graph indicating possible
production choices
– Draw a line connecting the plotted points
• Production possibilities frontier
– The line on a production possibilities graph that
shows the maximum possible output
Production Possibilities Graph
25
Shoes (millions of pairs)
20
15
10
5
0
5
10
15
Watermelons (millions of tons)
20
25
Section 3: Production Possibilities Curves
• Production possibilities frontier
– The line on a production possibilities graph
that shows the maximum possible output
• An economy working at its most efficient
production levels
• Any spot on the line represents a point where all
resources are being used to produce a maximum
combination of the two products
Section 3: Production Possibilities Curves
• Production possibilities frontier
– The line on a production possibilities graph that shows the
maximum possible output
• Any spot on the line represents a point where all resources
are being used to produce a maximum combination of the
two products
• Each point reflects a trade-off
– Because land, labor, and capital are scarce
– Using the factors of production to make one
product means that fewer resources are left to
make something else
Section 3: Production Possibilities Curves
• Production possibility graphs:
Efficiency, Growth, and Cost
• Illustrate how efficiently an economy is working
• Indicate whether an economy has grown or shrunk
• Show the opportunity cost of a decision to produce
more of one good or service
Section 3: Production Possibilities Curves
• Production possibilities frontier
– Represents an economy working at its most
efficient level of production
• Efficiency: Using resources in such a way
as to maximize the production or output of
goods and services
– An economy producing output levels on the
production possibilities frontier is operating
efficiently
Section 3: Production Possibilities Curves
• Sometimes economies operate inefficiently
• When workers are laid off, fewer goods are
produced
– This trade-off is represented by plotting a point inside
the production possibilities frontier
• Underutilization
Section 3: Production Possibilities Curves
• Underutilization
– Using fewer resources than an economy is capable of
using
• Less than the maximum possible production
Section 3: Production Possibilities Curves
• Production possibility graphs
(efficiency, growth, and cost)
• Reflect current production possibilities based on
unchanging resources
– Quantity of resources constantly changes
Section 3: Production Possibilities Curves
• Production possibility graphs
(efficiency, growth, and cost)
• If quantity or quality of available land, labor, or
capital changes, then the curve moves
– Increase or decrease in workers
– New inventions
– Increase or decrease in land
Section 3: Production Possibilities Curves
• Production possibility graphs
(efficiency, growth, and cost)
• When an economy grows or increases, the
production possibilities curve “shifts to the right”
• When an economy shrinks or decreases, the
production possibilities curve “shifts to the left”
• Current production possibilities frontier versus
future production possibilities frontier if amount of
land, labor, or capital resources changes
Section 3: Production Possibilities Curves
• Production possibility graphs
(efficiency, growth, and cost)
• Cost: The alternative that is given up because of
a decision
– “Cost” always means “opportunity cost”
• Law of increasing costs
– As factors of production switch from one item
to another, more and more resources are
necessary to increase production of the
second item
» Opportunity cost increases
Section 3: Production Possibilities Curves
• Production possibility graphs:
Resources and technology
– A country’s resources include its land and natural
resources, its work force, and its physical and human
capital
– A country’s production possibilities depend on both
the resources it has available and its level of
technology
• Each production method uses different technology,
or know-how, to create products
Chapter 1: What Is Economics?
• Section 3 Review
– Production Possibilities Curves
Chapter 1, Section 3 Review:
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by
an economy.
(b) the maximum possible output of an
economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
Chapter 1, Section 3 Review:
2. An economy that is using its resources to
produce the maximum number of goods
and services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.
Chapter 1, Section 3 Review:
3. Which of the following happens to a
production possibilities curve when
economic growth occurs?
(a) The curve shifts to the left.
(b) The curve becomes a straight line.
(c) The curve shifts to the right.
(d) The curve does not change at all.
Chapter 1: What Is Economics?
• Section 3 Review
– Production Possibilities Curves
• Assignments
– Textbook pg. 21, Skills for Life, #’s 17-21
– Vocabulary Practice crossword puzzle,
pg. 9 of Unit 1 book