3 Basic Economic Questions
 What to produce
 How to produce it
 For whom to produce it
 Why do we need to answer these questions? Because
wants often outweigh needs creating scarcity
Scarcity and Opportunity Cost
 Economics – social science studying the allocation of
scarce resources and goods (firms/bus, indiv, govt)
 Resources – inputs such as labor, capital,
entrepreneurship, and land-use by people to produce
outputs
 Natural Resources – all of the raw materials which
occur in nature and that are used to produce what
humans want or need (ex: timber, water, crude oil,
arable land)(can be renewable or nonrenewable)
 Goods – finished products created from resources
Four Factors of Production
 Land: incl. property on which a plant is built, but also
other natural resources involved (timber, water, fish, etc. in
an area)
 Labor: contribution of human workers, incl. mental
efforts as well as physical ones (both skilled and unskilled)
 Capital: all of the structures and equipment involved in
the manufacturing process (building, machinery, tools,
lighting, nail guns, rags used at a car wash)
 Entrepreneurship: creative, managerial, and risk-taking
capabilities involved in starting up or running a business
(organizing, developing, raising funds; Bill Gates, Sam
Walton)
Concepts cont.
 Scarcity – situation of having inadequate resources to
obtain all of one’s wants (the more scarce an item,
the more it costs)
 Government regulation (a means for dealing with
scarcity) – price ceiling, price floor, rationing
 Want – everything you could get if there was no limit
to resources (creates scarcity)
 Need – resources and goods that are necessary for
people
 Allocate – to distribute according to some plan or
system
Scarcity Means There Is Not Enough For
Everyone
Government must step in to help allocate
(distribute) resources
6
Opportunity Cost
 Trade-Off – the act of giving up one thing of value to
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gain another thing of value
Opp. Cost - is the value of the alternative option that
is lost when an individual, business (firm), or
government makes a decision.
Example: Ashley wants tank tops and t-shirts for
school. She doesn’t have enough $ for both . . . so she
buys the t-shirts.
The enjoyment of wearing the tank tops is her
opportunity cost!
Her trade-off is owning the tank tops
Opportunity Cost
 Ms. Kent owns an empty warehouse downtown that is
about the size of a football field. She would like to build
big cargo airplanes, but there is not enough space in the
warehouse for this to be done. Therefore, building cargo
airplanes is not one of her choices in the decision-making
process. Instead, she currently has two choices. A
company would like to lease the warehouse and use the
space to store furniture, but Ms. Kent might use the space
to build her own art gallery. If she decides to lease the
space to the furniture company, what is her opportunity
cost?
EOCT question
 Bill wants to buy a shirt for $45 and a hat for $20.
However, he only has $50. If he buys the shirt, then his
opportunity cost will be
a. The cost of the shirt
b. The cost of the hat
c. The enjoyment he would have gotten from the hat
d. How comfortable he will feel in the shirt
Cost-Benefit Analysis
 Whenever people decide whether the advantages of a
particular action are likely to outweigh its drawbacks,
they engage in a form of benefit-cost analysis. (Think:
pros v. cons) – This also results in a rational decision!
 Marginal benefit: amt. of benefit received once the
cost of the decision is considered
 Marginal cost: cost of the decision once it is weighed
against the benefits
 Why do people recycle?
Supply and Demand and Scarcity
 Law of Supply – as price goes up, so does production
(see supply curve)
 Law of Demand – as price goes up, demand goes
down (see demand curve)
 Market Equilibrium – occurs when the quantity
supplied and the quantity demanded are both equal at
the same price (see supply and demand curve)
 Market Clearing Price – is the same as market
equilibrium . . . The market is cleared of all products
Supply and Demand Curves
Surplus and Shortage
 Surplus - exists when the quantity supplied exceeds the
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quantity demanded at the price offered
Incentive – when a producer offers coupons, rebates, or 2
for 1 deals to get customers
Used to attract consumers and stimulate demand
Shortage – exists when the quantity demanded exceeds
the quantity supplied at the price offered
Consumers develop a budget that lists needs and wants and
the amount of $ to get them
If a consumer does not have enough $, they will change the
budget, finding substitute goods
Market
Equilibrium/Shortage/Surplus
Substitute/Complementary Goods
 Substitute Goods – goods and services that serve the
same purpose that can be used in place of each other
 Example: Butter and margarine, Coke and Pepsi, ?
 Complementary Goods – “An item that you would
buy along with another item”
 Example: Peanut butter and Jelly, Hot dog and Buns, ?
Substitutes
Complements
Warm-up
 What is the number one problem in economics and
how does the problem affect our buying habits? (use
your new economic terms)
 Explain how it affects:
 Households
When scarcity exists, people have to make choices
(substitutes)
 Firms
Businesses have to offer incentives to encourage people to
but their products
 Governments
Must regulate in some way (rationing, price floor, price
ceiling)
Draw This PPC (Production
Possibilities Curve)
Production Possibility Frontiers (Curve)
 Shows the different combinations of goods and
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


services that can be produced with a given amount of
resources
No ‘ideal’ point on the curve – any point ON the curve is
the most efficient
Any point inside the curve – suggests resources are not
being utilized efficiently
Any point outside the curve – not attainable with the
current level of resources, but with additional resources
or technology it can be reached
Useful to demonstrate economic growth and opportunity
cost
PPC
Capital Goods
Ym
Yo
A
it devotes all
Assume
a country
IfIf
the
country
is
resources
to its
capital
If it reallocates
can
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at
point
A ontwo
the
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goods
it (moving
could
types
of
the
PPF
A to B) it can
PPF
Itfrom
can
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agoods
maximum
produce
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with
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produce
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at the
– capital
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combination
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If it devotes
allcapital
its Yo
and
consumer
goods.
Thegoods
opportunity
resources
to
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and
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cost
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anitextra
consumer goods
Xo– consumer
Xo
X1 consumer goods
could
produce a
is
Yo
–
Y1
capital goods.
goods
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B
Y1
Xo
X1 Xm Consumer Goods
Production Possibility
Frontiers
Production
Capital Goods
C
Y1
Yo
.
A
It can only produce at
points outside the PPF
inside the PPF
if it finds a way of
– e.g. point
B
expanding
its
resources
improves
means or
the
the
productivity
of
country
is not
those resources it
usinghas.
all This
its will
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the PPF further
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B
Xo X1
Consumer Goods
Specialization and Division of
Labor
 To maximize profits, producers try to reduce costs of
production
 To accomplish this, they must increase productivity
(ability to turn input into output in certain amount of
time)
 One way to accomplish this is through specialization
(one worker focuses on one particular task) and
division of labor (splitting up work into smaller and
more specialized tasks)
Voluntary Exchange
 U.S. economy is based on voluntary exchange
(individuals and businesses freely exchange goods,
services, and resources for something of value $)
 Benefits:
 Increases productivity and efficiency
 Encourages inventions and innovations (change or
improvement)