Introduction to economics - lecture 1.ppt

Foundations of Foundations of EconomicsEconomics

What comes to your What comes to your mind when you hear the mind when you hear the

word SCARCEword SCARCE

What is Economics?What is Economics?

““A science that deals with the A science that deals with the allocation, or use, of scarce allocation, or use, of scarce resources for the purpose of resources for the purpose of fulfilling society’s needs and wants.” fulfilling society’s needs and wants.” – Addison-Wesley– Addison-Wesley

What is Economics?What is Economics?

So then the big two concepts are So then the big two concepts are that:that:Resources are scarce!Resources are scarce!Society has unlimited needs and Society has unlimited needs and

wants!wants!Economics decides the “best” way of Economics decides the “best” way of providing one to the otherproviding one to the other

VOCABULARY:VOCABULARY:

NeedNeedWantWantEconomicsEconomicsGoodsGoodsServicesServices

ScarcityScarcity

DefinitionDefinitionA situation in which the amount A situation in which the amount

of something actually available of something actually available would not be sufficient to satisfy would not be sufficient to satisfy the desire for it, if it were the desire for it, if it were provided free of charge.provided free of charge.

… … MORE VOCABULARYMORE VOCABULARY

ShortageShortageFactors of ProductionFactors of ProductionLandLandLaborLaborCapitalCapitalPhysical CapitalPhysical CapitalHuman CapitalHuman Capital

Factors of ProductionFactors of Production

There are 4 factors that must all be There are 4 factors that must all be used to produce anythingused to produce anythingNatural Resources (also referred to Natural Resources (also referred to

as “land”)as “land”)


There are 4 factors that must all be There are 4 factors that must all be used to produce anythingused to produce anythingLabor – effort of a person for which Labor – effort of a person for which

they are paidthey are paid


There are 4 factors that must all be There are 4 factors that must all be used to produce anythingused to produce anythingCapital – human-made resources Capital – human-made resources

used to create other goodsused to create other goods


3 Capital3 CapitalPhysical Capital – Also called Physical Capital – Also called Capital GoodsCapital Goods, objects that are , objects that are used to produce other goods used to produce other goods


3 Kinds of Capital3 Kinds of CapitalHuman Capital – knowledge or Human Capital – knowledge or skills workers get from education skills workers get from education and experience and experience


There are 4 factors that must all be There are 4 factors that must all be used to produce anythingused to produce anythingEntrepreneurship – person who Entrepreneurship – person who

takes a risk in combining the other takes a risk in combining the other 3 factors to create a new good3 factors to create a new good

VOCABULARY CONTINUED…VOCABULARY CONTINUED…

EntrepreneursEntrepreneurs

Making Economic DecisionsMaking Economic Decisions

Every decision we make involves Every decision we make involves trade-offs – trade-offs – alternatives that we alternatives that we must give up when we make a must give up when we make a choicechoiceExample – “I could stay up for 3 Example – “I could stay up for 3

hours doing facebook, study, or hours doing facebook, study, or sleep.”sleep.”

QUIZ QUIZ

1. Which of the following are factors of 1. Which of the following are factors of production?production?a. Capital and Landa. Capital and Landb. Scarcity and shortagesb. Scarcity and shortagesc. Technology and productivityc. Technology and productivityd. economics and business decisionsd. economics and business decisions

Answer is …Answer is …

a. capital and landa. capital and land

next question …next question …

To what part of an industry does a To what part of an industry does a worker’s education contribute?worker’s education contribute?a. technologya. technologyb. physical capitalb. physical capitalc. human capitalc. human capitald. scarce resourcesd. scarce resources


c. human capitalc. human capital

next question …next question …

Which of the following is an entrepreneur?Which of the following is an entrepreneur?a. a person who earns a lot of money as a a. a person who earns a lot of money as a

singer or dancersinger or dancerb. a person who creates a game and sells it b. a person who creates a game and sells it

to a game manufacturerto a game manufacturerc. a person who starts an all-organic cleaning c. a person who starts an all-organic cleaning

supplies business that employs otherssupplies business that employs othersd. a person who works as a highly paid d. a person who works as a highly paid

computer programmercomputer programmer


c. a person who starts an all-organic c. a person who starts an all-organic cleaning supplies business that employs cleaning supplies business that employs othersothers

Next …Next …

What is the difference between a shortage What is the difference between a shortage and scarcity?and scarcity?

a. A shortage can be temporary or long-term, a. A shortage can be temporary or long-term, but scarcity always exists.but scarcity always exists.

b. A shortage results from rising prices; b. A shortage results from rising prices; scarcity results from falling prices. scarcity results from falling prices.

c. A shortage is a lack of all goods and c. A shortage is a lack of all goods and services; scarcity concerns a single item.services; scarcity concerns a single item.

d. There is no real difference between a d. There is no real difference between a shortage and scarcityshortage and scarcity

answer …answer …

a. A shortage can be temporary or long-a. A shortage can be temporary or long-term, but scarcity always exists!term, but scarcity always exists!

next….next….

What does an economist mean by the term What does an economist mean by the term LAND?LAND?

a. farmland onlya. farmland onlyb. food crops grown on farmland as well as b. food crops grown on farmland as well as

the farmland itselfthe farmland itselfc. goods and services that are produced form c. goods and services that are produced form

the landthe landd. all natural resources used to produce d. all natural resources used to produce

goods and servicesgoods and services


d. all natural resources used to produce d. all natural resources used to produce goods and services!goods and services!

FIVE appealing VACATION FIVE appealing VACATION Destinations…Destinations…

Hawaii Paris

Dunns River Falls, Jamaica

AlaskaIreland

Volunteer: What is your first choice? What is your second choice?

Opportunity Cost


The most desirable of the options you The most desirable of the options you pass up is called the pass up is called the Opportunity Opportunity CostCost

Rank sleep, studying, and playing Rank sleep, studying, and playing video games 1video games 1stst, 2, 2ndnd, and 3, and 3rdrd on a list on a list for what you value the mostfor what you value the most

Making Economic DecisionsMaking Economic Decisions11stst Place is Place is

what you would what you would choose to dochoose to do

22ndnd Place is Place is your opportunity your opportunity cost (you give it cost (you give it up to do option up to do option 1)1)


What other option do you have other What other option do you have other than using 3 hours for one task?than using 3 hours for one task?

You could split your time among You could split your time among multiple activities!multiple activities!

Thinking at the Margin – Thinking at the Margin – decision decision involving adding one unit and involving adding one unit and subtracting one unit, rather than all or subtracting one unit, rather than all or nothingnothing


OptionsOptions BenefitBenefit Opportunity CostOpportunity Cost

0 hours studying, 0 hours studying, 3 hours sleeping3 hours sleeping

F on TestF on Test NoneNone

1 hours studying, 1 hours studying, 2 hours sleeping2 hours sleeping

C on TestC on Test 1 hour of sleep1 hour of sleep

2 hours studying, 2 hours studying, 1 hour sleeping1 hour sleeping

B on TestB on Test 2 hours of sleep2 hours of sleep

3 hours studying3 hours studying B+ on TestB+ on Test 3 hours of sleep3 hours of sleep


There is a point at which you are There is a point at which you are paying the same increase in cost, but paying the same increase in cost, but seeing lower benefitsseeing lower benefits

You must make the decision as to You must make the decision as to whether the cost is worth itwhether the cost is worth it

This same process is used by This same process is used by businesses and consumers to make businesses and consumers to make decisionsdecisions

QUIZ timeQUIZ time

1. The economic concept of guns or butter 1. The economic concept of guns or butter means that …means that … a. a person can spend extra money either on sports a. a person can spend extra money either on sports

equipment or food.equipment or food. b. a company must decide whether to manufacture b. a company must decide whether to manufacture

guns or butterguns or butter c. a government must decide whether to produce c. a government must decide whether to produce

more or less military or consumer goodsmore or less military or consumer goods d. a government can buy unlimited military and d. a government can buy unlimited military and

civilian goods if it is rich enoughcivilian goods if it is rich enough


c. a government must decide whether to c. a government must decide whether to produce more or less military or consumer produce more or less military or consumer goods … trade off …. due to scarcity!goods … trade off …. due to scarcity!

next..next..

2. If a person who wants to buy a 2. If a person who wants to buy a compact disc (CD) has just enough money compact disc (CD) has just enough money to buy one, and chooses CD A instead of to buy one, and chooses CD A instead of CD B, then CD B is theCD B, then CD B is thea. trade-offa. trade-offb. opportunity costb. opportunity costc. decision at the marginc. decision at the margind. opportunity at the margind. opportunity at the margin

answer is …answer is …

b. opportunity costb. opportunity cost

next…next…

3. A decision-making grid is a visual way 3. A decision-making grid is a visual way of:of:a. examining opportunity costsa. examining opportunity costsb. selling goods or servicesb. selling goods or servicesc. making marginal decisionsc. making marginal decisionsd. identifying shortagesd. identifying shortages

answer is ..answer is ..

a. examining opportunity costs!a. examining opportunity costs!

GRAPHS….GRAPHS….

WHY do graphs sometimes show WHY do graphs sometimes show information more clearly than text or information more clearly than text or tables?tables?

Section 1.3 – Production Possibilities Curves

Production PossibilitiesProduction Possibilities

Production Possibilities Graph – Production Possibilities Graph – shows alternatives to what an shows alternatives to what an economy can produceeconomy can produceLet’s say we can produce 2 Let’s say we can produce 2

things: Guns and Butterthings: Guns and Butter


Production Possibilities Graph – Production Possibilities Graph – shows alternatives to what an shows alternatives to what an economy can produceeconomy can produceThe outer red line shows the The outer red line shows the

maximum possible output with any maximum possible output with any given combinationgiven combination

This is the This is the Production Possibilities Production Possibilities Frontier (or Curve)Frontier (or Curve)


To move from To move from one point to one point to another, the another, the economy must economy must make make trade-trade-offsoffs


Any point along the line shows the Any point along the line shows the economy operating at maximum economy operating at maximum efficiencyefficiency

Any point below the line is Any point below the line is underutilization – underutilization – they are not getting they are not getting all that they couldall that they could

Any point above the line is presently Any point above the line is presently impossible, until new resources are impossible, until new resources are availableavailable


Why does the graph curve instead of Why does the graph curve instead of making a straight line?making a straight line?Law of Increasing Costs – Law of Increasing Costs – as as

production increases for one item, production increases for one item, more and more resources are more and more resources are necessary to increase production of necessary to increase production of the second item! The the second item! The OPPORTUNITY COST increases…OPPORTUNITY COST increases…


Every resource is best suited for Every resource is best suited for certain types of goodscertain types of goodsFarmland and cows make butterFarmland and cows make butterMetals and factories make guns and Metals and factories make guns and

many times you hear about butter vs. many times you hear about butter vs. guns due to military spending on guns due to military spending on weaponry using resources …weaponry using resources …

To convert butter production to guns, To convert butter production to guns, you must sell the cows and build new you must sell the cows and build new factories on the landfactories on the land

quiz time quiz time

Number your paper 1 – 4Number your paper 1 – 4

1. A production possibilities curve shows 1. A production possibilities curve shows the relationship between the production of:the relationship between the production of:a. farm goods and factory goodsa. farm goods and factory goodsb. two types of farm goodsb. two types of farm goodsc. two types of factory goodsc. two types of factory goodsd. any two categories of goodsd. any two categories of goods

answeranswer

d. any two categories of goods.d. any two categories of goods.

next …next …

2. The line on a production possibilities 2. The line on a production possibilities curve showing the relative amounts of two curve showing the relative amounts of two types of goods produced using all types of goods produced using all resources is called theresources is called thea. production possibilities frontiera. production possibilities frontierb. opportunity cost lineb. opportunity cost linec. utilization of resourcesc. utilization of resourcesd. maximum possible production lined. maximum possible production line


a. production possibilities frontiera. production possibilities frontier

question …question …

3. The law of increasing costs means that as 3. The law of increasing costs means that as production shifts from one item to another,production shifts from one item to another,

a. the cost of production gets cheaper and cheaper.a. the cost of production gets cheaper and cheaper. b. the cost of producing an item stays the same no b. the cost of producing an item stays the same no

matter how many are produced.matter how many are produced. c. more and more resources are necessary to c. more and more resources are necessary to

increase production of the second itemincrease production of the second item d. the land costs of increasing production rise much d. the land costs of increasing production rise much

more steeply than do the labor costsmore steeply than do the labor costs

answer is …answer is …

c. more and more resources are c. more and more resources are necessary to increase production of the necessary to increase production of the second itemsecond item

and last question …and last question …

4. The curve usually seen in a production 4. The curve usually seen in a production possibilities frontier can be explained by:possibilities frontier can be explained by:a. growth in the economya. growth in the economyb. underutilization of resourcesb. underutilization of resourcesc. increasing an economy’s efficiencyc. increasing an economy’s efficiencyd. the law of increasing costsd. the law of increasing costs

final answer is …final answer is …

d. the law of increasing costs!d. the law of increasing costs!

Gigantic India...Gigantic India...

India boasts of having 1,50,000 post office across the country. This is by Far the India boasts of having 1,50,000 post office across the country. This is by Far the largest among any nation of the world.largest among any nation of the world.

Structured India...Structured India...Indian Railways employs over 20 lakh staff, directly or indirectly. This is by far the Indian Railways employs over 20 lakh staff, directly or indirectly. This is by far the largest by any organization in the world.largest by any organization in the world.

Dependable India...Dependable India...From almost 0 in 1990, India is by far the largest outsourcing destination, with From almost 0 in 1990, India is by far the largest outsourcing destination, with over 100 billion dollars of revenue per annum coming from IT/ITESover 100 billion dollars of revenue per annum coming from IT/ITES Young India...Young India...Average Age of an India today is 25.6 compared to 40.5 of a British and 44.6 of a Average Age of an India today is 25.6 compared to 40.5 of a British and 44.6 of a Japanese. This surely makes my India, a Young IndiaJapanese. This surely makes my India, a Young India

An economy that is efficient is …An economy that is efficient is …

producing the maximum amount of goods producing the maximum amount of goods and services .. now that’s efficient!and services .. now that’s efficient!

Introduction to economics - lecture 1.ppt

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