Transcript Economics - Walton High

Scarcity and the Factors of Production
• What is economics?
• How do economists define scarcity?
• What are the three factors of production?
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What Economics Is All About
• Scarcity refers to the limited nature of society’s
resources.
• Economics is the study of how society manages its
scarce resources, including
– how people decide how much to work, save,
and spend, and what to buy
– how firms decide how much to produce,
how many workers to hire
– how society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs
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Scarcity and Shortages
• Scarcity occurs when there
are limited quantities of
resources to meet unlimited
needs or desires
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• Shortages occur when
producers will not or cannot
offer goods or services at
current prices
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The Factors of Production
• Land All natural resources that are used to produce
goods and services.
• Labor Any effort a person devotes to a task for which
that person is paid.
• Capital Any human-made resource that is used to
create other goods and services.
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The Factors of Popcorn Production
Land
Labor
Capital
Popping Corn
The human effort needed
to pop the corn
Corn-Popping
Device
Vegetable Oil
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Section 1 Assessment
1. What is the difference between a shortage and scarcity?
(a) A shortage can be temporary or long-term, but scarcity always exists.
(b) A shortage results from rising prices; a scarcity results from falling prices.
(c) A shortage is a lack of all goods and services; a scarcity concerns a single
item.
(d) There is no real difference between a shortage and a scarcity.
2. Which of the following is an example of using physical capital to save time and
money?
(a) hiring more workers to do a job
(b) building extra space in a factory to simplify production
(c) switching from oil to coal to make production cheaper
(d) lowering workers’ wages to increase profits
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Chapter 1
Section
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Section 1 Assessment
1. What is the difference between a shortage and scarcity?
(a) A shortage can be temporary or long-term, but scarcity always exists.
(b) A shortage results from rising prices; a scarcity results from falling prices.
(c) A shortage is a lack of all goods and services; a scarcity concerns a single
item.
(d) There is no real difference between a shortage and a scarcity.
2. Which of the following is an example of using physical capital to save time and
money?
(a) hiring more workers to do a job
(b) building extra space in a factory to simplify production
(c) switching from oil to coal to make production cheaper
(d) lowering workers’ wages to increase profits
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Opportunity Cost
• Does every decision you make involve trade-offs?
• How can a decision-making grid help you identify the
opportunity cost of a decision?
• How will thinking at the margin affect decisions you
make?
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Trade-offs and Opportunity Cost
• Trade-offs are all the alternatives that we give up
whenever we choose one course of action over others.
• The most desirable alternative given up as a result of a
decision is known as opportunity cost.
All individuals and groups of people make decisions
that involve trade-offs.
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The Decision-Making Grid
• Economists encourage us to consider the benefits and
costs of our decisions.
Karen’s Decision-making Grid
Alternatives
Sleep late
Wake up early to study
Benefits
• Enjoy more sleep
• Have more energy during the day
• Better grade on test
• Teacher and parental approval
• Personal satisfaction
Decision
• Sleep late
• Wake up early to study for test
Opportunity cost
• Extra study time
• Extra sleep time
Benefits forgone
• Better grade on test
• Teacher and parental approval
• Personal satisfaction
• Enjoy more sleep
• Have more energy during the day
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HOW PEOPLE MAKE DECISIONS
• Decision making is at
the heart of economics.
• The first four principles
deal with how people
make decisions.
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HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
All decisions involve tradeoffs. Examples:
• Going to a party the night before your midterm leaves
less time for studying.
• Having more money to buy stuff requires working
longer hours, which leaves less time for leisure.
• Protecting the environment requires resources that
might otherwise be used to produce consumer
goods.
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HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
• Society faces an important tradeoff:
efficiency vs. equity
• efficiency: getting the most out of scarce resources
• equity: distributing prosperity fairly among society’s
members
• Tradeoff: To increase equity, can redistribute income
from the well-off to the poor.
But this reduces the incentive to work and produce, and
shrinks the size of the economic “pie.”
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HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is What
• Making
requires
You
Givedecisions
Up to Get
It comparing the costs and
benefits of alternative choices.
• The opportunity cost of any item is whatever must be
given up to obtain it.
• It is the relevant cost for decision making.
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HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is What
You Give Up to Get It
Examples:
The opportunity cost of…
…going to college for a year is not just the tuition,
books, and fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket, but
the value of the time you spend in the theater.
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Thinking at the Margin
• When you decide how much more or less to do, you are
thinking at the margin.
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Options
Benefit
Opportunity Cost
1st hour of extra
study time
Grade of C on
test
1 hour of
sleep
2nd hour of extra
study time
Grade of B on
test
2 hours of
sleep
3rd hour of extra
study time
Grade of B+ on
test
3 hours of
sleep
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HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the
Margin
• A person is rational if she systematically and
purposefully does the best she can to achieve her
objectives.
• Many decisions are not “all or nothing,”
but involve marginal changes – incremental
adjustments to an existing plan.
• Evaluating the costs and benefits of marginal
changes is an important part of decision making.
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HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the
Margin
Examples:
• A student considers whether to go to college
for an additional year, comparing the fees &
foregone wages to the extra income he could earn
with an extra year of education.
• A firm considers whether to increase output,
comparing the cost of the needed labor and
materials to the extra revenue.
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HOW PEOPLE MAKE DECISIONS
Principle #4: People Respond to Incentives
• incentive: something that induces a person to act,
i.e. the prospect of a reward or punishment.
• Rational people respond to incentives because they
make decisions by comparing costs and benefits.
Examples:
– In response to higher gas prices,
sales of “hybrid” cars (e.g., Toyota Prius) rise.
– In response to higher cigarette taxes,
teen smoking falls.
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Section 2 Assessment
1. Opportunity cost is
(a) any alternative we sacrifice when we make a decision.
(b) all of the alternatives we sacrifice when we make a decision.
(c) the most desirable alternative given up as a result of a decision.
(d) the least desirable alternative given up as a result of a decision.
2. Economists use the phrase “guns or butter” to describe the fact that
(a) a person can spend extra money either on sports equipment or food.
(b) a person must decide whether to manufacture guns or butter.
(c) a nation must decide whether to produce more or less military or consumer
goods.
(d) a government can buy unlimited military and civilian goods if it is rich enough.
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Chapter 1
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Section 2 Assessment
1. Opportunity cost is
(a) any alternative we sacrifice when we make a decision.
(b) all of the alternatives we sacrifice when we make a decision.
(c) the most desirable alternative given up as a result of a decision.
(d) the least desirable alternative given up as a result of a decision.
2. Economists use the phrase “guns or butter” to describe the fact that
(a) a person can spend extra money either on sports equipment or food.
(b) a person must decide whether to manufacture guns or butter.
(c) a nation must decide whether to produce more or less military or consumer
goods.
(d) a government can buy unlimited military and civilian goods if it is rich enough.
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Chapter 1
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Production Possibilities Graphs
• What is a production possibilities graph?
• How do production possibilities graphs show
efficiency, growth, and cost?
• Why are production possibilities frontiers curved lines?
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Production Possibilities
•
A production possibilities graph shows alternative ways that an
economy can use its resources.
•
The production possibilities frontier is the line that shows the
maximum possible output for that economy.
Production Possibilities Graph
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Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
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b (8,14)
c (14,12)
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d (18,9)
5
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a (0,15)
A production
possibilities frontier
e (20,5)
f (21,0)
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Watermelons (millions of tons)
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Efficiency
Production Possibilities Graph
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Shoes (millions of pairs)
• Efficiency means
using resources in
such a way as to
maximize the
production of goods
and services. An
economy producing
output levels on the
production
possibilities frontier
is operating
efficiently.
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a (0,15)
b (8,14)
c (14,12)
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g (5,8)
5
d (18,9)
e (20,5)
A point of
underutilization
0
5
10
f (21,0)
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Watermelons (millions of tons)
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Growth
Production Possibilities Graph
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Future production
Possibilities frontier
T
Shoes (millions of pairs)
• Growth If more
resources become
available, or if
technology improves,
an economy can
increase its level of
output and grow.
When this happens,
the entire production
possibilities curve
“shifts to the right.”
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
d (18,9)
5
e (20,5)
f (21,0)
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5
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15
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Watermelons (millions of tons)
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Cost
• Cost A production possibilities graph shows the cost of
producing more of one item. To move from point c to point d on
this graph has a cost of 3 million pairs of shoes.
Production Possibilities Graph
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Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
c (14,12)
10
5
0
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d (18,9)
5
10
15
20
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Watermelons (millions of tons)
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Section 3 Assessment
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by an economy.
(b) the maximum possible output of an economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
2. An economy that is using its resources to produce the maximum number of goods
and services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.
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Chapter 1
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Section 3 Assessment
1. A production possibilities frontier shows
(a) farm goods and factory goods produced by an economy.
(b) the maximum possible output of an economy.
(c) the minimum possible output of an economy.
(d) underutilization of resources.
2. An economy that is using its resources to produce the maximum number of goods
and services is described as
(a) efficient.
(b) underutilized.
(c) growing.
(d) trading off.
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Sooooooo then…
Why are all these Billionaires giving away
their money?
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A C T I V E L E A R N I N G 1:
Exercise
You are selling your 1996 Mustang. You have already
spent $1000 on repairs.
At the last minute, the transmission dies. You can pay
$600 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you have the
transmission repaired?
A. Blue book value is $6500 if transmission works,
$5700 if it doesn’t
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t
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A C T I V E L E A R N I N G 1:
Answers
Cost of fixing transmission = $600
A. Blue book value is $6500 if transmission works,
$5700 if it doesn’t
Benefit of fixing the transmission = $800
($6500 – 5700).
It’s worthwhile to have the transmission fixed.
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t
Benefit of fixing the transmission is only $500.
Paying $600 to fix transmission is not worthwhile.
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A C T I V E L E A R N I N G 1:
Answers
Observations:
• The $1000 you previously spent on repairs is
irrelevant. What matters is the cost and benefit
of the marginal repair (the transmission).
• The change in incentives from scenario A
to scenario B caused your decision to change.
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