Do you think like an economist?Do you think like an economist? Answer true or false to the following questions.Answer true or false to the following questions. 1. Because it is desirable, sunshine is scarce.1. Because it is desirable, sunshine is scarce. 2. Because it is limited, polio (the disease) is 2. Because it is limited, polio (the disease) is

scarce.scarce. 3. Because water covers ¾ of the earth’s 3. Because water covers ¾ of the earth’s

surface and is renewable, it cannot be surface and is renewable, it cannot be considered scarce.considered scarce.

4. The main cost of going to college is tuition, 4. The main cost of going to college is tuition, room and board.room and board.

ECONOMIC MYSTERIESECONOMIC MYSTERIES

SIX CLUES TO ECONOMIC SIX CLUES TO ECONOMIC UNDERSTANDINGUNDERSTANDING

1. People Economize1. People Economize

2. All Choices Involve Cost2. All Choices Involve Cost

3. People Respond to Incentives3. People Respond to Incentives

4. Economic Systems Influence Individual 4. Economic Systems Influence Individual Choices and IncentivesChoices and Incentives

5. People Gain from Voluntary Trade5. People Gain from Voluntary Trade

6. The value of a good or service is affected 6. The value of a good or service is affected by people’s choices.by people’s choices.

Scarcity – the fundamental Scarcity – the fundamental Economic ProblemEconomic Problem

Imagine this situation: All day you have Imagine this situation: All day you have been thinking about making your favorite been thinking about making your favorite foods brownies and scrambled eggs when foods brownies and scrambled eggs when you return to your home. you return to your home.

Scarcity – the fundamental Scarcity – the fundamental Economic ProblemEconomic Problem

You look in the refrigerator You look in the refrigerator and to your surprise there and to your surprise there are only two eggs left. It are only two eggs left. It takes two eggs to make takes two eggs to make brownies and two eggs to brownies and two eggs to make scrambled eggs, so make scrambled eggs, so you can’t make both. You you can’t make both. You need to make a choice. What need to make a choice. What is your decision?is your decision?

ScarcityScarcity

Scarcity is the fundamental problem of Scarcity is the fundamental problem of economicseconomics:: how to make decisions in a how to make decisions in a world of limited resources and unlimited world of limited resources and unlimited desires. desires.

What is a resource? What is a resource? Resource: all things people can use to make Resource: all things people can use to make goods, or products. goods, or products.

What are some examples of resources? What are some examples of resources? http://www.youtube.com/watch?v=yoVc_S_gd_0&feature=related

Scarcity, ContinuedScarcity, Continued Most resources are limited, or scarce. No matter how wealthy a person or nation is, there Most resources are limited, or scarce. No matter how wealthy a person or nation is, there

are never enough limited resources to provide everything that everyone wants. are never enough limited resources to provide everything that everyone wants. What resources are scarce? Can you think of some examples?What resources are scarce? Can you think of some examples? Needs: essential for survival – water, food, shelterNeeds: essential for survival – water, food, shelter Wants: anything that makes life more comfortableWants: anything that makes life more comfortable

Because of scarcity, people must choose how to use resources – Which do they take care Because of scarcity, people must choose how to use resources – Which do they take care of first – needs or wants?of first – needs or wants?

Scarcity, ContinuedScarcity, Continued The reality of life is that we have limited resources The reality of life is that we have limited resources

(You can’t always get what you want)(You can’t always get what you want) Because of scarcity we must make decisions on how Because of scarcity we must make decisions on how

to use the resources we have.to use the resources we have.

Opportunity Cost Opportunity Cost

Because of scarcity, trade-off’s are inevitableBecause of scarcity, trade-off’s are inevitable Every time people make a choice about how to Every time people make a choice about how to

use their resources, they must make a use their resources, they must make a trade-off. trade-off. This means they gain something, but they also This means they gain something, but they also give up something. give up something.

Costs are not always explicit or monetary. Costs are not always explicit or monetary. Opportunity Costs are implicit – the Opportunity Costs are implicit – the thing you thing you

give upgive up by making a choice is called the by making a choice is called the

opportunity cost opportunity cost of your decisionof your decision. .

Individuals, businesses, and nations face an Individuals, businesses, and nations face an opportunity cost every time they decide how opportunity cost every time they decide how to use their scarce productive resourcesto use their scarce productive resources. .

Producing one good means not producing Producing one good means not producing other goods and services, so again, trade-other goods and services, so again, trade-off’s are inevitable.off’s are inevitable.

Economics is the study of how and why Economics is the study of how and why people make choices about the allocation, people make choices about the allocation, or distribution, of resources. or distribution, of resources.

Opportunity Cost continuedOpportunity Cost continued What are some recent decisions you have made? What are some recent decisions you have made? When you make a decision, you evaluate the benefits of When you make a decision, you evaluate the benefits of

each choice. The opportunity cost of making a decision each choice. The opportunity cost of making a decision like this is the value of the next best alternatives you like this is the value of the next best alternatives you could have chosen. could have chosen.

It’s not always about money – could include time, It’s not always about money – could include time, aggravation, convenience or moral guilt.aggravation, convenience or moral guilt.

For example, if your favorite activity is playing video For example, if your favorite activity is playing video games, but you decide to do your homework instead, the games, but you decide to do your homework instead, the opportunity cost of your decision is the amount of fun opportunity cost of your decision is the amount of fun you could have had playing the game. The benefit of you could have had playing the game. The benefit of your choice is that you don’t have to worry about doing your choice is that you don’t have to worry about doing your homework later. your homework later.

Rational DecisionRational Decision

Rational decision will play a part when Rational decision will play a part when people make choices. people make choices.

When making a rational decision, you will When making a rational decision, you will weigh the benefits and costs of each weigh the benefits and costs of each option. option.

Then we choose Then we choose thethe option whose benefits option whose benefits (in our opinion) outweigh its cost(in our opinion) outweigh its cost. This kind . This kind of decision making is of decision making is also called a cost-also called a cost-benefit analysis. benefit analysis.

Warm Up: what is the opp. Cost Warm Up: what is the opp. Cost of your decisions?of your decisions?

DecisionDecision Opportunity CostOpportunity Cost

You decide to play a You decide to play a sport after school sport after school instead of getting a part instead of getting a part time job.time job.

You decide to go out to You decide to go out to eat instead of to a eat instead of to a moviemovie

You decide to go to a You decide to go to a party instead of party instead of studyingstudying

ScarcityScarcity Unlimited Wants Limited

Resources

3 Basic Economic Questions

Types of Types of Productive ResourcesProductive Resources

The things people need to make and sell products are called The things people need to make and sell products are called productive resources or productive resources or factors of productionfactors of production. . There are 4 There are 4 important productive resources. important productive resources.

1. 1. Land: Land: Land resources include not only the land Land resources include not only the land itself, but all the natural resources on the land, as well itself, but all the natural resources on the land, as well as any improvements people have made to the land. as any improvements people have made to the land. “gifts of nature”“gifts of nature”

Examples: water, air, mineral deposits, Examples: water, air, mineral deposits, forests, landforests, land

Types of Types of Productive ResourcesProductive Resources

2.2.Labor: Labor: The process of making The process of making things requires labor, the mental things requires labor, the mental and physical efforts of human and physical efforts of human workers. workers.

For example, running a business For example, running a business might require workers to operate might require workers to operate machines, load boxes, drive machines, load boxes, drive trucks, answer telephones, write trucks, answer telephones, write letters and track orders on a letters and track orders on a computer. computer.

Types of Types of Productive ResourcesProductive Resources

3.Capital3.Capital: are human –made resources used to : are human –made resources used to make other products or deliver services. make other products or deliver services. Businesses need both physical capital and Businesses need both physical capital and human capital. human capital.

4.Physical Capital: 4.Physical Capital: refers to all the tools, refers to all the tools, machines, and other equipment a business machines, and other equipment a business needs. needs. For example: a restaurant needs stoves, For example: a restaurant needs stoves, refrigerators, pots and pans, tables and chairs.refrigerators, pots and pans, tables and chairs.

Types of Types of Productive ResourcesProductive Resources

Human capital: refers Human capital: refers to the skills and to the skills and knowledge of a knowledge of a company’s workers. company’s workers.

The value of the The value of the health, education, and health, education, and skills of peopleskills of people

4. Entrepreneurship4. Entrepreneurship An entrepreneur is a person who starts and An entrepreneur is a person who starts and

manages a business. manages a business. They come up with ideas They come up with ideas about how to produce about how to produce

something that they think people will want to buysomething that they think people will want to buy. . Organize all the land, labor and capital resources Organize all the land, labor and capital resources

needed to produce the good or service. needed to produce the good or service. Risk Takers: invest money in a new business. Risk Takers: invest money in a new business. Without entrepreneurship, no goods and services Without entrepreneurship, no goods and services

would ever be produced. would ever be produced.

London 2012 OlympicsLondon 2012 Olympics

What types of productive resources… What types of productive resources… LandLand LaborLabor CapitolCapitol

• HumanHuman• PhysicalPhysical

…are being used in the London Olympics right now. Discuss in a small group and list examples for each resource in your notes.

Georgia Performance Standards

SSEF1 The student will explain why limited SSEF1 The student will explain why limited productive resources and unlimited wants result productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments.individuals, businesses, and governments.

a. Define scarcity as a basic condition that exists a. Define scarcity as a basic condition that exists when unlimited wants exceed limited productive when unlimited wants exceed limited productive resources.resources.

d. Define opportunity cost as the next best d. Define opportunity cost as the next best alternative given up when individuals, alternative given up when individuals, businesses, and governments confront scarcity businesses, and governments confront scarcity by making choices.by making choices.