Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1
CHAPTER
What Is
Economics?
1-1
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1-2
ECONOMICS
The social science
concerned with the efficient
use of scarce resources to
achieve the maximum
satisfaction of economic
wants.
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1-3
ECONOMICS
The social science
concerned with the efficient
use of scarce resources to
achieve the maximum
satisfaction of economic
wants.
WHY STUDY ECONOMICS
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1-4
• Most __________ decisions involve
economics.
• An understanding of economics and
government are the keys to
participatory citizenship.
• Learn analytical and observational skills
that are important in the workplace.
• Business managers or owners need
these skills and understanding.
• Make better financial decisions with
your investments.
• Foundation for careers in accounting,
business, finance, marketing, or public
policy.
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1-5
THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
THE FOUNDATION OF
ECONOMICS
SOCIETY HAS VIRTUALLY
UNLIMITED WANTS...
BUT LIMITED OR SCARCE
RESOURCES!
1-6
GOODS & SERVICES PROVIDE...
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1-7
UTILITY
GOODS & SERVICES PROVIDE...
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1-8
UTILITY
WANT
GOODS & SERVICES PROVIDE...
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1-9
UTILITY
WANT vs. NEED
The Economic Way of Thinking
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 10
Scarcity
• The world has limited
resources.
• These resources are
desirable.
• TINSTAAFL
–There is no such thing as a
free lunch
ECONOMICS AT WORK
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 11
The Three Fundamental Questions...
What will be produced?
How will the goods
be produced?
Who will get the goods
and services?
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 12
ECONOMIC PRODUCTS
• Consumer Goods
• Capital Goods
• Services
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
Let’s see if you’re thinking
like an economist yet
Take the true/false
quiz in your packet
called Activity 1
1 - 13
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 14
FACTORS OF
PRODUCTION
SCARCE RESOURCES
Scarcity and
the Science of
Economics
ECONOMIC RESOURCES
Basic
Economic
Concepts
PROPERTY RESOURCES
Economic
Choices and
Decision
Making
LAND
1 - 15
SCARCE RESOURCES
Scarcity and
the Science of
Economics
ECONOMIC RESOURCES
Basic
Economic
Concepts
PROPERTY RESOURCES
Economic
Choices and
Decision
Making
LAND
CAPITAL
1 - 16
SCARCE RESOURCES
Scarcity and
the Science of
Economics
ECONOMIC RESOURCES
Basic
Economic
Concepts
PROPERTY RESOURCES
Economic
Choices and
Decision
Making
LAND
CAPITAL
1 - 17
SCARCE RESOURCES
Scarcity and
the Science of
Economics
ECONOMIC RESOURCES
Basic
Economic
Concepts
PROPERTY RESOURCES
Economic
Choices and
Decision
Making
LAND
CAPITAL
HUMAN RESOURCES
1 - 18
SCARCE RESOURCES
Scarcity and
the Science of
Economics
ECONOMIC RESOURCES
Basic
Economic
Concepts
PROPERTY RESOURCES
Economic
Choices and
Decision
Making
LAND
CAPITAL
HUMAN RESOURCES
LABOR
1 - 19
SCARCE RESOURCES
Scarcity and
the Science of
Economics
ECONOMIC RESOURCES
Basic
Economic
Concepts
PROPERTY RESOURCES
Economic
Choices and
Decision
Making
LAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEURIAL ABILITY
1 - 20
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
ENTREPRENEURIAL
ABILITY
Takes The Initiative
Makes Strategic Business
Decisions
Innovator
The Risk Bearer
1 - 21
RESOURCE PAYMENTS
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
PROPERTY RESOURCES
LAND
RENT
CAPITAL
INTEREST
HUMAN RESOURCES
LABOR
ENTREPRENEUR
1 - 22
WAGES
PROFIT &
LOSS
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
RESOURCES & SCARCITY
Let’s illustrate this with a
challenge.
We need 4 teams. Group
by seats.
1 - 23
CIRCULAR FLOW MODEL
Scarcity and
the Science of
Economics
RESOURCE
MARKET
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
BUSINESSES
HOUSEHOLDS
PRODUCT
MARKET
1 - 24
CIRCULAR FLOW MODEL
Scarcity and
the Science of
Economics
RESOURCE
MARKET
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
PRODUCT
MARKET
1 - 25
CIRCULAR FLOW MODEL
Scarcity and
the Science of
Economics
$ COSTS
RESOURCE
MARKET
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
$ INCOMES
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
1 - 26
CIRCULAR FLOW MODEL
Scarcity and
the Science of
Economics
$ COSTS
RESOURCE
MARKET
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
$ INCOMES
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
1 - 27
CIRCULAR FLOW MODEL
Scarcity and
the Science of
Economics
$ COSTS
RESOURCE
MARKET
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
$ INCOMES
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
1 - 28
$ REVENUE
$ CONSUMPTION
CIRCULAR FLOW MODEL
Scarcity and
the Science of
Economics
$ COSTS
RESOURCE
MARKET
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
$ INCOMES
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
1 - 29
$ REVENUE
$ CONSUMPTION
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 30
What is the difference
between a Trade-Off and
Opportunity Cost?
Trade-Off
An exchange of
one or more
thing(s) in return
for another.
Opportunity Cost
The value of the
next-highest
valued
alternative or the
forgone cost.
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 31
What is the difference
between a Trade-Off and
Opportunity Cost?
Trade-Off
An exchange of
one or more
thing(s) in return
for another.
Opportunity Cost
The cost of
passing up the
next best choice.
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
FRIDAY NIGHT OPTIONS
•
•
•
•
•
Go out with friends
Stay home and watch TV
Go on a date
Study economics
Attend the basketball game
The one we pick is our choice, the
rest become Trade-offs.
The “next best” alternative becomes
the Opportunity Cost.
1 - 32
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
FRIDAY NIGHT OPTIONS
• Go out with friends
Economic
Choices and
Decision
Making
The one we pick is our choice, the
rest become Trade-offs.
The “next best” alternative becomes
the Opportunity Cost.
1 - 33
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
GO OUT ON A DATE
• The Opportunity Cost of going
out on a date is what you’ve lost
by not going out with friends.
– Excitement
– Fun
• Your decision was based on
getting more utility on your date.
• That’s the “incentive”
1 - 34
Scarcity and
the Science of
Economics
ANY OTHER COSTS?
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
Dating is expensive. Let’s say
you spend $30. You could have
spent that $30 on something
else.
1 - 35
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 36
SO OUR OPPORTUNITY
COST IS…?
• The lost fun you would
have had with your
friends.
• The cash you spent on
your date.
The Economic Way of Thinking
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 37
Marginal Analysis
• Comparing benefits and costs.
• Marginal – means “extra, additional, one
more”
• Marginal Cost (MC) – What does it cost
to go to the next level or to get one more
item?
• Marginal Benefit (MB) – What pleasure
or “utility” do you get out of the next
level or item?
• Incentive
– Why do we act?
– We do it when MB is greater than or equal to
MC.
Marginal Analysis Example
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 38
Hours
Econ Score
Math Score
0
0
0
1
26
24
2
48
44
3
61
62
4
73
75
5
83
84
6
91
91
7
97
96
8
100
100
PRODUCTION POSSIBILITIES
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
Assumes...
•Full Employment
•Full Production
•Fixed Resources
•Fixed Technology
•Two Goods
for example...
1 - 39
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
PRODUCTION POSSIBILITIES
A Consumer
Assumes...
Good
Full Employment
and Productive
Efficiency
Fixed Resources
Fixed Technology
Two Goods
for example...
1 - 40
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
PRODUCTION POSSIBILITIES
A
Capital
Good
Assumes...
Full Employment
and Productive
Efficiency
Fixed Resources
Fixed Technology
Two Goods
for example...
1 - 41
PRODUCTION POSSIBILITIES
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
What if we could only produce ...
10,000 Robots
or
400,000 Pizzas
Using all of our resources, to
get some pizza, we must give
up some robots!
for example...
1 - 42
PRODUCTION POSSIBILITIES
Scarcity and
the Science of
Economics
in table form
Basic
Economic
Concepts
PIZZA
Economic
Choices and
Decision
Making
ROBOTS
1 - 43
0
1
2
3
4
10
9
7
4
0
(in hundred thousands)
(in thousands)
PRODUCTION POSSIBILITIES
in table form
Basic
Economic
Concepts
PIZZA
Economic
Choices and
Decision
Making
ROBOTS
1
2
3
4
10
9
7
4
0
(in hundred thousands)
(in thousands)
graphical form
Robots
1 - 44
0
(thousands)
Scarcity and
the Science of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
Basic
Economic
Concepts
PIZZA
Economic
Choices and
Decision
Making
ROBOTS
1
2
3
4
10
9
7
4
0
(in hundred thousands)
(in thousands)
graphical form
Robots
1 - 45
0
(thousands)
Scarcity and
the Science of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
Basic
Economic
Concepts
PIZZA
Economic
Choices and
Decision
Making
ROBOTS
1
2
3
4
10
9
7
4
0
(in hundred thousands)
(in thousands)
graphical form
Robots
1 - 46
0
(thousands)
Scarcity and
the Science of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
Basic
Economic
Concepts
PIZZA
Economic
Choices and
Decision
Making
ROBOTS
1
2
3
4
10
9
7
4
0
(in hundred thousands)
(in thousands)
graphical form
Robots
1 - 47
0
(thousands)
Scarcity and
the Science of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
Basic
Economic
Concepts
PIZZA
Economic
Choices and
Decision
Making
ROBOTS
1
2
3
4
10
9
7
4
0
(in hundred thousands)
(in thousands)
graphical form
Robots
1 - 48
0
(thousands)
Scarcity and
the Science of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
Basic
Economic
Concepts
PIZZA
Economic
Choices and
Decision
Making
ROBOTS
1
2
3
4
10
9
7
4
0
(in hundred thousands)
(in thousands)
graphical form
Robots
1 - 49
0
(thousands)
Scarcity and
the Science of
Economics
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
Q 14
Robots (thousands)
Scarcity and
the Science of
Economics
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
C
W
Attainable
& Efficient
D
Attainable
but
Inefficient
E
1
1 - 50
B
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 51
Limited Resources means
a limited output...
An economy must
sacrifice some of
product X to obtain
more of product Y.
Scarcity and
the Science of
Economics
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
Law of Increasing
Opportunity Cost
• Economic resources are not
completely adaptable to other
uses
• To make more of X it costs more
and more of Y
• This makes the PPC:
– Bowed out from the origin
– Concave
1 - 52
PRODUCTION POSSIBILITIES
Scarcity and
the Science of
Economics
Q 14
Economic
Choices and
Decision
Making
Robots (thousands)
Basic
Economic
Concepts
Unemployment &
Underemployment
Shown by Point U
13
12
11
10
9
8
7
6
5
4
3
2
1
1
1 - 53
More of either or
both is possible
U
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
Q 14
Robots (thousands)
Scarcity and
the Science of
Economics
13
12
11
10
9
8
7
6
5
4
3
2
1
Notes...Unemployment
Economic Growth
1.
2. Better resource
quality
More of either or
3.
U Technological
advances
both is possible
4. Capital Goods
1
1 - 54
&
Underemployment
Increase
in
resource
supplies
Shown
by Point U
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
PRODUCTION POSSIBILITIES
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
Q 14
Robots (thousands)
Scarcity and
the Science of
Economics
A’
13
12
11
10
9
8
7
6
5
4
3
2
1
C’
D’
E’
1
1 - 55
Economic Growth
B’
2
3
4
5
6
7
Pizzas (hundred thousands)
8
Q
Scarcity and
the Science of
Economics
Let’s work with Production
Possibility Curves
Basic
Economic
Concepts
Economic
Choices and
Decision
Making
1 - 56
Open you course packet
to Activity 1-2 and
complete Parts A – D.