The Economic Way of Thinking

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The Economic Way of Thinking

• Chapter 1

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Scarcity The Basic Economic Problem

• KEY CONCEPTS
• Economics study of how people use resources to
  satisfy wants
• how individuals/societies choose to use resources
• organizes, analyzes, interprets data about
  economic behaviors
• develops theories, economic laws to explain
  economy, predict future

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Scarcity The Basic Economic Problem

• Scarcity
• is the economic problem of having seemingly
  unlimited human needs and wants, in a world of
  limited resources.
• Why does it exist?
• It exists because wants are unlimited and
  resources are limited

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Basic Economic PrinciplesPrinciple 1 People
Have Wants

• Wants desires that can be met by consuming
  products
• Needs things necessary for survival
• Scarcity lack of resources available to meet
  all human wants, not a temporary shortage
• People make choices about all their needs and
  wants
• Wants are unlimited, ever changing

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Basic Economic PrinciplesPrinciple 2 Scarcity
Affects Everyone

• Scarcity affects which goods and services are
  provided
• Goods physical objects that can be bought
• Services work one person does for another for
  pay
• Consumer person who buys good or service for
  personal use
• Producer person who makes a good or provides a
  service

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Video Clip Scarcity Choice
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Three Basic Economic Questions

• Every society must answer three basic economic
  questions because of scarcity.
• Societies answer these questions differently,
  leading to a variety of economic systems.

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Three Basic Economics Questions

• Question 1 What Will Be Produced?
• Societies must decide on mix of goods to produce
• depends on their natural resources
• Some countries allow producers and consumers to
  decide
• In other countries, governments decide
• Must also decide how much to produce choice
  depends on societies wants

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Three Basic Economics Questions

• Question 2
• How Will It Be Produced?
• Production decisions involve using resources
  efficiently
• Influenced natural resources
• Societies adopt different approaches
• labor-intensive methods versus capital-intensive
  methods depends on availability

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Three Basic Economics Questions

• Question 3
• For Whom Will It Be Produced?
• How goods and services are distributed involves
  two questions
• how should each persons share be determined?
• how will goods and services be delivered to
  people?

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The Factors of Production

• Factors of production
• resources needed to produce goods and services
• land
• labor
• Capital
• entrepreneurship
• supply is limited

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The Factors of Production

• Factor 1 Land
• Land means all natural resources on or under the
  ground
• includes water, forests, wildlife, mineral
  deposits

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The Factors of Production

• Factor 2 Labor
• Labor is all the human time, effort, talent used
  to make products
• physical and mental effort used to make a good or
  provide a service

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The Factors of Production

• Factor 3 Capital
• Capital is a producers physical resources
• includes tools, machines, offices, stores, roads,
  vehicles
• sometimes called physical capital or real capital
• Workers invest in human capital knowledge and
  skills
• workers with more human capital are more
  productive

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The Factors of Production

• Factor 4 Entrepreneurship
• Entrepreneurship vision, skill, ingenuity,
  willingness to take risks
• Entrepreneurs anticipate consumer wants, satisfy
  these in new ways
• develop new products, methods of production,
  marketing or distributing
• risk time, energy, creativity, money to make a
  profit

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Practice

• Label the 4 Factors f Production
• (CL Lesson 5, pg 26)
• Factors of Production CL Lesson 6 Activity in
  groups of 2 -3 .

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Making Economic Choices

• Two factors affect economic decisions
• Incentives benefits that encourage people to
  act in certain ways
• Utility benefit or satisfaction gained from
  using a good or service
• Choices vary between individuals based on what is
  best for him / her

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Making Economic Choices

• Factor 1 Motivations for Choice
• People motivated by incentives, expected utility,
  desire to economize
• They weigh costs against benefits to make
  purposeful choices
• Motivated by self-interest

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Making Economic Choices

• Factor 2 No Free Lunch
• All choices have a cost
• choosing one thing means giving up another, or
  paying a cost
• cost can take form of money, time, other thing of
  value

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Trade-Offs and Opportunity Cost

• Trade-off
• is alternative people give up when they make a
  choice
• usually means giving up some, not all, of a thing
  to get more of another

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Trade-Offs and Opportunity Cost

• Example of a Trade Off
• Jessica wants to earn college credit over summer
• semester-long university course offers more
  credits
• six-week high school course leaves time for
  vacation

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Trade-Offs and Opportunity Cost

• Opportunity cost is value of next-best
  alternative a person gives up
• not the value of all possible alternatives
• Example of Opportunity Cost
• Dan chooses to work for six months so he can
  travel for six months
• opportunity cost six months of salary

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Video Clip Opportunity Cost
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Opportunity Cost Activity

• In a group of 2 -3 consider this scenario
• You have won 1,000. Create a chart with these
  columns
• What will you buy?
• What will you gain from each choice?
• What do you give up with each choice? (Whats the
  opportunity cost?)

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Analyzing Economic Choices

• Cost-benefit analysis
• examines the costs and expected benefits of
  choices
• one of most useful tools for evaluating relative
  worth of economic choices

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Analyzing Economic Choices

• Marginal Costs and Benefits
• Marginal cost
• additional cost of using one more unit of a good
  or service
• Marginal benefit
• additional benefit of using one more unit of a
  good or service

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Analyzing Production Possibilities

• KEY CONCEPTS
• Production possibilities curve (PPC) is one model
  (graph)
• PPC shows the maximum goods or services that can
  be produced from limited resources
• also called production possibilities frontier
• PPC
• PPC based on assumptions
• resources are fixed
• all resources are fully employed
• only two things can be produced
• technology is fixed

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Graphing the Possibilities

• Production Possibilities Curve
• PPC runs between extremes of producing only one
  item or the other
• Data is plotted on a graph lines joining points
  is PPC
• shows maximum number of one item relative to
  other item
• PPC shows opportunity cost of each choice
• more of one product means less of the other

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What We Learn from PPCs

• Efficiency producing the maximum amount of
  goods and services possible
• Underutilization producing fewer goods and
  services than possible

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Why is the PPC a Curve?

• Law of increasing opportunity costs
• as production switches from one product to
  another, more resources needed to increase
  production of second product
• Reasons for increasing cost of making more of one
  product
• need new resources, machines, factories
• must retrain workers
• Costs paid by making less and less of other
  product

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Lets Look at Some Examples

• PPC Practice

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Changing Production Possibilities

• A countrys supply of resources changes over time
• Example U.S. in 1800s grew, gained resources,
  workers, new technology
• new resources mean new production possibilities
  beyond frontier
• Increased production shown on PPC as shift of
  curve outward
• Increase in total output called economic growth

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PPFThe Curve

• What Does Guns And Butter Curve Mean?
• In a theoretical economy with only two goods, a
  choice must be made between how much of each good
  to produce.
• As an economy produces more guns (military
  spending) it must reduce its production of butter
  (food), and vice versa. 

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Video Clip Individual and Society PPCs
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• CL Lesson 7 Activity pg. 35 PPC Problems

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Microeconomics and Macroeconomics

• Microeconomics
• Microeconomics examines specific, individual
  elements in an economy
• prices, costs, profits, competition, consumer and
  producer behavior
• Some Topics of Interest business organization,
  labor markets, environmental issues

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Microeconomics and Macroeconomics

• Macroeconomics
• Macroeconomics studies sectors combination of
  all individual units
• Includes consumer, business, public or government
  sectors
• Macroeconomics studies national or global topics
• monetary system, business cycle, tax policies,
  international trade

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Examples of Macro and Micro

• Which is it?
• National Unemployment Figures Rise
• World Trade Organization Meets
• Shipbuilder Wins Navy Contract
• Cab Drivers on Strike!
• Gasoline Prices Jump 25 Cents