Chapter 1
Scarcity and the Factors of Production
In this lesson, students will be able to define the
following key concepts:
Scarcity
Economics
The Factors of Production
Entrepreneur
In a magical world, there is no need for
Economics but we live in a world of
Scarcity. We need Economics.
Economics is the study of how individuals, families,
businesses, and societies use limited resources to fulfill
their unlimited wants.
All economies must answer 3 basic questions:
1. What goods and services should be produced?
2. How they should be produced?
3. Who should share in what is produced?
Wants Versus Needs
People use the terms needs and wants
interchangeably.
In economic terms, wants are anything other
than what is needed for basic survival.
Needs are things required for basic survival:
food, clothing shelter.
Needs are few and basic, wants are unlimited.
Scarcity
• Scarcity is the realization that our wants and desires are
unlimited but the world’s natural resources are limited.
• In other words, we always want more than we have.
• We cannot wave a magic wand to get everything we
desire.
Wouldn’t it be nice if we could
just wave the magic wand and
multiply our dollars?
Economics
• Due to scarcity, we cannot have
everything we want or need.
Therefore, we have to make choices.
• Economics is the study of the choices
we make.
Which will you choose in a world
of limited resources?
Scarcity should not be confused with a shortage.
Scarcity is the condition of not being able to have
all of the goods and services one wants, because
wants exceed what can be made from all available
resources at any given time.
The Factors of Production
• Whenever we make a good (an object) or a service (an action
performed), we need the Factors of Production.
• The Factors of Production are:
Land ( Natural Resources)
Labor (Paid Workers)
Capital (Money and Machines)
Entrepreneur
• An entrepreneur is a person who puts together land, labor, and
capital to make new businesses.
• If your mother opened her own business, she is an
entrepreneur.
• Bill Gates is also an entrepreneur.
E. Napp
Questions for Reflection:
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Define scarcity.
Explain how scarcity affects your daily life.
What is Economics?
Why does Economics exist?
Describe the Factors of Production.
Do you want to be an entrepreneur? Explain
your answer.
Section 2-Opportunity Cost
Trade-offs
Opportunity Cost
Guns or Butter
Thinking at the Margin
Scarcity exists. We have endless desires
but limited resources.
In Economics, we must choose.
Trade-off
• A trade-off occurs when we choose one course of action over
another.
• In Economics, we can never have everything we want or need.
• We must make choices.
• A woman spends ten dollars buying her lunch at a local
restaurant. She cannot use the same ten dollars to buy a book.
A trade-off has occurred.
Sometimes a society is more concerned
with economic growth than environmental
quality.
It’s All About Scarcity!
• Scarcity exists. Our wants and desires are limitless but our
natural resources are limited.
• We can always want more than we have. As such, we are
constantly choosing one course of action over another.
• We cannot spend ten dollars on a movie ticket and the same
ten dollars on a restaurant meal.
Opportunity Cost
• Whenever we make a decision, we receive
one thing but give other things up.
• If I chose to study tonight for the examination,
I cannot go to the party or the movies or walk
the dog.
• The most desirable alternative given up for
the decision is the opportunity cost.
• Think of the opportunity cost as the best
course of action of all those things you didn’t
get.
Scarcity and opportunity costs affect
individuals, businesses, and governments.
Guns or Butter
• Government officials also must choose where to spend tax
dollars.
• When a government spends more money on the military, it
must invariably spend less money on consumer goods like
roads and schools.
• Economists refer to government trade-offs as Guns or Butter.
Thinking at the Margin
• Sometimes a decision involves whether to add or subtract one
additional unit of a resource.
• After studying many hours, a student might ask herself:
“Should I study one more hour?”
• This question is a question at the margin.
• Deciding whether to add or subtract one additional unit occurs
at the margin.
Should we study one more hour?
That is thinking at the margin.
Questions for Reflection
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Provide examples of trade-offs.
Why do trade-offs exist?
What is the opportunity cost?
Provide an example of an opportunity cost?
What is thinking at the margin?
Provide an example of thinking at the margin.
Section 3-Production Possibilities Graphs
• In this lesson, we will examine the various options
available to producers.
• Students will be able to define the following terms:
Production Possibilities Graph
Efficiency
Underutilization
Production Possibilities Frontier
Producers have options. Should a
farmer grow corn or broccoli?
A Production Possibilities Graph
• A Production Possibilities Graph shows alternative ways
of using a country’s or producer’s resources.
• If a farmer uses more of his land to grow corn, he has
less land for broccoli.
• Every decision has its cost.
Efficiency
• An economy is efficient when it uses
resources in such a way as to maximize
production.
• Why is it important to be efficient?
Look at the graph. Where is efficiency
occurring?
Underutilization
• Underutilization is the opposite of efficiency.
• Underutilization occurs when an economy uses fewer
resources than it is capable of using.
• Why do producers avoid the underutilization of
resources?
Look at the graph. Where is
underutilization occurring?
The Production Possibilities Frontier
• The line on the graph that shows the maximum possible
production is called the production possibilities frontier.
• At the frontier, efficiency is occurring.
• However, new technology can shift the frontier. Think
about it!
Don’t Forget Scarcity!
• A producer cannot produce everything.
• A producer must make choices.
• Remember: It’s all about scarcity. Our resources are
limited but our wants and desires are unlimited.
It’s all about corn or broccoli.
We can’t have it all.
Questions for Reflection:
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What does a production possibilities graph show?
Define efficiency.
Why is it important to be efficient?
Define underutilization.
What problems are created by underutilization?
What is the production possibilities frontier?