The social science that studies the choices people make as they try to satisfy their wants in a world of scarcity.
The Fundamental Economic Problem
SCARCITY = tension between unlimited wants and the limited productive resources available for satisfying these wants
Needs are required for survival
Wants are desired for satisfaction
How to make best use of limited productive resources to satisfy human wants
Every Society must answer 3 questions
1. What goods and services will be produced?
2. How are goods and services to be produced?
3. For whom are goods and services to be produced?
Factors of Production (Productive Resources)
1. LAND / Natural Resources – “gifts of nature”, these are NOT created by human effort
2. LABOR / Human Resources – human work effort both mental & physical
3. CAPITAL – man-made goods used to produce other products
The Other Guy: Final Factor of Production
4. Entrepreneur – risk takers who combine land, labor, and capital and turn them into new products
Role of the Entrepreneur
What do they do?
Combine factors of production to create product
Successful entrepreneurs attract other firms to the industry (this helps everyone!)
Search for profits = new products = competition = more production = lower prices for consumers (What’s this called?)
Entrepreneurs and countries’ leaders strive for greater productivity! Why?
Productivity – the value of our output for every unit of input (in other words: how efficiently resources are being used!)
To be more productive we must:
Create more output with same inputs
Create same output with less inputs
How to increase productivity =
1. Division of Labor
3. Investing in Human Capital
Other Basic Economic Language
Review Production Equation
LAND + LABOR + CAPITAL = PRODUCT
able to be touched
anything that satisfies a person’s wants & is TANGIBLE
Durable - Used 3 + years and lasts
Nondurable - Used 3 + years and does not last
can’t be touched / felt
tasks that you pay other people to perform for you
services are INTANGIBLE
What’s the difference between consumer and capital goods???
Why would you buy that?
Utility - is a good’s or service’s capacity to provide satisfaction or usefulness, which varies with the needs and wants of each person
Disutility- is a good’s or service’s capacity to provide dissatisfaction (unhappiness)
How do we assign value to products?
Value is worth expressed in dollars and cents. For something to have value, it must be scarce and provide utility!
Why is water worth so much less than diamonds? (Diamond-Water Paradox)
How do we decide who gets which products?
We use a rationing device, a way of allocating our products
Our rationing device is price !!!
Besides the price of items, what else influences who gets what?
Making Good Choices
Without enough resources to satisfy our wants, we have to CHOOSE which wants we will satisfy
Maria earns $1000 a month. She wants a new outfit, 10 new books, a trip to Hawaii, a new car, and many other things.
Maria can pay the price of all of these things but can’t have them all. She has a decision to make!
Economic Decision Making
Trade-offs are the alternative choices people face in making an economic decision.
To decide among our tradeoffs, we use cost/benefit analysis!
Discussion – What are your tradeoffs of going to the next school dance?
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.
Discussion – What is your opportunity cost of going to the school dance? The OC
Review: Economic Decision Making
Everyone incurs tradeoffs and opportunity costs when making decisions
Ex. Entrepreneur who uses a building to sell car insurance
Ex. Homeowner purchases new carpet
Ex. Government provides universal healthcare to its citizens
Economists say, “There’s No Such Thing as a Free Lunch!”
Production Possibilities Frontiers (PPF)
An economic model that shows how an economy might use its resources to produce two goods
Show all combinations of production when all productive resources are employed
We use a PPF to evaluate opportunity cost – “when we produced more of 1 thing, we must give up producing something else
The Classic Guns and Butter example: B A C D E F
Society’s choices are limited to points on or inside the PPF – WHY???
Guns Butter 10,000 20,000 30,000 40,000 50,000 100,000 95,000 85,000 70,000 50,000 40,000 At point A, all resources are used for butter Moving from point A to point B requires shifting resources out of butter and into guns. At point F. all resources are used for Guns.
Understanding the PPF
The curve represents optimal production for an economy
An economy can produce at any point ON or BELOW the PPF curve
An economy cannot produce at any point above the PPF curve
INCREASING OPPORTUNITY COST (curved PPF) As you move along the curve, you give up increasing amounts of a good/service in order to produce an additional unit of the other good/service mainly because not all of the resources can be used in the exact same way!
Constant Opportunity Cost
Straight-line PPF (slope stays the same)
Each time you produce additional units of one good, you give up the same amount of the other good to do so
Efficiency and Inefficiency
Productive efficiency: achieving as much output as possible from a given amount of resources – occurs at any point on the PPC .
Any point within the PPC represents inefficiency.
Any point outside the PPC is unattainable, given present resources and technology.
Efficiency and Inefficiency Butter 10 8 6 4 2 0 2 4 6 8 10 Guns C D A B Efficient points Inefficient point Unattainable point, given available technology, resources and labor force
An economic system is the way a society coordinates the production and consumption of goods & services.
How a society answers the three basic economic questions determines which type of economic system they are!
Three Types of Economic Systems:
Circular Flow Model
Model details the flow of money and goods in a market economy
The factor market is where individuals sell their resources to businesses to gain income
The product market is where individuals use their income to buy the goods & services businesses sell.
The Circular Flow of Economic Activity – Market Economy Consumer Spending Profit / Revenue Income = Flow of inputs and outputs = Flow of dollars PRODUCT MARKET Goods and services bought Goods and services sold Sell Factors Of Production Buy Factors of production Factor Payments Businesses
Produce and sell
goods and services
Buy and use factors
Buy and consume
goods and services
Own and sell factors
of production Individuals
The American Economic System
We said we are a ____________ economy…
What’s the difference?
Scottish Economist who wrote The Wealth of Nations
Devised the “Invisible Hand” Theory
Smith wanted Little Government Interference !
Credited with creating capitalism, free enterprise, etc.
Smith’s ideas were used in the 1700s-1800s:
Individual investors, known as capitalists , grew wealthy by accumulating capital & devoted them to industrial production
More goods & services became available
Better quality of life for some while others suffer
What do we want in our economy?
We know we are a Mixed Economy
We have both private individuals owning factors of production with freedom of business , but we also have government regulation/ownership !
Role of the Government
Acts as a Protector
Passes laws / regulations to prevent abuse of consumers & workers
Protects both producers & consumers
Acts as a Regulator
Tries to address national goals – economic equity & security