What is Economics? “Scarcity and Factors of Production” Chapter 1.1.
Chapter 1: What is Economics?
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Transcript of Chapter 1: What is Economics?
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Chapter 1: What is Economics?
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Section 1: Scarcity and Factors of Production
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What is Economics?
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What is Economics?• The study of scarcity and choices• Scarcity- limited resources for unlimited wants
“There is no such thing as a free lunch”
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Choices• People need to decide how to use limited
resources– Need: necessary for survival– Want: desirable but not essential
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Goods and Services• Goods: physical objects that are produced• Services: actions performed
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Factors of Production
• Land• Labor• Capital (Physical & Human)
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Land• Natural resources used to produce goods.– Oil, Trees, Iron-Ore
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Labor
• Effort of people to create a product. – Manufacturers, managers, engineers, etc.
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Capital
• Human made resources used to produce other goods.– Physical Capital– Human Capital
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Physical Capital• Human-made goods used to produce other
goods.
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Human Capital
• Skills and knowledge of a worker acquired through education and experience.
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Entrepreneurship: The 4th Factor of Production
• Entrepreneur: someone who combines land, labor, and capital to creates and services
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In groups…
• Choose an object• What was necessary for its creation?– Land?– Labor?– Capital (Physical and Human)?
– Report back to class
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Section 2: Opportunity Cost
• Because of scarcity: we need to make decisions about how to manage resources.
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Economics: Science of Decision Making
• Trade-offs are alternatives given up when making a decision
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Guns or Butter?
• Countries need to decide how they will use their resources• If a country chooses to produce more military goods (“guns”)
they will have less consumer goods (“butter”)
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Opportunity Cost• Opportunity cost is the most desirable alternative
given up in a decision.
Decision Benefit Opportunity CostGo to College Education, increased job
opportunityMoney earned/saved from
working
Work after High School Money earned/saved Education, increased job opportunity
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Thinking at the Margin
• Black and White decisions in economies are rare, thinking at the margin considers compromises and multiple scenarios.
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Decisions at the MarginOptions Benefit Opportunity Cost
1st hour of extra study time Grade of C on test One 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 A on test 3 hours of sleep
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Decisions at the Margin
Options Benefit Opportunity Cost
Work for 1 hour $10 One hour of studying
Work for 2 hours $20 Two hours of studying
Work for 3 hours $30 Three hours of studying
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Section 3: Production Possibilities Curves
Watermelons (millions of tons) Shoes (millions of pairs)0 158 14
14 1218 920 521 0
Production possibilities curves plot decision making on a graph, or curve
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Production Possibilities Curve
0 5 10 15 20 250
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Watermelons (millions of tons)
Shoe
s (m
illio
ns o
f pai
rs)Watermelon
s (millions of tons)
Shoes (millions of
pairs)0 15
8 14
14 12
18 9
20 5
21 0
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Frontier
0 5 10 15 20 250
2
4
6
8
10
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14
16
Watermelons (millions of tons)
Shoe
s (m
illio
ns o
f pai
rs)
The Frontier represents maximum efficiency: the full production capability of the economy
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Underutilization
• Underutilization: economy is not producing at capability– WHY?
0 5 10 15 20 250
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4
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Watermelons (millions of tons)
Shoe
s (m
illio
ns o
f pai
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Future Production Possibilities Curve
0 5 10 15 20 250
2
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Watermelons (millions of tons)
Shoe
s (m
illio
ns o
f pai
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Sometimes the entire curve shifts outwardWHY?
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Examples of trade-offs: Soviet Union
• The former Soviet Union prioritized military development at the expense of consumer goods and development.