Unit 2 Unit 2 Fundamental Fundamental

Economic Economic ConceptsConceptsSSEF1-SSEF6SSEF1-SSEF6

Unit 2: Test SOON!Unit 2: Test SOON!

What is What is Economics?Economics?

What is Economics?What is Economics?

Economics is the study Economics is the study of how people seek to of how people seek to satisfy their needs and satisfy their needs and wants by making wants by making choices.choices.

A social scientist studying A social scientist studying the allocation of scarce the allocation of scarce resources and goods.resources and goods.

Allocate-Allocate- Distribute Distribute according to some plan or according to some plan or system.system.

SSEF1 SSEF1

The student will explain why The student will explain why limited productive resources limited productive resources and unlimited wants result and unlimited wants result in scarcity, opportunity in scarcity, opportunity costs, and tradeoffs for costs, and tradeoffs for individuals, businesses, and individuals, businesses, and governments. governments.

SSEF1: Element ASSEF1: Element A

Define scarcity as a Define scarcity as a basic condition that basic condition that exists when unlimited exists when unlimited wants exceed limited wants exceed limited productive resources. productive resources.

1. Scarcity and Choice1. Scarcity and Choice

A “need” is something A “need” is something that is that is necessarynecessary for for survival (food, air, survival (food, air, shelter)shelter)

A “want” is something we A “want” is something we desire that is desire that is notnot essentialessential to survival. to survival.

Wants are Wants are unlimited while unlimited while the resources (i.e. the resources (i.e. Money) are not!Money) are not!

Scarce:Scarce:

Short in supplyShort in supply

ScarcityScarcityScarcity implies limited Scarcity implies limited quantities of resources to quantities of resources to meet unlimited wants.meet unlimited wants.

Unlimited wants exceed Unlimited wants exceed limited resourceslimited resources

EconomicsEconomics attempts to attempts to solve the problem of solve the problem of scarcity.scarcity.

Shortage vs. ScarcityShortage vs. Scarcity A “shortage occurs” when A “shortage occurs” when

producers will not or cannot producers will not or cannot offer goods or services.offer goods or services.

Shortages can be temporary Shortages can be temporary or long term.or long term.

““Scarcity” Scarcity” alwaysalways exists exists because our needs and wants because our needs and wants are always greater than our are always greater than our resource supply.resource supply.

What does this picture What does this picture represent? represent?

Why is social security a Why is social security a scarce resource?scarce resource?

What type of scarcity does What type of scarcity does this political cartoon this political cartoon

represent?represent?

SSEF1: Element BSSEF1: Element B

Define and give examples of Define and give examples of productive resources productive resources (factors of production) (factors of production) (e.g., land (natural), labor (e.g., land (natural), labor (human), capital (capital (human), capital (capital goods), entrepreneurship). goods), entrepreneurship).

What resourcesWhat resources were used to produce the were used to produce the

fruits and vegetables shown fruits and vegetables shown here?here?

Answer: #1Answer: #1

Natural Resources: are Natural Resources: are all of the raw materials all of the raw materials in nature used to in nature used to produce what humans produce what humans need or want!need or want!

2. Resources2. Resources

Defined as those Defined as those things which things which humans can put humans can put to productive use.to productive use.

3. Productive Resources3. Productive Resources

Resources need to be Resources need to be properly processed in properly processed in order to produce order to produce things that are needed things that are needed and/or wanted.and/or wanted.

4. Factors of 4. Factors of ProductionProductionEconomists call the resources Economists call the resources

that are used to make all goods that are used to make all goods and services the factors of and services the factors of production.production.

Four basic Factors of Four basic Factors of production: land, labor, production: land, labor, entrepreneurship and capital entrepreneurship and capital (human and physical).(human and physical).

i. Resource/Factors of i. Resource/Factors of ProductionProduction

The inputs land, labor, The inputs land, labor, capitol, and capitol, and entrepreneurship-used by entrepreneurship-used by society to produce outputs society to produce outputs which are often finished which are often finished products… products… example: example: HamburgersHamburgers! !

Factors of Production Factors of Production (cont.)(cont.)

CapitalCapital is any is any human-made human-made resourceresource that is used that is used to produce other to produce other goods and services.goods and services.

• LandLand refers to all refers to all natural resources natural resources used to produce used to produce goods and goods and services.services.

Land cont.Land cont.

It is more than the land It is more than the land we stand on it is we stand on it is timber, water, iron ore, timber, water, iron ore, crude oil, natural gas, crude oil, natural gas, coal, fish, uranium.coal, fish, uranium.

• b. Laborb. Labor is is the effort the effort that a person that a person devotes to a devotes to a task for task for which that which that person is person is paid.paid.

Contribution by the Contribution by the human workers to the human workers to the production process. production process.

Labor Includes: Physical Labor Includes: Physical and Mental efforts, highly and Mental efforts, highly skilled, and un skilled. A skilled, and un skilled. A Doctor and an assembly-Doctor and an assembly-line work are all equal!line work are all equal!

c. Capitalc. CapitalPhysical capital includes Physical capital includes

buildings, machinery, tools, all buildings, machinery, tools, all structures and equipment used structures and equipment used in the manufacturing process. in the manufacturing process. etc.etc.

Human capitalHuman capital is the knowledge is the knowledge and skills a worker gains and skills a worker gains through education and through education and experience.experience.

It assists in It assists in saving time and saving time and money when money when producing goods.producing goods.

d. Entrepreneurshipd. Entrepreneurship

A specific form of labor. It A specific form of labor. It consist of the creative, consist of the creative, managerial, and risk-managerial, and risk-taking capabilities that are taking capabilities that are involved in starting up and involved in starting up and running a business. running a business.

5. Goods vs. Services5. Goods vs. Services Goods are physical objects Goods are physical objects

such as shoes and shirts.such as shoes and shirts. Services are actions or Services are actions or

activities that one person activities that one person performs for another.performs for another.

Thoughts:Thoughts:

All goods and services All goods and services are scarce because the are scarce because the land, labor, and land, labor, and capital used to create capital used to create them are scarce.them are scarce.

Can you identify the Can you identify the physical capital and human physical capital and human

capital in this cartoon?capital in this cartoon?

Where did they come Where did they come from????from????

Journey of the French Journey of the French Fry…Fry…

Journey of the French Fry….Journey of the French Fry…. Started as a potato; planted in soil, Started as a potato; planted in soil,

had to be watered, fertilized, had to be watered, fertilized, harvested, processed, frozen, harvested, processed, frozen, transported to a supermarket.transported to a supermarket.

Cooked, sprinkled with salt, and Cooked, sprinkled with salt, and eaten.eaten.

Scarce resources used to Scarce resources used to make the French Fry…make the French Fry…

Land: Small quantity of land for Land: Small quantity of land for agricultureagriculture

Labor: Limited amount of people Labor: Limited amount of people available to plant, harvest, and available to plant, harvest, and process the potato crops.process the potato crops.

Physical Capital: farming equipment Physical Capital: farming equipment

Pop Quiz: Good or Pop Quiz: Good or ServiceService

Number Your Paper Number Your Paper 1-12.1-12.

Good or ServiceGood or Service

SSEF1: Element CSSEF1: Element C

List a variety of List a variety of strategies for strategies for allocating scarce allocating scarce resources. resources.

1. Scarcity:1. Scarcity:

Is the lack of Is the lack of adequate resources adequate resources to obtain all of one’s to obtain all of one’s wants. wants.

Strategies for allocationsStrategies for allocationsa. a. Higher PricesHigher Prices. By raising . By raising prices, companies limit the prices, companies limit the number of consumers who can number of consumers who can actually buy the product. actually buy the product. This This allows the producers to still allows the producers to still make money while making make money while making sure the limited supply of a sure the limited supply of a product lasts longer than it product lasts longer than it normally would havenormally would have

b. Government b. Government RegulationRegulation

Government Government establishes establishes price ceiling or price ceiling or price floorprice floor

i. i. Price ceilingPrice ceiling: means that : means that the price of a certain good or the price of a certain good or service is not allowed to rise service is not allowed to rise above a certain level.above a certain level.

ii. ii. Price floorPrice floor: means that a : means that a certain good or service is not certain good or service is not allowed to drop below a allowed to drop below a certain pricecertain price

iii. iii. RationingRationing: only : only allows citizens to allows citizens to purchase so much of a purchase so much of a scarce good to make scarce good to make sure there is enoughsure there is enough

iv. Lotteries: ex. Ga Pre-Kiv. Lotteries: ex. Ga Pre-K

v. Markets: Farmers v. Markets: Farmers Market: Local GoodsMarket: Local Goods

vi. Redistribution of vi. Redistribution of Income: Income tax Income: Income tax used to provide used to provide Government Aid. Government Aid.

SSEF1: Element DSSEF1: Element D

Define opportunity cost as Define opportunity cost as the next best alternative the next best alternative given up when given up when individuals, businesses, individuals, businesses, and governments and governments confront scarcity by confront scarcity by making choices. making choices.

1. Trade-off1. Trade-off

Every time people Every time people make a choice about make a choice about how to use their how to use their resources, the must resources, the must make a trade-off! make a trade-off! People gain People gain something, but also something, but also give up something! give up something!

2. Opportunity Cost2. Opportunity Cost

Is the option you gave up Is the option you gave up by making a choice. by making a choice.

You face an opportunity You face an opportunity cost every time you cost every time you decide how to use your decide how to use your scarce productive scarce productive resource! resource!

Making Choices…Making Choices…EFFICIENTLYEFFICIENTLY

SSEF2: The student will give examples of how rational decision making entails comparing the marginal benefits and the marginal costs of an action.

SSEF2: Element A. SSEF2: Element A.

a. Illustrate by means a. Illustrate by means of a production of a production possibilities curve possibilities curve the trade offs the trade offs between two options. between two options.

Choices: the Choices: the Decision to Decision to produce one good produce one good instead of another.instead of another.

Remember: Remember: Trade Offs are Trade Offs are all the all the alternatives that we alternatives that we give upgive up whenever we whenever we choose one course of choose one course of action over another.action over another.

Types of Trade-OffsTypes of Trade-Offs

Individual Trade Offs Individual Trade Offs

Businesses Trade OffsBusinesses Trade Offs Society Trade Offs: “Guns Society Trade Offs: “Guns

or Butter”or Butter”Should we produce more Should we produce more military goods (“guns”) or military goods (“guns”) or more consumer goods (ex. more consumer goods (ex. “butter”)?“butter”)?

Remember: Remember: Opportunity CostsOpportunity Costs

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

The Items we give up by The Items we give up by making a choice.making a choice.

How could this have been How could this have been prevented? prevented?

??????????

If you choose to use your If you choose to use your savings to pay off a savings to pay off a credit card bill instead credit card bill instead of going on the senior of going on the senior trip, what is your trip, what is your opportunity cost?opportunity cost?

What is the opportunity What is the opportunity cost represented in this cost represented in this

cartoon?cartoon?

Opportunity Cost is Opportunity Cost is associated with associated with scarcity. Why?scarcity. Why?

OC is the value of the OC is the value of the best alternative forgone best alternative forgone when a choice is madewhen a choice is made

Every economic decision Every economic decision must determine which must determine which tradeoffs are most tradeoffs are most beneficial. Trade-offs beneficial. Trade-offs involves giving up one involves giving up one option for another.option for another.

1. Production 1. Production Possibilities Curve: Possibilities Curve:

Depicts how much of a Depicts how much of a particular product can particular product can be produced given the be produced given the limited amount of limited amount of resources at a company resources at a company or individuals disposal. or individuals disposal.

Productions Possibilities Curve Productions Possibilities Curve (PPC)(PPC)

Graphical Graphical representation of representation of how an economy how an economy makes decisions makes decisions

Shows the Shows the choiceschoices an an economy can economy can make with make with respect to its respect to its availableavailable resourcesresources

Interpreting the PPCInterpreting the PPCAll points on the curve All points on the curve represent the represent the efficientefficient production of goods and production of goods and services (you are using your services (you are using your resources well)resources well)

Any point inside the curve Any point inside the curve represents an underutilization represents an underutilization of resources (you’re wasting of resources (you’re wasting resources – could be producing resources – could be producing more)more)

Interpreting the PPCInterpreting the PPCAll points on the curve All points on the curve represent the represent the efficientefficient production of goods and production of goods and services (you are using your services (you are using your resources well)resources well)

Any point inside the curve Any point inside the curve represents an underutilization represents an underutilization of resources (you’re wasting of resources (you’re wasting resources – could be producing resources – could be producing more)more)

Interpreting the PPC/PPFInterpreting the PPC/PPF

Points on the curvePoints on the curve – efficient – efficient combination of goods/servicescombination of goods/services

Points inside (under) the curvePoints inside (under) the curve – inefficient use of resources– inefficient use of resources

Points outside the curvePoints outside the curve – – unattainable points (current unattainable points (current productive resources will not productive resources will not allow the economy to produce allow the economy to produce

Why are PPCs/PPFs Why are PPCs/PPFs valuable to decision-valuable to decision-

makers?makers?Graphical illustration of opportunity cost to produce more or one good (or service)

Shows how efficient (or inefficient) an economy is working

Shows growth or reduction

Why would the PPC/PPF Why would the PPC/PPF move?move?

When the quantity or quality of When the quantity or quality of land, labor, capital, or land, labor, capital, or technology technology growsgrows, the ENTIRE , the ENTIRE PPC will PPC will shift to the right shift to the right

When the quantity or quality of When the quantity or quality of land, labor, and capital land, labor, and capital shrinksshrinks, , the ENTIRE PPC will the ENTIRE PPC will shift to shift to the leftthe left

SSEF2: Element BSSEF2: Element B

Explain that rational Explain that rational decisions occur when decisions occur when the marginal benefits of the marginal benefits of an action equal or an action equal or exceed the marginal exceed the marginal costs. costs.

1. Marginal Cost 1. Marginal Cost

Is the cost of the Is the cost of the decision once it is decision once it is weighted against weighted against the benefits.the benefits.

2. Marginal 2. Marginal BenefitsBenefits

Refers to the amount of Refers to the amount of Benefit a person, Benefit a person, business, or government business, or government receives once the cost of receives once the cost of their decision is their decision is considered. considered.

Marginal Costs vs. Marginal Costs vs. Marginal BenefitsMarginal Benefits

The additional cost incurred The additional cost incurred from one more unit (cost of from one more unit (cost of processing one more item)processing one more item)

The additional benefit The additional benefit gained from one more unit gained from one more unit (benefit associated with that (benefit associated with that one additional item)one additional item)

3. Thinking at the 3. Thinking at the MarginMargin

When you’re trying to decide, When you’re trying to decide, “how much more, or how much “how much more, or how much less?”…you are less?”…you are thinking at the thinking at the marginmargin

Rational Decisions are made Rational Decisions are made when the marginal benefits when the marginal benefits equal or exceed marginal costsequal or exceed marginal costs