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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
What Is Economics?
1C H A P T E R
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
ECONOMICS
The social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
ECONOMICS
The social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
WHY STUDY ECONOMICS• Most __________ decisions involve
economics. • An understanding of economics and
government are the keys to participatory citizenship.
• Learn analytical and observational skills that are important in the workplace.
• Business managers or owners need these skills and understanding.
• Make better financial decisions with your investments.
• Foundation for careers in accounting, business, finance, marketing, or public policy.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
THE FOUNDATION OF ECONOMICS
SOCIETY HAS VIRTUALLYUNLIMITED WANTS...
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
BUT LIMITED OR SCARCERESOURCES!
SOCIETY HAS VIRTUALLYUNLIMITED WANTS...
THE FOUNDATION OF ECONOMICS
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
GOODS & SERVICES PROVIDE...
UTILITY
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
WANT
GOODS & SERVICES PROVIDE...
UTILITY
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
WANT vs. NEED
GOODS & SERVICES PROVIDE...
UTILITY
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Scarcity• The world has limited
resources.• These resources are
desirable.• TINSTAAFL
–There is no such thing as a free lunch
The Economic Way of Thinking
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
The Three Fundamental Questions...
How will the goods be produced?
What will be produced?
Who will get the goodsand services?
ECONOMICS AT WORK
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
ECONOMIC PRODUCTS
• Consumer Goods• Capital Goods• Services
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Let’s see if you’re thinking like an economist yet
Take the true/false quiz in your packet
called Activity 1
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
FACTORS OF PRODUCTION
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PROPERTY RESOURCES
LAND
SCARCE RESOURCESECONOMIC RESOURCES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PROPERTY RESOURCES
LAND
CAPITAL
SCARCE RESOURCESECONOMIC RESOURCES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PROPERTY RESOURCES
LAND
CAPITAL
SCARCE RESOURCESECONOMIC RESOURCES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
SCARCE RESOURCESECONOMIC RESOURCES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
SCARCE RESOURCESECONOMIC RESOURCES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEURIAL ABILITY
SCARCE RESOURCESECONOMIC RESOURCES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
ENTREPRENEURIAL ABILITY
Takes The Initiative
Makes Strategic Business Decisions
Innovator
The Risk Bearer
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
RESOURCE PAYMENTS
RENT
INTEREST
WAGES
PROFIT &LOSS
PROPERTY RESOURCES
LAND
CAPITAL
HUMAN RESOURCES
LABOR
ENTREPRENEUR
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
RESOURCES & SCARCITY
Let’s illustrate this with a challenge.
We need 4 teams. Group by seats.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
CIRCULAR FLOW MODEL
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
PRODUCTMARKET
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
PRODUCTMARKET
CIRCULAR FLOW MODEL
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
GOODS &SERVICES
GOODS &SERVICES
PRODUCTMARKET
CIRCULAR FLOW MODEL
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
CIRCULAR FLOW MODEL
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
CIRCULAR FLOW MODEL
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
CIRCULAR FLOW MODEL
BUSINESSES HOUSEHOLDS
RESOURCEMARKET
RESOURCES INPUTS
$ COSTS $ INCOMES
PRODUCTMARKET
GOODS &SERVICES
GOODS &SERVICES
$ CONSUMPTION$ REVENUE
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
What is the difference between a Trade-Off and
Opportunity Cost?
Trade-Off
An exchange of one or more thing(s) in return for another.
Opportunity Cost
The value of the next-highest valued alternative or the forgone cost.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
What is the difference between a Trade-Off and
Opportunity Cost?
Trade-Off
An exchange of one or more thing(s) in return for another.
Opportunity Cost
The cost of passing up the next best choice.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
FRIDAY NIGHT OPTIONS
• Go out with friends• Stay home and watch TV• Go on a date• Study economics• Attend the basketball game
The one we pick is our choice, the rest become Trade-offs.
The “next best” alternative becomes the Opportunity Cost.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
FRIDAY NIGHT OPTIONS
• Go out with friends
The one we pick is our choice, the rest become Trade-offs.
The “next best” alternative becomes the Opportunity Cost.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
GO OUT ON A DATE
• The Opportunity Cost of going out on a date is what you’ve lost by not going out with friends.– Excitement– Fun
• Your decision was based on getting more utility on your date.
• That’s the “incentive”
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
ANY OTHER COSTS?
Dating is expensive. Let’s say you spend $30. You could have spent that $30 on something else.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
SO OUR OPPORTUNITY COST IS…?
• The lost fun you would have had with your friends.
• The cash you spent on your date.
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Marginal Analysis• Comparing benefits and costs.• Marginal – means “extra, additional, one
more”• Marginal Cost (MC) – What does it cost
to go to the next level or to get one more item?
• Marginal Benefit (MB) – What pleasure or “utility” do you get out of the next level or item?
• Incentive– Why do we act?– We do it when MB is greater than or equal to
MC.
The Economic Way of Thinking
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Marginal Analysis ExampleHours Econ Score Math Score
0 0 0
1 26 24
2 48 44
3 61 62
4 73 75
5 83 84
6 91 91
7 97 96
8 100 100
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PRODUCTION POSSIBILITIES
Assumes...
•Full Employment•Full Production•Fixed Resources•Fixed Technology•Two Goods
for example...
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PRODUCTION POSSIBILITIESAssumes...
Full Employmentand ProductiveEfficiency
Fixed ResourcesFixed TechnologyTwo Goods
for example...
PIZZA
A Consumer Good
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Two Goods
Fixed ResourcesFixed Technology
Assumes...
Full Employmentand ProductiveEfficiency
PRODUCTION POSSIBILITIES
for example...
Robots
A Capital Good
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Using all of our resources, to get some pizza, we must giveup some robots!
for example...
What if we could only produce ...
10,000 Robotsor
400,000 Pizzas
PRODUCTION POSSIBILITIES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
PRODUCTION POSSIBILITIES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
graphical formR
obot
s(t
hou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
graphical formR
obot
s(t
hou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
graphical formR
obot
s(t
hou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
1 - 47
Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
graphical formR
obot
s(t
hou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
1 - 48
Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
graphical formR
obot
s(t
hou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
1 - 49
Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
PIZZA 0 1 2 3 4(in hundred thousands)
ROBOTS 10 9 7 4 0(in thousands)
in table form
graphical formR
obot
s(t
hou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A B
C
D
E
W
Attainablebut
Inefficient
Unattainable
Attainable& Efficient
PRODUCTION POSSIBILITIES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making An economy must
sacrifice some of product X to obtain more of product Y.
PRODUCTION POSSIBILITIES
Limited Resources meansa limited output...
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Law of IncreasingOpportunity Cost
• Economic resources are not completely adaptable to other uses
• To make more of X it costs more and more of Y
• This makes the PPC:– Bowed out from the origin– Concave
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Q
Q
Rob
ots
(tho
usan
ds)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
U
Unemployment &Underemployment Shown by Point U
More of either orboth is possible
PRODUCTION POSSIBILITIES
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
U
Unemployment &Underemployment Shown by Point U
More of either orboth is possible
PRODUCTION POSSIBILITIES
Notes...Economic Growth1. Increase in
resource supplies 2. Better resource
quality 3. Technological
advances4. Capital Goods
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Scarcity and the Science of Economics
Basic Economic Concepts
Economic Choices and Decision Making
Economic Growth
Q
Q
Ro
bo
ts (t
ho
usa
nd
s)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A’
B’
C’
D’
E’
PRODUCTION POSSIBILITIES