Transcript PH_Chapter_1_Econ_2009

An Economic Way of
thinking
• Economics- the study of the choices people
make to satisfy their needs and wants.
• There are many choices people make and
Economists study why people make the
choices they do.
Two categories of Economics
• Microeconomics- the study of choices
made by individuals
- micro looks at the smaller picture of
the economy
• Macroeconomics- study behavior of entire economies
- looks at the larger picture of the
economy
• You are involved in both micro and macro economics
by the choices you make everyday.
Who makes decisions?
• Two large groups: consumers and
producers
– Consumers- the people who buy things
– Producers- the people who make things
• Consumers choose what to buy and
producers choose what to provide and
how to provide it.
• These decisions are the basis for
all economies world wide
How do you make choices?
• Based on your needs and wants
- Needs- those things necessary
for survival
- Wants- extras
• Focuses on goods and services
- Goods- physical objects that can
be purchased
- Services- labor performed for
others
Economic Resources
• Resource- anything that people use to make
or obtain what they want
• Factors of production- resources that can be
used to produce goods and services
• 3 types:
- Land-(Natural)
-
Labor-(Human)
-
Capital
Land-Natural Resources
• Items provided by nature
• Ex. Fish, farmland, minerals
• Only considered a natural resource in
economics when it is scarce and some payment
is required for its use
Labor-Human Resources
• Any human effort used during production
• Can be physical or intellectual
Capital Resources
• manufactured materials used to create products
• Includes the goods and the money used to
purchase them
• Buildings, structures, machinery, tools
Entrepreneurship
• Organizational abilities and the risk involved in
starting a business - the person willing to risk starting a business
• They risk their money for possible financial return
• Ex: Michael Dell (Dell computers)
• Can get a large return, or nothing
The Factors of Popcorn Production
Land
Labor
Capital
Popping Corn
The human effort needed
to pop the corn
Corn-Popping
Device
Vegetable Oil
Entrepreneurship-The person willing to take the chance to
open the popcorn stand.
Scarcity
• All resources are limited
• Combination of limited resources and unlimited
wants creates scarcity
• People must make decisions on how to use
resources more effectively
Shortages occur when
producers will not or cannot
offer goods or services at
current prices
Opportunity costs
• Because of scarcity, there is a need for trade offs
• 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.
• Face opportunity
cost everyday
when making
choices
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
Thinking at the Margin
• When you decide how much more or less to
do, you are thinking at the margin.
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
Production Possibilities
18
9
20
5
21
0
Shoes (millions of pairs)
• Shows combination of goods or services that can be
produced given current resources and technology
• The production possibilities frontier is the line that
shows the maximum possible output for that economy.
• Assume that
Production Possibilities Graph
resources stay the Watermelons
25
Shoes
(millions of tons) (millions of pairs)
same, and that
20
0
15
technology will
a (0,15)
8
14
15
b (8,14)
not change
14
12
c (14,12)
10
d (18,9)
5
0
A production
possibilities frontier
e (20,5)
f (21,0)
5
10
15
20
25
Watermelons (millions of tons)
Efficiency
Production Possibilities Graph
25
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.
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
g (5,8)
5
d (18,9)
e (20,5)
A point of
underutilization
0
5
10
f (21,0)
15
20
Watermelons (millions of tons)
25
Growth
Production Possibilities Graph
25
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)
0
5
10
15
20
Watermelons (millions of tons)
25
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
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
c (14,12)
10
d (18,9)
5
0
5
10
15
20
25
Watermelons (millions of tons)
Interdependence
• Depends on unmet needs and wants
• If you are satisfied, there is no need for exchange
(self-sufficiency)
• People specialize in certain areas of production
and rely on others for everything else
• Relying on others, is interdependence
• Allows everyone to do what they do best, leads to
more goods and services for everyone
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
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
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.
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.
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.
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.