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Chapter 1: What is Economics?

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Chapter 1: What is Economics? Here we go! Get ready! Section 1: Scarcity and the Factors of Production Production Possibilities Frontier Plot all of the points on the ... – PowerPoint PPT presentation

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Title: Chapter 1: What is Economics?


1
Chapter 1 What is Economics?
  • Here we go! Get ready!
  • Section 1 Scarcity and the Factors of Production

2
What is Economics?
  • What do you know about the subject of economics?

3
Scarcity and Choice
  • Primary idea We cant have everything we need
    and want!

4
  • Needs necessary for survival
  • Air, food, shelter
  • Wants item we desire but do not NEED to survive
  • If we cannot have everything, how do we make
    decisions???

5
  • Economics is the study of how people seek to
    satisfy their needs and wants by making choices.
  • Why, oh why, must we make these difficult
    choices, you ask??...

6
Scarcity!
  • ...because of the idea economists call scarcity
  • Scarcity means that we have limited quantities of
    resources to meet our unlimited wants.
  • Economics is about solving the problem of
    scarcity.

7
Goods and Services
  • Goods physical objects
  • Shoes and shirts
  • Services actions or activities that one person
    performs for another
  • Haircuts, dental checkups, tutoring
  • Although these goods and services are abundant in
    the U.S., they are still scarce because there is
    always a limit.

8
Scarcity Versus Shortages
  • Scarcity ? Shortage
  • Shortage when producers will not or cannot
    offer goods or services at the current prices
    (more on this later)
  • Temporary or long term
  • Scarcity always exists b/c our needs and wants
    are always greater than our resources

9
Factors of Production
  • The resources that are used to make all goods and
    services are factors of production.
  • There are 3.
  • They are land, labor, and capital.

10
Land
  • Land all natural resources (found in nature)
    used to produce goods and services
  • Fertile land for farming
  • Products in or on the land
  • Coal, water, forests

11
Labor
  • Labor the effort that a person devotes to a
    task for which that person is paid
  • Medical aid provided by a doctor
  • Tightening of a clamp by an assembly line worker
  • Artists creation of a painting
  • Repair of a television

12
Capital
  • Capital any human-made resource used to produce
    other goods and services
  • There are two kinds
  • Physical
  • and
  • Human

13
Capital
  • Physical Capital
  • Human made objects used to create other goods and
    services
  • Buildings and tools
  • Benefits of physical capital
  • Extra time
  • More knowledge
  • More productivity

14
Capital
  • Human Capital
  • Knowledge and skills a worker gains through
    education and experience

15
Who pulls these resources together?
  • Entrepreneurs ambitious leaders who decide how
    to combine land, labor, and capital resources to
    create new goods and services
  • Take risks to develop original ideas, start
    businesses, create new industries, and fuel
    economic growth

16
Scarce Resources
  • No matter what good or service, the supplies of
    land, labor, and capital used to produce it are
    scarce.

17
Section 2
  • Opportunity Cost

18
Trade-Offs
  • Trade-offs all the alternatives we give up
    whenever we choose one course of action over
    another
  • All individuals, businesses, and groups of people
    make decisions involving trade-offs.

19
Trade-Offs Who makes them?
  • Individuals
  • Businesses
  • How to use land, labor, and capital resources
  • Society
  • Guns or butter?

20
Opportunity Cost
  • Opportunity cost the most desirable alternative
    given up as the result of a decision
  • What we trade for what we choose
  • Decision-making grids weighing two alternatives
  • What alternative offers the most desirable
    benefits?

21
Thinking at the Margin
  • Economists always think at the margin when
    deciding how much more or less to do
  • It involves thinking about using ONE additional
    unit
  • Look at the opportunity costs and benefits of
    each additional unit

22
Section 3
  • Production
  • Possibility
  • Curves
  • Its your first
  • graph in Econ.
  • Get excited.

23
Historical Example
  • U.S. faced urgent task when entering W.W. II
  • How could we create the weapons and equipment
    needed to defeat Hitler?
  • (We didnt just have all that stuff sitting
    around!)

24
Now that you know some economic concepts
  • you probably realize that we cant just suddenly
    make a bunch of military stuff without giving up
    something! (ahhemmtrade-offs)

25
To create what we needed
  • we had to switch our production focus as a
    country from consumer goods (like food and
    clothing) to wartime goods (like guns, aircraft,
    and uniforms)

26
And thats what Production Possibilities in Econ
is all about
  • Excited yet? Well, heres a definition for you
  • Production Possibilities curve shows
    alternative ways to use an economys productive
    resources

27
What does a Production Possibilities Curve look
like, you ask?
  • Axes of the graph
  • Show different kinds of goods and services
  • Farm goods vs. factory goods
  • Capital goods vs. consumer goods
  • guns and butter
  • Show any pair of specific goods or services
  • Hats vs. shoes

28
The classic example is Guns v. Butter What the
heck does that mean?
  • Its supposed to show that every society has to
    choose what to produce.
  • Guns represent military expenditures.
  • Butter represents money spent on domestic
    (consumer) things.

29
Now you get to learn how to draw a Production
Possibilities Curve!
  • Were going to use the creative example that your
    book provides on page 15. The authors have
    chosen to examine the production possibilities
    of
  • Shoes and watermelons
  • Label your axes
  • Vertical axis shoes
  • Horizontal axis watermelons

30
Drawing a Production Possibilities Curve
  • Determine points of possible production
  • If this country devoted ALL resources to making
    shoes (and produced NO watermelons), how many
    shoes could it produce?
  • If this country devoted ALL resources to making
    watermelons, how many watermelons could it
    produce?

31
Drawing a Production Possibilities Curve
  • So this country can produce
  • 15 million pairs of shoes
  • OR
  • 21 million tons of watermelons
  • Do they have any other choices of production?...

32
Drawing a Production Possibilities Curve
  • Now determine points of production in between
    these two extremes
  • A country can produce a number of combinations of
    both goods
  • Do you think its usually a good idea to be
    producing at one of the extremes or somewhere in
    between? Why?

33
Drawing a Production Possibilities Curve
  • Options of production for this country
  • What is the best combination??
  • Hmmmwell, that takes some analyzing!

Watermelons Shoes
0 15
8 14
14 12
18 9
20 5
21 0
34
Production Possibilities Frontier
  • Plot all of the points on the curve and connect
    them to draw a line (curve)
  • Production possibilities frontier the line on a
    production possibilities graph that shows the
    maximum possible output (think of the word
    frontier as far out as you can see)
  • any point on this line means a country is using
    all of its resources to produce a maximum
    combination of those two goods

35
Trade-Offs
  • Each point on the curve represents a trade-off
  • When we move along the curve, we are trading some
    of one product to make more of the other product
  • top of the curve factories produce more shoes,
    but farms grow fewer watermelons
  • Moving down the curve farms grow more
    watermelons, but factories make fewer shoes
  • Why??

36
Trade-Offs
  • because of scarcity!
  • Land, labor, and capital are scarce
  • Using factors of production to make one product
    leaves fewer resources to make something else
  • Its all about making decisions!

37
Efficiency, Growth, and Cost
  • Why are production possibility curves important?
  • Show how efficient an economy is
  • Show whether an economy has grown or shrunk
  • Show the opportunity cost of a decision to
    produce more of one good or service

38
Efficiency
  • Efficiency using resources in such a way as to
    maximize the production or output of goods and
    services
  • Production possibilities frontier represents
    economy operating at full efficiency

39
Efficiency
  • When economies are inefficient, they are
    operating somewhere inside the frontier
  • This represents an underutilization of resources
  • Using fewer resources than the economy is capable
    of using

40
Efficiency
  • Anywhere on the PPF the economy is operating at
    full efficiency
  • Somewhere inside the PPF achievable but the
    economy is inefficient (not using their resources
    completely)
  • Outside the PPF an economy cant get there with
    current land, labor, and capital

41
Growth
  • Production possibilities curves represent only a
    countrys current possibilities. Right now, we
    cannot produce at X.
  • But things are always changing!
  • If quantity or quality of available land, labor,
    or capital changes, then the curve will move.

42
Growth
  • If immigrants pour into a country, then more
    labor becomes available
  • The maximum amount of goods the nation can
    produce increases
  • New inventions allow workers to produce more
    goods at lower costs

43
Growth
  • When an economy grows, the entire curve shifts
    to the right
  • Why???

44
Growth
  • A countrys production capacity can decrease, too
  • When a country goes to war and loses land as a
    result
  • If a countrys population ages, supply of labor
    and human capital decreases
  • When this happens, the curve shifts to the left.

45
Cost
  • Cost does NOT EQUAL money in economics
  • It is the alternative we give up when we choose
    one option over another
  • Cost always means opportunity cost
  • Production possibilities curves are used to see
    opportunity cost in a decision

46
Cost
  • How many shoes do we have to give up to go from
    producing no watermelons to 8 million watermelons?

Watermelons Shoes
0 15
8 14
14 12
18 9
20 5
21 0
47
Cost
  • How many shoes do we have to give up to jump to
    the next level (producing 14 million watermelons
    only 6 million more)?

Watermelons Shoes
0 15
8 14
14 12
18 9
20 5
21 0
48
Law of increasing costs
  • Each time we grow watermelons, the sacrifice in
    terms of shoes increases
  • This is called the law of increasing costs as
    production switches from one item to another,
    more and more resources are necessary to increase
    production of the second item.
  • So the opportunity cost increases

49
Law of increasing costs
  • Why??
  • Moving resources from factory to farm production
    means farmers must use resources that are not as
    suitable for farming
  • Ex at first, use most fertile land to be
    growing watermelons
  • Over time, have to use poorer land that can
    produce less

50
Shape of the curve
  • Law of increasing costs explains why production
    possibilities frontiers usually curve.
  • As we move along the curve, we trade off more and
    more to get less and less additional output.
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