FUNDAMENTALS OF
ECONOMICS
(TOPIC 1)LEARNING OBJECTIVES
• Explain why scarcity & choice are the
basis of economics in every society
• Describe the 3 economic factors of
production
• Identify why every decision involves
trade-offs
• Explain the concept of opportunity cost
• Describe how people make decisions by
thinking at the margin
UNLIMITED WANTS, LIMITED
RESOURCES
• Wants=something we desire
• Needs=something essential for survival
• People satisfy theirs wants & needs with goods and
services
• Goods=physical objects that someone
produces
• Services= actions or activities that one
performs for another
SCARCITY
Wants v. Needs
On a sheet of paper, work with a
partner and create a collage with
wants on one side, & needs on the
other
• Economics: The
study of how
individuals,
businesses, &
governments
seek to satisfy
their needs &
wants by
making
choices.
SCARCITY MEANS MAKING CHOICES
• Unlimited wants, limited resources
• Scarcity does NOT mean shortage
Shortage is when
• Scarcity is a naturally
consumers want
occurring limitation
more of a GorS
than producers are
willing to make
available at a
particular price
• Entrepreneurs: people who
decided how to combine
resources to create new goods &
services
• Factors of
Production
Land
Capital is any human-made resource
used to create other G&S
Labor
Capital
Physical
Human
Land, Labor,
Human Capital,
Physical capital
Human3Capital
2
Labor
Physical
1
Capital
4
Land
Human Capital
Labor
Physical
Capital
Land
TRADE-OFF
• Act of giving up one benefit in order
to gain another, greater benefit
• Football or school play?
• Part time job or volunteer work?
• Vacation or new car?
• College or job?
• Grow broccoli or squash?
• Make chairs or tables?
• New roads or education?
GUNS OR
BUTTER
Gov’ts face trade-offs
• Guns
(military
goods)
• Butter
(consumer
goods)
GUNS OR BUTTER
1.2 OPPORTUNITY COST & TRADE-OFFS
• In most trade-off situations, one of the
rejected alternatives is more desirable
than the rest. The most desirable
alternative somebody gives up as the
result of a decisions is the opportunity
cost.
OPPORTUNITY
COST
• The most desirable alternative
somebody gives up as the result of a
decision
OPPORTUNITY COST
• It’s Friday night. You decide to…
Study Econ, go to bed early,
watch some Netflix (Making a
Murderer or Walking Dead), go on
a date with your significant other,
or go to a party with friends
Your opportunity cost is…
•m
THINKING AT THE MARGIN
Deciding
• When making decisions,
how
economists look at opportunity much
cost & thinking at the margin. more or
less to do
Marginal = Additional
When you add one
more additional unit,
how much benefit will
you get?
MARGINAL COST/MARGINAL BENEFIT
• To make a sensible decision, weigh the
marginal cost vs. the marginal benefit
Extra cost of
adding one
additional
unit
Extra benefit
of adding
the same
unit
• If MB is > MC, then go for it
Look at the marginal cost of each extra
hour of studying & compare it to the
marginal benefit.
Make your own Decision Making at the
Margin chart
A farmer needs to
decide what to grow
& how much.
• In economics you need to decide how
to use resources most efficiently
• The OC of using scarce resources for one
thing instead of something else is often
represented as a graph known as a
Production Possibilities Curve (PPC)
PRODUCTION POSSIBILITIES CURVE
PRODUCTION POSSIBILITIES CURVE
To decide what
and how much
to produce,
economists use
a PPC
Any spot on the line
represents an
economy working
at its most efficient
level
The line, Production Possibilities Frontier,
shows the different combinations possible
Any spot on the line
represents an
economy working
at its most efficient
level
The line, Production Possibilities Frontier,
shows the different combinations possible
Any spot on the line
represents an
economy working
at its most efficient
level
Underutilization: the use of fewer resources
than the economy is capable of using
OPPORTUNITY COST
OPPORTUNITY COST
D
A-B: 20
B-C: 60
C-D: 100
Law of
Increasing
Opportunity
Costs: Trade-offs
get more &
more expensive
A-B:
B-C:
250
250
GROWTH
• A PPC is a snapshot
• In the real world, resources are constantly changing
• If quantity or quality of land, labor, or capital changes,
the curve will move
GROWTH
• A PPC is a snapshot
• In the real world, resources are constantly changing
• If quantity or quality of land, labor, or capital changes,
the curve will move
Growth examples:
more immigration,
new natural
resources found,
better
technology
Curve shifts left when
production capacity
decreases.
Curve shifts left when
production capacity
decreases.
Decrease in supplies,
loss of land during
war, natural disaster
GROWTH
• If there is an increase in resources
available for one product, then the
PPF may shift at just one end.