Transcript What is Economics? - Our Lady of Lourdes High School

What is Economics?
•
•
•
•
Define Economics and the importance of making choices
Compare Scarcity and shortage
Identify key terms: land, labor and capital.
The role of entrepreneurs
What is Economics?
• Economics is the study of how people seek to satisfy their
needs and wants by making choices
OR
• How people look to fill their unlimited wants with limited
resources.
• Need: Air, food, shelter, i.e. things necessary for survival
• Want: Something desired but not necessary for survival
• Goods - physical objects
• Services - Actions or activities that someone performs
for another
• While our wants may be unlimited, there are only so
many resources available to us and to create goods
and services.
• Scarcity implies limited quantities of resources to
meet unlimited wants.
• Sooner or later a limit is always reached
• Scarcity and shortage are not the same thing
• Shortages come and go, but scarcity always
exists….Why?
• Goods and services are made from resources that are
scarce
• Shortage: Producers cannot or will not offer
goods or services at current prices
Can be short term or long term
What could cause a shortage?
War
Changes in population
Changes in consumer tastes
Holidays
• Factors of Production
• Resources that are used to make all goods and
services.
• Land
• Labor
• Capital
• Land
• All natural resources that are used to produce goods
and services.
• Materials found in nature
• Fertile land for farming
• Products in or on the land
• Coal, water, forests, etc
• Labor
• Effort that a person devotes to a task for which that
person is paid
Anything you do and get paid for it
• Capital
• Any human made resource that is used to produce other goods
and services.
• Two types:
• Physical Capital (capital goods) - buildings and tools
• Saves time and money
• Increases productivity
• Other benefits
• Extra time
• More knowledge
• Time to do other things
• Human Capital
• The knowledge and skills that a person acquires through
education and experience
• Economies require both human and physical
capital to produce goods and services
• Entrepreneur
• Ambitious leaders who decide how to combine land,
labor, and capital resources to create new goods and
services
• They take risks and develop new ideas, start new
businesses, create new industries and fuel economic
growth
• Could be anyone
CH 1.2 - Opportunity Cost
• Why is every decision a trade off?
• Identify the trade offs and opportunity costs using a decision
making grid
• How do people make decisions by thinking on margin
Trade offs
• Everyone makes decisions that involve trade offs
• All the alternatives we give up whenever we choose one one
course of action instead of another
Trade offs in business
How businesses choose to use land, labor, and capital
resources
?
Maybach Exelero $ 8M
Opportunity Costs
• Opportunity Cost is the most desirable
alternative given up when a decision is
made
Or
• The value of the lost choices
• **Must be a desirable choice**
• Guns or Butter
• If a country decides to use more resources to make
military items, it has less resources available to make
consumer goods and vice versa
• Why?….Resources are limited
More guns = less butter. Butter is the opportunity cost
Decision Making Grids
Alternatives
Benefits
Decision
Opportunity
Cost
Benefits
Forgone
• Thinking at the margin: instead of thinking about a decision as
a whole, think about it in terms of units.
• Study time: 1 hour of studying = C = 1 less hour of sleep. 2 hours = B =
2 less hours, 3 hours = B+ = 3 less hours.
• Improvement between 2 and three hours is not enough to sacrifice
the extra hour of sleep.
• Cost does not equal the benefit. Take the B
• Once the costs outweigh the benefits, no more units should be
added.
1 Hour of
studying
C
2 hours of
studying
B
3 hours of
studying
B+
Lose 1 hour
of sleep
Lose two
hours of
sleep
Lose three
hours of
sleep
CH 1.3
Production Possibilities
Graph
What do they show?
What can we learn from them?
Economists use graphs to analyze the
choices and trade offs people make
• Production possibilities graphs (PPG) show
alternative ways to use resources.
• The axes show categories of goods and services,
or pairs of specific goods and services
Shoes or Watermelons
S
h
o
e
s
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
0
5
10
Watermelons
15
20
25 0
5
10
15
20
25
Shoes and Watermelons
Watermelons
(Millions of
tons)
Shoes
(Millions of
pairs)
12
0
15
10
8
14
14
12
4
18
9
2
20
5
21
0
16
S
h
o
e
s
14
8
6
0
0
5
10
15
Watermelons
20
25
• Any point on the graph shows the
maximum combination of each of the
two products
• Why is there an inverse relationship?
• Land, Labor and Capital
• Making one product leaves less
resources to make others
• By producing the maximum of each product
the economy is operating efficiently.
• Efficiency = using resources in such a
way that maximizes the output of goods
and services
• What causes inefficiency?
• Lay offs, broken machinery
• Any point inside the line in the
production possibilities frontier would
be underutilization or inefficient
• What are some limitations to the PPF?
• It only shows what is happening right now
• Exact number of people
• Exact number of resources
• These are constantly changing
• Any change in these numbers will affect the
slope of the graph
• How do these changes affect production in a
positive way
• More labor = Produce more
• New technology or inventions
• This shifts the curve to the right
Shoes and Watermelons
Watermelons
(Millions of
tons)
Shoes
(Millions of
pairs)
12
0
15
10
8
14
14
12
4
18
9
2
20
5
21
0
16
S
h
o
e
s
14
8
6
0
0
5
10
15
Watermelons
20
25
• What causes a PPF to shift to the left,
or an economy to decline in
production
• Loss of land
• Population
• Unhealthy, less education, Aging
Shoes and Watermelons
Watermelons
(Millions of
tons)
Shoes
(Millions of
pairs)
12
0
15
10
8
14
14
12
4
18
9
2
20
5
21
0
16
S
h
o
e
s
14
8
6
0
0
5
10
15
Watermelons
20
25
Opportunity costs and PPF
• Law of increasing costs: As
production switches from one item
to another, more and more
resources are sacrificed to increase
production of that item
• 1 million tons of watermelons = 5
million pairs of shoes
Watermelons
(Millions of tons)
Shoes
(Millions of pairs)
0
15
8
14
14
12
18
9
20
5
21
0
Law of increasing costs
Watermelons
(Millions of tons)
Shoes
(Millions of pairs)
0
15
+8
8
14
-1
+6
14
12
-2
+4
18
9
-3
+2
20
5
+1
21
0
-4
-5
Law of Increasing Costs
F
a
c
t
o
r
y
F
a
r
m
Resources and Technology
• A country’s Production Possibilities depend on
both resources available and technological level
• Many different ways to produce watermelons and
shoes
• Better technology increases the amount that an
economy can produce
• Plant, harvest, sew by hand
• Use of animals and hand operated looms
• Tractors and harvesting equipment, or sewing machines other
textile producing machinery