Unit 1: Foundations of Unit 1: Foundations of EconomicsEconomics

What is Economics?What is Economics?

““A science that deals with the A science that deals with the allocation, or use, of scarce allocation, or use, of scarce resources for the purpose of resources for the purpose of fulfilling society’s needs and fulfilling society’s needs and wants.” – Addison-Wesleywants.” – Addison-Wesley

What is Economics?What is Economics?

So then the big two concepts are So then the big two concepts are that:that: Resources are scarce!Resources are scarce! Society has unlimited needs Society has unlimited needs

and wants!and wants!Economics decides the “best” Economics decides the “best” way of providing one to the otherway of providing one to the other

ScarcityScarcity

DefinitionDefinitionA situation in which the A situation in which the amount of something amount of something actually available would not actually available would not be sufficient to satisfy the be sufficient to satisfy the desire for it, if it were desire for it, if it were provided free of charge.provided free of charge.

Factors of ProductionFactors of Production

There are 4 factors that must all There are 4 factors that must all be used to produce anythingbe used to produce anything Natural Resources (also Natural Resources (also

referred to as “land”)referred to as “land”)

Factors of ProductionFactors of Production

There are 4 factors that must all There are 4 factors that must all be used to produce anythingbe used to produce anything Labor – effort of a person for Labor – effort of a person for

which they are paidwhich they are paid

Factors of ProductionFactors of Production

There are 4 factors that must all There are 4 factors that must all be used to produce anythingbe used to produce anything Capital – human-made resources Capital – human-made resources

used to create other goodsused to create other goods

Factors of ProductionFactors of Production

3 Kinds of Capital3 Kinds of CapitalPhysical Capital – Also called Physical Capital – Also called Capital GoodsCapital Goods, objects that are , objects that are used to produce other goods used to produce other goods

Factors of ProductionFactors of Production

3 Kinds of Capital3 Kinds of CapitalHuman Capital – knowledge Human Capital – knowledge or skills workers get from or skills workers get from education and experience education and experience

Factors of ProductionFactors of Production

3 Kinds of Capital3 Kinds of CapitalFinancial Capital – money Financial Capital – money needed to begin production needed to begin production of a good or serviceof a good or service

Factors of ProductionFactors of Production

There are 4 factors that must all be There are 4 factors that must all be used to produce anythingused to produce anything Entrepreneurship – person who Entrepreneurship – person who

takes a risk in combining the other takes a risk in combining the other 3 factors to create a new good3 factors to create a new good

Making Economic DecisionsMaking Economic Decisions

Every decision we make Every decision we make involves involves trade-offs – trade-offs – alternatives that we must give alternatives that we must give up when we make a choiceup when we make a choice Example – “I could stay up for 3 Example – “I could stay up for 3

hours playing Halo, study, or hours playing Halo, study, or sleep.”sleep.”

Making Economic DecisionsMaking Economic Decisions The most desirable of the options The most desirable of the options

you pass up is called the you pass up is called the Opportunity CostOpportunity Cost

Rank sleep, studying, and playing video games 1st, 2nd, and 3rd on a list for what you value the most

Making Economic DecisionsMaking Economic Decisions 11stst Place is what Place is what

you would you would choose to dochoose to do

22ndnd Place is your Place is your opportunity opportunity cost (you give it cost (you give it up to do option up to do option 1)1)

Making Economic DecisionsMaking Economic Decisions

What other option do you have What other option do you have other than using 3 hours for one other than using 3 hours for one task?task?

You could split your time among You could split your time among multiple activities!multiple activities!

Thinking at the Margin – Thinking at the Margin – decision decision involving adding one unit and involving adding one unit and subtracting one unit, rather than subtracting one unit, rather than all or nothingall or nothing

Making Economic DecisionsMaking Economic Decisions

OptionsOptions BenefitBenefitOpportunity Opportunity

CostCost

0 hours 0 hours studying, 3 studying, 3 hours sleepinghours sleeping

F on TestF on Test NoneNone

1 hours 1 hours studying, 2 studying, 2 hours sleepinghours sleeping

C on TestC on Test 1 hour of sleep1 hour of sleep

2 hours 2 hours studying, 1 hour studying, 1 hour sleepingsleeping

B on TestB on Test 2 hours of sleep2 hours of sleep

3 hours studying3 hours studying B+ on TestB+ on Test 3 hours of sleep3 hours of sleep

Making Economic DecisionsMaking Economic Decisions

There is a point at which you are There is a point at which you are paying the same increase in paying the same increase in cost, but seeing lower benefitscost, but seeing lower benefits

You must make the decision as You must make the decision as to whether the cost is worth itto whether the cost is worth it

This same process is used by This same process is used by businesses and consumers to businesses and consumers to make decisionsmake decisions

Production PossibilitiesProduction Possibilities

Production Possibilities Graph Production Possibilities Graph – shows alternatives to what – shows alternatives to what an economy can producean economy can produceLet’s say we can produce 2 Let’s say we can produce 2 things: Guns and Butterthings: Guns and Butter

Production PossibilitiesProduction Possibilities

Production PossibilitiesProduction Possibilities

Production Possibilities Graph – Production Possibilities Graph – shows alternatives to what an shows alternatives to what an economy can produceeconomy can produce The outer red line shows the The outer red line shows the

maximum possible output with maximum possible output with any given combinationany given combination

This is the This is the Production Production Possibilities Frontier (or Curve)Possibilities Frontier (or Curve)

Production PossibilitiesProduction Possibilities

To move To move from one from one point to point to another, the another, the economy economy must make must make trade-offstrade-offs

Production PossibilitiesProduction Possibilities

Any point along the line shows Any point along the line shows the economy operating at the economy operating at maximum efficiencymaximum efficiency

Any point below the line is Any point below the line is underutilization – underutilization – they are not they are not getting all that they couldgetting all that they could

Any point above the line is Any point above the line is presently impossible, until new presently impossible, until new resources are availableresources are available

Production PossibilitiesProduction Possibilities

Why does the graph curve Why does the graph curve instead of making a straight instead of making a straight line?line?Law of Increasing Costs – Law of Increasing Costs – as as production increases for one production increases for one item, amount needed as item, amount needed as tradeoff increases as welltradeoff increases as well

Production PossibilitiesProduction Possibilities

Every resource is best suited Every resource is best suited for certain types of goodsfor certain types of goods Farmland and cows make butterFarmland and cows make butter Metals and factories make gunsMetals and factories make guns To convert butter production to To convert butter production to

guns, you must sell the cows and guns, you must sell the cows and build new factories on the landbuild new factories on the land