The Economic Way of Thinking

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					THE ECONOMIC WAY OF
THINKING
Chapter 1
          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
    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
BASIC ECONOMIC PRINCIPLES
PRINCIPLE 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
 BASIC ECONOMIC PRINCIPLES
 PRINCIPLE 2: SCARCITY AFFECTS EVERYONE


 Scarcityaffects 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
THREE BASIC ECONOMIC QUESTIONS
 Every society must answer three
 basic economic questions because of
 scarcity.

 Societiesanswer these questions
 differently, leading to a variety of
 economic systems.
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
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
THREE BASIC ECONOMICS QUESTIONS

   Question 3:
    For Whom Will It Be
    Produced?

       How goods and services are
        distributed involves two
        questions
         how should each person’s share
          be determined?
         how will goods and services be

          delivered to people?
 THE FACTORS OF PRODUCTION
Factors of production
 resources needed to
  produce goods and
  services
    1. land
    2. labor
    3. Capital
    4. entrepreneurship
     supply is limited
THE FACTORS OF PRODUCTION

Factor    1: Land
     Land means all natural
     resources on or under the
     ground
     includes water, forests,
      wildlife, mineral deposits
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
THE FACTORS OF PRODUCTION
 Factor   3: Capital
   Capital is a producer’s 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
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
             Making Economic Choices


 Two   factors affect economic decisions:
   1.   Incentives — benefits that encourage
        people to act in certain ways
   2.   Utility — benefit or satisfaction gained from
        using a good or service

 Choices vary between individuals based on what is
 best for him / her
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
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
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
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
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
VIDEO CLIP: OPPORTUNITY COST
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?

     (What’s the opportunity cost?)
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
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
            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
     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
WHAT WE LEARN FROM PPCS
     Efficiency — producing the maximum
     amount of goods and services possible

     Underutilization — producing fewer goods
     and services than possible
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
LET’S LOOK AT SOME EXAMPLES
   PPC Practice
CHANGING PRODUCTION POSSIBILITIES
   A country’s 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
PPF—THE 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.
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
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
EXAMPLES OF MACRO AND MICRO
 Which   is it?
 1.   National Unemployment Figures Rise
 2.   World Trade Organization Meets
 3.   Shipbuilder Wins Navy Contract
 4.   Cab Drivers on Strike!
 5.   Gasoline Prices Jump 25 Cents

				
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posted:1/30/2013
language:English
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