CHAPTER 1CHAPTER 1

“ “ What is EconomicsWhat is Economics?”?”

What Reichling Economics is NOT!What Reichling Economics is NOT!

http://www.youtube.com/watch?http://www.youtube.com/watch?v=uhiCFdWeQfA&feature=relatedv=uhiCFdWeQfA&feature=related

EconomicsEconomics

Book Definition – The study of how Book Definition – The study of how people seek to satisfy their seemly people seek to satisfy their seemly unlimited needs and wants with limited unlimited needs and wants with limited resources by making choices.resources by making choices.

We Must Make Choices? We Must Make Choices? Because of …..Because of …..

Scarcity – fundamental problem in Scarcity – fundamental problem in economicseconomics

Scarcity occurs because our wants and Scarcity occurs because our wants and needs exceed societies ability to satisfy needs exceed societies ability to satisfy all of them due to a limited amount of all of them due to a limited amount of resources.resources. Limited quantities of resources to meet Limited quantities of resources to meet

unlimited wants.unlimited wants. Scarcity will always exist!Scarcity will always exist!

Several principles support economic thinking.• Scarcity-forces-tradeoffs principle: Limited resources force people to make choices

and face tradeoffs when they choose.• Cost-versus-benefits principle: People choose something when the benefits of

doing so are greater than the costs.• Thinking-at-the-margin principle: Most decisions involve choices about a little

more or a little less of something.• Incentives-matter principle: People respond to incentives in generally predictable

ways.• Trade-makes-people-better-off principle: By focusing on what we do well and

then trading with others, we will end up with more and better choices than bydoing everything for ourselves.

• Markets-coordinate-trade principle: Markets usually do better than anyone oranything else at coordinating exchanges between buyers and sellers.

• Future-consequences-count principle: Decisions made today have future (andoften unintended) consequences.

QUESTIONSQUESTIONS

Living in America do you always fear that Living in America do you always fear that there will not be an item on the shelf there will not be an item on the shelf when you go shopping?when you go shopping?

Who faces the problem of scarcity?Who faces the problem of scarcity? Are scarcity and shortages the same Are scarcity and shortages the same

thing?thing?

SHORTAGESSHORTAGES Shortages and scarcity are not the same Shortages and scarcity are not the same

thing. Shortages occur when producers thing. Shortages occur when producers either can not or will not offer goods and either can not or will not offer goods and services at a certain price.services at a certain price. Holiday season, workers going on strike, Holiday season, workers going on strike,

change in priceschange in prices

Some resources that we use on a daily Some resources that we use on a daily basis are scarce because they are limited, basis are scarce because they are limited, but currently there is not a shortage of that but currently there is not a shortage of that resource.resource.

TRADE-OFFSTRADE-OFFS

Trade-off – all alternatives that we Trade-off – all alternatives that we sacrifice when we make a decision.sacrifice when we make a decision.

All alternative choices. Trade offs are All alternative choices. Trade offs are another word for choices or alternatives.another word for choices or alternatives.

We have to make choices because of the We have to make choices because of the condition of scarcity.condition of scarcity.

Individually we make these decisions which are Individually we make these decisions which are trade-offs.trade-offs.

When you choose not to study then you miss out When you choose not to study then you miss out on a good test grade. So the cost of your on a good test grade. So the cost of your decision is how hard are you going to have to decision is how hard are you going to have to work for the rest of the six weeks or what are work for the rest of the six weeks or what are you going to do to bring up your grade.you going to do to bring up your grade.

Coming to school today and paying attention in Coming to school today and paying attention in class you are currently sacrificing whatever you class you are currently sacrificing whatever you would be doing instead. For most it would be would be doing instead. For most it would be sleeping. So the cost of coming to school and sleeping. So the cost of coming to school and sitting through economics class is sleep.sitting through economics class is sleep.

OPPORTUNITY COSTOPPORTUNITY COST

Trade-offs are ALL the alternatives you give up Trade-offs are ALL the alternatives you give up with every decision that you make. Opportunity with every decision that you make. Opportunity cost is the result of trade-offs. cost is the result of trade-offs.

Opportunity cost – next best alternativeOpportunity cost – next best alternative Every decision we make has a cost, and the Every decision we make has a cost, and the

most desirable alternative given up as the most desirable alternative given up as the result of a decision is called the opportunity result of a decision is called the opportunity cost.cost.

BUILDING A ZOO BUILDING A ZOO ACTIVITY!ACTIVITY!

Get into groupsGet into groups Follow the directions!Follow the directions!

Your group is building a new zoo.Your group is building a new zoo. You have to decide what animals to have.You have to decide what animals to have. Space is limited. You get 25 acres.Space is limited. You get 25 acres. Take 8-10 minutes to make your Take 8-10 minutes to make your

selections, based on the next slide.selections, based on the next slide.

QUESTIONSQUESTIONS1.Why didn't you put 1.Why didn't you put one of every one of every

animal in the zoo?"  animal in the zoo?"  2. "Why didn't you put a turkey in 2. "Why didn't you put a turkey in

your zoo?"  your zoo?"  3. "Why didn't you have a zoo with 3. "Why didn't you have a zoo with

only monkeys?"  only monkeys?"  4. "Why did you choose an Asian 4. "Why did you choose an Asian

elephant and not an African elephant and not an African elephant?" elephant?"

5. "What is the last animal to make the cut for 5. "What is the last animal to make the cut for your zoo?" your zoo?" 

6. "What 6. "What is the is the animal that just missed animal that just missed the the cut cut for your for your zoo?"  zoo?" 

7. What animal did everyone in your 7. What animal did everyone in your group agree to include ___?  group agree to include ___? 

8. Would everyone in your group have 8. Would everyone in your group have made the same choices if they did it made the same choices if they did it alone?" alone?" 

FACTORS OF FACTORS OF PRODUCTIONPRODUCTION

Resources that are used to make all Resources that are used to make all goods and services are called the factors goods and services are called the factors of production.of production. Three categoriesThree categories

LandLand LaborLabor Capital – both human and physicalCapital – both human and physical

LANDLAND

Natural resources that are used to make goods Natural resources that are used to make goods and services. Land is sometimes refered to as and services. Land is sometimes refered to as natural capital.natural capital.

Gifts of nature that we use in the production of Gifts of nature that we use in the production of goods and services.goods and services.

Economically, "land" is far more than just plots Economically, "land" is far more than just plots of ground; it is all natural materials and of ground; it is all natural materials and opportunities.opportunities. CottonCotton WaterWater Mineral DepositsMineral Deposits

LABORLABOR

Effort people devote to a task for which Effort people devote to a task for which they are paid.they are paid.

In economics, labor is human exertion, In economics, labor is human exertion, mental or physical, in production. This is mental or physical, in production. This is needed to produce the goods and needed to produce the goods and services.services.

CAPITALCAPITAL Divided into two sub categories.Divided into two sub categories.

Physical - Buildings, machines, and Physical - Buildings, machines, and technical equipment used in production plus technical equipment used in production plus inventories of raw materials, half-finished inventories of raw materials, half-finished goods, and finished goods. You may use goods, and finished goods. You may use financial capital to purchase physical capital.financial capital to purchase physical capital.

Human - People’s innate abilities and talents Human - People’s innate abilities and talents plus their knowledge, skills, and experience plus their knowledge, skills, and experience that make them economically productive. that make them economically productive. Human capital can be increased by investing Human capital can be increased by investing in health care, education, and job training. in health care, education, and job training.

ENTREPRENEURSENTREPRENEURS

Ambitious leader who combines the Ambitious leader who combines the factors of production to create and factors of production to create and market new goods and services. They market new goods and services. They are the risk takers.are the risk takers.

PPF CurvePPF Curve

In In economicseconomics, a , a production production possibilities frontier (PPF)possibilities frontier (PPF) or is a or is a graphgraph that shows the different that shows the different quantities of two quantities of two goodsgoods that an that an economyeconomy could efficiently produce could efficiently produce with limited with limited productive resourcesproductive resources..

Point Point AA in the diagram for example, shows that in the diagram for example, shows that FAFA of food and of food and CACA of computers can be of computers can be produced when production is run efficiently. produced when production is run efficiently.

A move from point A move from point AA to point to point BB indicates an indicates an increase in the number of computers produced. increase in the number of computers produced. But it also implies a decrease in the amount of But it also implies a decrease in the amount of Food produced. This decrease is the Food produced. This decrease is the opportunity cost of producing more computers.opportunity cost of producing more computers.

All points All points onon a production possibilities a production possibilities curve are points of maximum productive curve are points of maximum productive efficiency or minimum productive efficiency or minimum productive inefficiency: allocated such that it is inefficiency: allocated such that it is impossible to increase the output of one impossible to increase the output of one commodity without reducing the output of commodity without reducing the output of the other. That is, there must be a the other. That is, there must be a sacrifice, an opportunity costsacrifice, an opportunity cost

Point W:Point W: A point inside of the curve A point inside of the curve means that the economy is operating means that the economy is operating inefficiently. In other words the economy inefficiently. In other words the economy is not living up to its potential. is not living up to its potential. (Unemployed resources)(Unemployed resources)

Point Z:Point Z: A point outside of the curve A point outside of the curve represents a level of production not represents a level of production not currently possible with a given amount of currently possible with a given amount of resources and technology. May be resources and technology. May be possible in the future.possible in the future.

A A rightward shiftrightward shift of the PPF Curve of the PPF Curve represents represents economic growtheconomic growth. In other . In other words point Z with growth may be words point Z with growth may be possible where before it was not.possible where before it was not.

Two ways for economic growth to Two ways for economic growth to occur:occur:1. Get more resources1. Get more resources2. Get more out of your existing 2. Get more out of your existing resources (we call this increasing your resources (we call this increasing your productivity)productivity)

How does productivity increase?How does productivity increase?

1.1.Education (Increase human Education (Increase human capital)capital)

2.2.Technology (Increase capital Technology (Increase capital stock)stock)

3.3.Specialization (International trade)Specialization (International trade)

GUNS AND BUTTER GUNS AND BUTTER

This is a scenario of a constant trade-off This is a scenario of a constant trade-off situation. The trade-off deals with situation. The trade-off deals with defense vs. consumer and social issues. defense vs. consumer and social issues. Each government has to choose between Each government has to choose between guns and butter.guns and butter.

OR

PPF Analysis of Great PPF Analysis of Great Depression EraDepression Era

Guns

B D

AC

Match the dates with the points on the PPF.

1928

1933

1941

1946Butter

PPF Analysis of Great PPF Analysis of Great Depression EraDepression Era

Butter

Guns

CA

B D Point D: 1928

Point C: 1946

Point B: 1933

Point A: 1941