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Chapter 1: What is Economics?

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Kelly Patel

on 8 May 2017

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Transcript of Chapter 1: What is Economics?

3 groups of resources that are used to make all goods an services

1. LAND: refers to all natural resources (found in nature) used to produce goods and services (fertile land, coal, h20, forests)

2. LABOR: an effort that a person devotes a task for which that person is paid (medical aid-doctor, creation of a painting-artist)

3. CAPITAL: any human made resource that is used to produce other goods and services.

LAND, LABOR, & CAPITAL are all essential ingredients for creating goods and services
1. Explain why scarcity and choice are basic problems of economics.
2. Identify land, labor, capital as the 3 factors of production, and identify the types of capital.
3. Explain the roles of entrepreneurs.
4. Explain why economists say all resources are scarce.
What comes to mind when you hear the word "scarce."
Two Basic Economic Ideas
1. Scarcity 2. Shortage
SHORTAGE: a situation in which a good or service is unavailable

-Shortages can be temporary or long-term. *Empty shelves at Christmas one day, and the next day the shelves will be restocked

Scarcity and Shortage are NOT the same
ECONOMICS: is the study how people make choices when they face a limited supply of resources

*For example: you must choose how to spend your time OR businesses choose how many people to hire

NEED: necessary for survival (air, food, h20, shelter)

WANT: item you desire but is not essential to survival (iPod)

GOODS: all physical objects (shoes, shirts, jeans)

SERVICES: actions or activities that one person, performs for another (haircuts, dental, tutoring)

Two Basic Economic Ideas
1. Scarcity 2. Shortage
SCARCITY: implies limited quantities of resources to meet unlimited wants

-Scarcity exists in all places, at all times
-All goods and services we produce are scarce
-Economics is about solving the problems of scarcity
-Scarcity always exists because our own needs and wants are always greater than our resource supply. *GAS

Chapter 1: What is Economics?
Section 1: Scarcity and Factors of Production

3 Categories of Capital
PHYSICAL Capital: any human made objects used to create other goods and services

Services - (building & tools)

A shoe factory-sewing machines,and specialized machinery

Saves people and companies a great deal of time and money
HUMAN Capital: knowledge and skills a worker gains through education and experience

*LIQUID Capital: cash or money that can be used to purchase the other needed factors of production
An economy requires both physical and human capital to produce goods and services. (Doctors use a stethoscopes and their schooling to provide their services.


Entrepreneurs: ambitious leader who combines LAND, LABOR, & CAPITAL (factors of production) to create and market new goods and services

-Individuals, who take risks to develop original ideas, start businesses, create new industries, and fuel economic growth.

BRAINSTORM: List entrepreneurs and what they have accomplished? (your family, in Stoughton, today, in history)

Economists say that all goods and services are scarce because the land, labor, and capital used to create them are scarce, and that each resource has many alternatives.

Crash Course 10 min. Start at 1:50 min.

People, businesses, and governments must choose among limited or scarce resources. Economics describes how people seek to satisfy their needs and wants by choosing among many alternatives
Factors of Popcorn Production:
Popping corn seed
Vegetable oil
farm workers
human effort to pop the corn
transportation workers
corn popping machine
Popcorn Maker
Section Assessment:

1. What is the difference between a shortage and a scarcity?
A) a shortage can be temporary or long-term, but scarcity always exists.
B) a shortage results from rising prices; a scarcity results from falling prices.
C) a shortage is a lack of goods and services; a scarcity concerns a single item.
D) there is no real difference between a shortage and a scarcity.

2. Which of the following is an example of using PHYSICAL capital to save time and money?
A) hiring more workers to do a job.
B) building extra space in a factory to simplify production.
C) switching oil to coal to make production cheaper.
D) lowering workers' wages to increase profits.

We have discussed topics of scarcity, factors of production (CELL), types of capital (3), the role of entrepreneurs, and why economists say all resources are scarce.

Now you will be able to work you 1.1 worksheet and the factors of production chart for tomorrow
Chapter 1 - Section 2: Opportunity Cost
1. Describe why every decision involves trade-offs
2. Explain the concept of opportunity cost
3. Explain how people make decisions by thinking at the margin
Identify five (5) appealing vacation destinations. Then choose your favorite one (1). Put a star by it. Then explain their choices and describe what you gave up by choosing that vacation over the others. This would be an example of a TRADE-OFF

*Scenery, culture, food, weather, history, geography, etc.

Trade-Off: are all the alternatives that we give up whenever we choose one course of action over another.

Individual & Trade-Offs
Every decision we make involves trade-offs.

*spend time @ work, give up watching movie, give up going to baseball game, give up eating dinner w/ family, etc.
Businesses & Trade-Offs
The decisions that business people make about how to use land, labor, and capital (factors of production). Resources also create trade-offs.

*Farmers can't grow corn if they have carrots planted in the soil.
Society & Trade-Offs
"Guns or Butter" trade-offs that nations face when choosing whether to produce more or less military or consumer goods.

*The steel used to make a tank is not longer available for building the dairy equipment needed to make butter.
3 types of Trade-Offs
Opportunity Cost: the most desirable alternative given up as the result of a decision.

-Every decision that we make everyday involves an opportunity cost
-When we select one alternative, we have to sacrifice at least one alternative and go w/o its benefits

Give an example of the concept of opportunity cost from your own life.
*Going on Spring Break...giving up the choice to buy new living room furniture

Decide whether to work at an after school job by comparing the opportunity costs and benefits of the alternatives.
*Working more hours means earning more money, but less time will be available for other activities (socializing, studying, family, etc.)

Which factor would an employer consider if she/he were trying to decide whether to hire an additional worker?
*Employers would consider the cost (wages) of hiring an additional worker compared to the benefits gained (more work performed) from having another person in the workforce.
Thinking at the Margin: deciding whether to do or use one additional unit of some resource.

-Employers think at the margin when they decide how many extra workers to hire
-Legislators think at the margin when deciding if a government program should include more of a particular benefit

-This decision making process is sometimes called cost/benefit analysis -->using economic logic to make decisions. Typically weigh the costs and benefits (including opportunity costs) when making a decision.
*Example: Marijuana Legalization - article "Legalize It"

-Decision-makers have to compare the opportunity costs and the benefits – What they will sacrifice and what they will gain.

Chapter 1 - Section 3: Production Possibilities Curves
1. Interpret a production possibilities curve.
2. Demonstrate how production possibilities curves show efficiency, growth, and cost.
3. Understand that a country's production possibilities depend on its available resources and technology.
-Economists often use graphs to analyze choices and trade-offs that people make
-Graphs help us to see how one value relates to another value
Production Possibilities Curve
- a graph that shows alternative ways to use an economy's resources
-To draw a production possibilities curve, an economist begins by deciding which goods and services to examine
Production Possibilities Frontier
- the line on a production possibilities graph that shows the maximum possible output.
-Remember each point represented on a production possibilities curve reflects a trade-off
-Production possibilties Frontier represents an economy working at its most efficient level of production
Because land, labor, & capital are scarce. Using the factors of production to make one product means that fewer resources are left to make something else.

Production Possibilities graphs can illustrate:
EFFICIENCY-using resources in such a way as to maximize the production of goods and services

-sometimes economies operate inefficiently. Drawing a point inside the productions possibilities frontier represents a trade-off

UNDERUTILIZATION-using fewer resources than an economy is capable of using
If the quantity or quality of available land, labor, or capital changes, then the curve will move....*immigrants move into country = more labor, new inventions = allows workers to produce more goods at lower costs
-GROWTH in the economy --> production possibilities curve shifts to the RIGHT
When a country's production capacity DECREASES, the curve shifts to the LEFT....*country goes to war and loses part of its land as a result, population ages, unhealthy, uneducated
COST - is the alternative we give up when we choose one option over the other.
Cost is not necessarily $money$

LAW OF INCREASING COSTS - as we shift factors of production from making one good or service to another, the cost of producing the 2nd item increases
A country's resources include its land and natural resources, its work force, and PHYSICAL and HUMAN capital

Human and physical capital reflect a vital ingredient - TECHNOLOGY

Each production method uses different technology, or know-how, to create products

Economists also must assess each country's level of technological know-how

A country's production possibilities depend both on its TECHNOLOGICAL level and the RESOURCES it has available
EFFICIENCY - using resources in such a way to maximize the production of goods and services * inefficient = underutilization --> shown by any point that appears inside the production possibilities frontier.

GROWTH - a production possibilities curve reflects the country's current production possibilities. (QUANTITY/QUALITY) Growth = shift to the RIGHT, Decline = shift to the LEFT

COST - to an economist, the alternative that is given up because of a decision
Question pg. 535
If the # of farms s decreased since 1950, does this mean that the production possibilities for farm output have also decreased? Why or Why not?

* The production possibilities for farm output do not necessarily decrease; the size of each farm has increased, and new technology/fertilizers, may also allow more output per acre
Question pg. 19 "Safety at Any Cost" Suppose you are buying a car. How would the trade-offs discussed in the article affect your decision?

*Is the added safety from anti-lock brakes, airbags and traction control worth the added costs? A larger car is safer, but a larger car uses more fuel and therefore contributes to pollution and over dependence on foreign oil

The opportunity cost of an individual's decisions, therefore, is determined by his or her needs, wants, time and resources (INCOME)
Closing: You consider costs and benefits at the margin in everyday decisions.
What is shown on this graph:
*Opportunity Cost-when you gain butter you give up gun
*Efficiency-Edge of graph (points B, D, C,) all maximum work
*point A = inefficient or underutilization
*Maximum Production: Can't go beyond edge to point X
*Specialization: graph is curved becasue people in some jobs are not good at them

Example: At max gun production some non-factory working farmers are making guns poorly
*point D is not always perfect, (i am - ha ha) but it depends on your needs.
*Example: If you were in war do you want to make as much domestic stuff? or military stuff?
-The curve moving outward means new variables have been added to increase productivity (more people, new machines, etc.)

-The curve moving inward means variables have been added to decrease productivity (sickness, war, etc.)
Other Economic Graphs

MARGINAL UTILITY- As more of an item is consumed, less pleasure is derived from each additional unit consumed
Other Economic Graphs

LAW OF DIMINISHING RETURNS: we will get less and less extra output when we add additional doses of an input while holding other inputs fixed.

AKA: As you add more inputs, less total work is done per input
a BAD thing that happens is not tied into the actual cost of a product.

Example: pollution from a factory that kills fish. Factory goes out of business prior to fixing problem.
+POSITIVE+ Externalities
GOOD things that happen that are not tied to the actual cost of a product.

Example: Beekeepers do not charge farmers for bees to pollinate crops. Beekeepers sell honey

Indoor and secure bike parking on campus
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