Transcript Production Possibilities (cont.)

CHAPTER INTRODUCTION
SECTION 1 Scarcity and the Science
of Economics
SECTION 2 Basic Economic Concepts
SECTION 3 Economic Choices and
Decision Making
CHAPTER SUMMARY
CHAPTER ASSESSMENT
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Did You Know?
• We witness scarcity with each year’s “hot”
new toy. Inspired by hunter President
Teddy Roosevelt, Americans coveted the
teddy bear in 1906. Cabbage Patch dolls
were big during the 1980s, as were Tickle
Me Elmos in 1996. By 1999 Game Boy’s
Pokémon was the rage with a 10-cent
trading card. The most-prized first-edition
pocket monsters were in such short supply
that they commanded from $8 to $182.
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The Fundamental Economic Problem
• Scarcity is the condition where unlimited
human wants face limited resources. 
• Economics is the study of how people
satisfy wants with scarce resources. 
• Needs are required for survival; wants are
desired for satisfaction. 
• Someone has to pay for production costs,
so There Is No Such Thing As A Free
Lunch (TINSTAAFL).
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Three Basic Questions
• What must we produce? Society must
choose based on its need. 
• How should we
produce it? Society
must choose based
on its resources. 
Figure 1.1
• For whom should we
produce? Society
must choose based
on its population and
other available
markets.
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The Factors of Production
• Factors of production are resources
necessary to produce what people want or
need. 
• Land is the society’s limited natural
resources—landforms, minerals,
vegetation, animal life, and climate. 
• Capital is the means by which something
is produced such as money, tools,
equipment, machinery, and factories.
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The Factors of Production (cont.)
• Labor is the workers who apply their efforts,
abilities, and skills to production. 
• Entrepreneurs are risk-takers who combine
the land, labor, and capital into new
products. 
• Production is creating goods and
services—the result of land, capital, labor,
and entrepreneurs.
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The Factors of Production (cont.)
Figure 1.2
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The Scope of Economics
• Economics deals with the description of
economic activity—Gross Domestic
Product, unemployment rate, government
spending, tax rates, etc. 
• Analysis looks at the “why” and “how” of
economic activity—why prices go up and
down, for example, or how taxes affect
savings.
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The Scope of Economics (cont.)
• Explanation refers to how economists
communicate knowledge of the economy
and its activities to the society’s
population. 
• Prediction refers to how yesterday’s and
today’s economic activities advise us of
potential future activity.
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Did You Know?
• The 20 percent of the world’s people who
live in the wealthiest nations consume 86
percent of the world’s goods and services.
The 20 percent who live in the poorest
nations consume just 1.3 percent.
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Goods, Services, and Consumers
• Goods are items that are economically
useful or satisfy an economic want. They
are tangible and can be classified as
consumer/capital and durable/
nondurable. 
• Services are work performed for someone
and are intangible. 
• Consumers use goods and services to
satisfy wants and needs.
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Value, Utility, and Wealth
• Value is worth expressed in dollars and
cents. Scarcity by itself is not enough to
create value. For something to have value,
it must also have utility. 
• Utility is a good’s or service’s capacity to
provide satisfaction, which varies with the
needs and wants of each person. 
• Wealth is the accumulation of goods that
are tangible, scarce, useful, and
transferable to another person. Wealth
does not include services.
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The Circular Flow of Economic
Activity
• Markets are locations/mechanisms for
buyers and sellers to trade. They are
classified as local, regional, national,
global, and cyberspace. 
• A factor market is where people earn their
incomes. Factor markets center on the four
factors of production: land, capital, labor,
and entrepreneurs. 
• A product market is where people use their
income to buy from producers. Product
markets center on goods and services.
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The Circular Flow of Economic
Activity (cont.)
Figure 1.3
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•A household is a person or a group of people
that share their income.
•A firm is an organization that produces goods
and services for sale.
•Firms sell goods and services that they
produce to households in markets for goods
and services.
•Firms buy the resources they need to
produce—factors of production—in factor
markets.
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Productivity and Economic Growth
• Productivity is a measure of the amount of
output produced by the amount of inputs
within a certain time. Productivity increases
with efficient use of scarce resources. 
• Specialization and division of labor may
improve productivity because they lead to
more proficiency (and greater economic
interdependence).
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Productivity and Economic Growth
• Investing in human capital improves
productivity because when people’s skills,
abilities, health, and motivation advance,
productivity increases. 
• Economic growth depends on high
productivity. Yet, an economy’s productivity
may be affected by its interdependence—
reliance on others and their reliance on us
to provide goods and services.
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Growth in the U.S. Economy from 1962…
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Did You Know?
• Economists reward their greatest for
breakthrough discoveries. The 1999 Nobel
Prize for Economics went to Robert A.
Mundell, a Canadian economist at New
York’s Columbia University, for his careerlong work in international currency
exchange rates, vital in today’s global
marketplace. The prize is worth a million
dollars in U.S. currency.
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Trade-Offs and Opportunity Cost
• Trade-offs are the alternative choices
people face in making an economic
decision. A decision-making grid lists the
advantages and disadvantages of each
choice. 
• Opportunity cost is the cost of the next best
alternative among a person’s choices. The
opportunity cost is the money, time, or
resources a person gives up, or sacrifices,
to make his final choice.
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Trade-Offs and Opportunity Cost (cont.)
Figure 1.5
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Production Possibilities
• The production possibilities frontier diagram
illustrates the concept of opportunity cost.
It shows the combinations of goods and/or
services that can be produced when all
productive resources are used. The line on
the graph represents the full potential—the
frontier—when the economy employs all of
these productive resources. 
• Identifying possible alternatives allows an
economy to examine how it can best put its
limited resources into production.
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“How much?” is a decision at the margin.
•You make a trade-off when you compare the
costs with the benefits of doing something.
•Decisions about whether to do a bit more or a
bit less of an activity are marginal decisions.
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•Making trade-offs at the margin: comparing
the costs and benefits of doing a little bit
more of an activity versus doing a little bit
less.
•The study of such decisions is known as
marginal analysis.
•
Ex.: Hiring one more worker, studying
one more hour, eating one more cookie,
buying one more CD
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People usually take advantage of opportunities to make themselves better off.
•An incentive is anything that offers rewards to
people who change their behavior.
•
Ex.: Price of gasoline rises  people buy
more fuel-efficient cars.
•
There are more well-paid jobs available
for college graduates with economics degrees
 more students major in economics.
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Production Possibilities (cont.)
• Considering different ways to fully employ
its resources allows an economy to analyze
the combination of goods and services that
leads to maximum output. 
• An economy pays a high cost if any of it
resources are idle. It cannot produce on its
frontier and it will fail to reach its full
production potential. 
• Economic growth made possible by more
resources, a larger labor force, or
increased productivity causes a new
frontier for the economy.
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Production Possibilities (cont.)
Figure 1.6
The Production Possibilities Frontier
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Production Possibilities (cont.)
Figure 1.6
The Production Possibilities Frontier
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•What causes shifts in the production
possibilities frontier (PPF)?
•1.
•If someone developed a faster computer,
or a more efficient way of manufacturing
cars, we might see a shift right in the PPF.
This means that everything else held
constant (ceteris paribus) more goods can
be produced after the technological
change.
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•What causes shifts in the production
possibilities frontier (PPF)?
•2.
• Allows more production of both
capital and consumer goods
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Production Possibilities (cont.)
Figure 1.6
The Production Possibilities Frontier
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•What causes shifts in the production
possibilities frontier (PPF)?
•3.
•Destroys some of the inputs in the
production process. Imagine if a
hurricane took out a factory, then we
would see lower production in the
economy as a result.
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•What causes shifts in the production
possibilities frontier (PPF)?
•4.
•Capital grows over time, then we could
see the PPF curve shift out (representing
higher possibilities for production:
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•
is the branch of
economic analysis that describes the
way the economy actually works.
•
makes prescriptions
about the way the economy should
work.
•
is a simple prediction of the
future.
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Thinking Like an Economist
• Building simple models helps economists
analyze or describe actual economic
situations. 
• _______________analysis helps
economists evaluate alternatives by looking
at each choice’s cost and benefit. 
• Taking small, incremental steps in
implementing an economic decision helps
economists test whether the estimated cost
of the decision was correct.
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