Unit 1

ECONOMIC PRINCIPLES

ECONOMICS & SCARCITY

Chapter 18 & Chapter 19.1 – Objective 7.01 7.02 7.03– Explain how scarcity forces us to make choices. Compare trade-offs & opportunity costs. Describe the basic factors of production & their impact on economic activities.

VocabularyEconomics

Study of how decisions are made when resources are limited

Scarcity Not enough resources to satisfy all of our desires

Needs Things required for survival

Wants Things we would like to have but don’t need for

survivalResources

Things used in making goods & providing services

SCARCITY IS THE FUNDAMENTAL ECONOMIC PROBLEM

Because of Scarcity we must answer 3 questions in economicsWhat to Produce?How to Produce?Whom to produce for?

Economic ModelsEconomy

All activity that affects production, distribution & use of goods & services

Economists use economic models to study the economy

They study past and present to predict the future

Based on assumptionsBusinesses & government make

decisions based on models

What is the fundamental economic problem?

1. Money2. Time3. Scarcity4. Economics

Trade Offs & Opportunity CostsTrade Off – Decision that must be made

when choosing between itemsOpportunity Cost – Value of the next best

alternative that was given up when an economic choice was made (Think Cost = $)Can be time or money as well

You always lose when faced with a trade offProduction Possibilities: The combinations

of goods and services that can be produced from a fixed amount of resources. (Guns vs. Butter or Computers vs. Food).

Assessment Activity: All economic questions and

problems arise from scarcity. Economics assumes people do not have the resources do satisfy all of their wants. Therefore, we must make choices about how to allocate those resources. We make decisions about how to spend our money and use our time. This activity will focus on the central idea of economics- every choice involves a cost.

Let's say you have five dollars. What would you like to spend it on? There are a million things you would love to spend five bucks on, but let's imagine there are only three things out there you really want to buy: gum, soda, and movie tickets. Look at the price chart to the right and answer the questions.

Good Price

Gum $ . 50

Soda $1.oo

Movie Ticket

$5.00

Questions:1. How many sodas can you buy instead of one

movie ticket?2. How many pieces of gum can you buy instead of

one soda?3. If buy 4 pieces of gum, how many sodas could

you have bought?

For example, if you go to the movies you have to give up a certain amount of gum and soda. If you are a sodaholic, you have to give up five sodas. If you are gum fanatic, you surrender ten packs of gum. But, the opportunity cost of a movie is not five sodas and ten packs of gum. It is five sodas or ten packs of gum.

Which of the following best describes scarcity?

A. Not enough goods for everyoneB. Not enough resources to provide every

desireC. Lack of desire to produce enough

resourcesD. The amount that people want

What is the opportunity cost of passing the Health Care Bill?

A. More people will have health care coverage.

B. Grandparents will be put to sleep because of Death Panels.

C. Obama will become the Devil and the Four Horseman will arrive.

D. The government will have less money to spend on other services like the military.

Production Possibilities CurveCurve shows the

different rates of production for individual or 2-good country.

Points on the curve are efficient.

Outside curve not possible due to lack of resources.

Inside the curve inefficient (2-good world could produce more)

Increase in food, decrease in computers

Production Possibilities CurveShows opportunity cost of producing 1 item and not the

other. As we produce more of one item, the opportunity cost

becomes greater because we are using resources not suited for making that item. – Must find a middle.

When individuals make decisions, the items they do not choose become:

A. opportunity costsB. human capitalC. goods & servicesD. needs

BUSINESS ECONOMICSChapter 18 section 2 & Chapter 19 section 1

All of the following are questions we must ask because of scarcity except:

1. When to produce?2. How to produce?3. What to produce?4. Whom to produce

for?

VocabularyGoods – Anything manufacturedCapital Goods = Factor Goods –

businesses use them to produce other goods or services

Consumer Goods = Final Goods – goods used by a consumer and not used to produce other goods to be sold

Service – Something someone does for someone else

Resources – anything used to make a good or provide a service – Same as Capital Goods

Natural Resource – anything from the earth used to make a good or provide a service

4 Factors of ProductionCapital

Money/resources used to start & continue a businessCan include Capital Goods

Natural Resources (also known as Land)Things that come from the earthIncludes land & energy

LaborHired workers to help in productionEarn money which they use to buy goods & servicesDivision of Labor – separating big jobs into small

onesEntrepreneurship

People willing to take risk in business (Decision Makers)

Plan & supervise production

All resources come from the earth

1. True2. False

A sewing machine to make Nike shirts would be placed in which factors of production?

A. LandB. LaborC. Entrepreneurship D. Capital

Business CostsFixed Costs

Expense is the same no matter how much is produced

Example - RentVariable Costs

Expense changes with number produced changingFixed Costs + Variable Costs = Total CostMarginal Cost

extra cost of producing one additional unit of outputMarginal Benefit /Revenue

additional benefit after all costs are accounted for producing one more unit

Cost Benefit Analysis economic model used to compare marginal costs &

benefits of a decision

Which economic term best explains a consumer’s choice of buying a new car or opening a savings account:

A. trade-offB. scarcityC. opportunity costD. comparative advantage

Considerations for BusinessesProductivity

Measure of the amount of output produced by a given amount of inputs in a specific period of time

SpecializationTakes place when people, businesses, regions &

countries concentrate on goods or services that they can produce better than anyone else

Examples – China and electronicsHuman Capital

Sum of the skills, abilities & motivations of people

ProductivityGoes up when more output can be

produced when scarce resources are used efficiently

Usually labor and human capitalIncreases when businesses invest in

human capitalIncreases with specialization

What is an example of a fixed cost of doing business?

1. Wages2. Cost of fuel3. Price of materials4. Rent on a building