SCARCITY THE FUNDAMENTAL PROBLEM OF ECONOMICS IS SCARCITY

SCARCITY • THE FUNDAMENTAL PROBLEM OF ECONOMICS IS SCARCITY • THE WORLD HAS FINITE RESOURCES (LIMITED) • PEOPLE’S WANTS ARE UNLIMITED, BUT THE EARTH DOES NOT HAVE THE RESOURCES TO PROVIDE FOR UNLIMITED WANTS

A. 3 ECONOMIC QUESTIONS I. AS A RESULT OF SCARCITY ECONOMIC SOCIETIES MUST ASK THEMSELVES THREE BASIC QUESTIONS: A. WHAT TO PRODUCE • CAN NOT PRODUCE EVERYTHING EVERYONE WANTS • HAVE TO DECIDE HOW THEY WILL ALLOCATE RESOURCES • ARE THEY GOING TO PRODUCE MORE MILITARY EQUIPMENT OR FOCUS ON

THREE BASIC QUESTIONS CONT’D B. HOW TO PRODUCE • MASS PRODUCTION VS HAND MAKING GOODS • ARE THEY GOING TO PRODUCE GOODS IN THE UNITED STATES OR ABROAD? C. FOR WHOM TO PRODUCE • ARE THEY PRODUCING FOR STUDENTS OR PROFESSIONALS?

FACTORS OF PRODUCTION B. FACTORS OF PRODUCTION: RESOURCES REQUIRED TO PRODUCE THINGS WE WANT I. LAND: NATURAL RESOURCES (OIL, SAND, FERTILE FIELDS, WOOD, ETC)

2. CAPITAL: ANY HUMANMADE RESOURCE USED TO PRODUCE GOODS AND SERVICES A. PHYSICAL CAPITAL: TOOLS, EQUIPMENT, FACTORIES, ETC USED TO PRODUCE GOODS/SERVICES B. HUMAN CAPITAL: THE LABOR, THE SKILLS AND KNOWLEDGE OF PEOPLE USED TO PRODUCE GOODS/SERVICES

ENTREPRENEURS 3. ENTREPRENEURS: ORGANIZE THE FACTORS OF PRODUCTION (LAND, LABOR, AND CAPITAL) BRING SOMETHING NEW TO THE MARKET. A. PRODUCE GOODS (PHYSICAL OBJECT) OR SERVICES (ACTIONS PERFORMED FOR ANOTHER) B. USE RESOURCES IN AN EFFORT TO MAKE A PROFIT. . • STEVE JOBS (APPLE), • LARRY PAGE AND SERGEY BRIN (GOOGLE) • LOCAL BUSINESS OWNERS

Hi, I’m Econ Emily DECISION MAKING I. TRADE OFFS A. TRADE OFFS: ALL THE ALTERNATIVES THAT ARE PRESENT WHEN MAKING AN ECONOMIC DECISION. B. TAKE ADVANTAGES AND DISADVANTAGES INTO CONSIDERATION • E. G. EMILY CAN DECIDE BETWEEN GOING TO THE MOVIES, BUYING A CD, OR GOING TO LUNCH • IF SHE DECIDES TO GO TO THE MOVIES SHE IS FORGOING BUYING A CD AND GOING TO LUNCH

DECISION MAKING II. OPPORTUNITY COST A. OPPORTUNITY COST: THE COST OR VALUE OF THE NEXT BEST ALTERNATIVE USE OF ONE’S MONEY, TIME, OR RESOURCES WHEN MAKING A CHOICE. › IF EMILY SPENDS $20 ON A NEW SHIRT, SHE GIVES UP 3 CANS OF HAIR SPRAY OR A MOVIE TICKET AND LARGE POPCORN. › THE ONE SHE VALUES THE MOST IS THE OPPORTUNITY COST. BOTH OF THEM ARE TRADE-OFFS

PRODUCTION POSSIBILITIES: SCARCITY AND OPPORTUNITY COSTS IN ACTION

Like wait a sec, Mr. Cooper! I like totally love guns and I totally love butter, why can’t we just have a ton of both? Well Emily, it is the fundamental problem we have in Economics that is the answer to your question…

DECISION MAKING: COST BENEFIT ANALYSIS B. COST BENEFIT ANALYSIS : COMPARES THE OPPORTUNITY COSTS OF AN ACTION TO THE BENEFITS RECEIVED Options Benefit Opportunity Cost 1 hr of extra study time Grade of C on a test One hour of sleep 2 hr of extra study time Grade of B on a test 2 hours of sleep 3 hr of extra study time Grade of B+ on a test 3 hours of sleep

MARGINS I. THINKING AT THE MARGIN: MAKING YOUR DECISION BASED HOW MUCH BENEFIT YOU WILL GAIN OR LOSE FROM ADDING OR What does the student get if they SUBTRACTING ONE UNIT (MINUTE, HOUR, DOLLAR, ETC) study for just 1 hour? What are they giving up? 2 hours of study time? 3 hours? What happens to the benefit after adding an additional 1 hr unit of study Options Benefit does this affect theof C on a test 1 hr time? of extra. How study time Grade student’s decision making? Opportunity Cost One hour of sleep 2 hr of extra study time Grade of B on a test 2 hours of sleep 3 hr of extra study time Grade of B+ on a test 3 hours of sleep What units are we comparing here? ?

THINKING AT THE MARGIN � COST BENEFIT AT THE MARGIN: INDIVIDUALS, EMPLOYERS, LEGISLATORS, ETC CONSTANTLY MAKE COMPARE OPPORTUNITY COSTS AND BENEFITS AT THE MARGIN � THINK ABOUT IT THE NEXT TIME YOU GO TO PURCHASE A MEAL AT MCDONALDS AND THEY ASK IF YOU WANT TO SUPERSIZE – YOU WILL BE ENGAGING AT COST BENEFIT ANALYSIS AND MCDONALDS BETS YOU WILL WEIGH THE BENEFITS AND CHOOSE TO SUPERSIZE.

PRODUCTION POSSIBILITY FRONTIER • C. THE PRODUCTION POSSIBILITY FRONTIER (PPF) IS A CURVE DEPICTING ALL MAXIMUM OUTPUT POSSIBILITIES FOR TWO GOODS, GIVEN A SET OF INPUTS CONSISTING OF RESOURCES AND OTHER FACTORS. THE PPF ASSUMES THAT ALL INPUTS ARE USED EFFICIENTLY D. 3 ASSUMPTIONS CAN BE MADE WHILE LOOKING AT A PRODUCTION POSSIBILITIES CURVE › 1. FIXED TIME � EX: TIME IS NOT EXTENDED FOR DECADES › 2. FIXED RESOURCES � SOCIETY HAS ALL OF THE RESOURCES IT NEEDS TO PRODUCE THE GOODS

CHARTING A PRODUCTION POSSIBILITY CURVE Watermelons (millions of tons) 0 Shoes (millions of pairs) 15 8 14 14 12 18 9 20 5 21 0

LAW OF INCREASING COSTS/DIMINISHING RETURNS IV. COSTS AND RETURNS A. LAW OF INCREASING COSTS: AS PRODUCTION SHIFTS FROM ONE ITEM TO A SECOND ITEM, MORE AND MORE RESOURCES ARE NEEDED TO INCREASE PRODUCTION OF THE SECOND ITEM. Watermelons (millions of tons) 0 8 14 18 20 21 Shoes (millions of pairs) How many millions of pairs of How many millions of tons 15 How ADDITIONAL shoes domany we give up to produce of watermelons am I How many additional 14 millions pairs. ADDITIONAL shoes do we getting for that costofof 1 8 million tons ofofwatermelons? How of many millions of tons How many additional million pairs am of shoes? give upof topairs produce 14 million 12 watermelons I getting millions of shoes do we millions of tons of watermelons? for that cost of givetons up toofproduce 18 million watermelons am 2 Imillion getting 9 pairscost of shoes? for that of 3 million tons of watermelons? 5 pairs of shoes? 0

UNDERUTILIZATION V. EFFICIENCY A. UNDERUTILIZATION: POINT INSIDE THE PRODUCTION POSSIBILITY CURVE THAT SHOWS WHEN AN ECONOMY IS USING LESS RESOURCES THAN IT IS CAPABLE OF • WHAT WOULD BE AN EXAMPLE OF A PRODUCTION COMBINATION THAT WOULD SHOW UNDERUTILIZATION ON http: //glencoe. com/sites/common_assets/advanced_placement/ mcconnell_18 e/solman_video_mov/prod_poss_curve 2. mov

VI. MOVEMENT IN PPC A. GROWTH AND CONTRACTION: IF ECONOMIES BECOME MORE EFFICIENT (TECHNOLOGY) OR GAINS MORE RESOURCES IT CAN PRODUCE MORE = GROWTH. IF SOMETHING HAPPENS TO HURT PRODUCTION (NATURAL DISASTER, LESS RESOURCES) = CONTRACTION A. GROWTH = SHIFT IN PPC TO THE RIGHT B. CONTRACTION = SHIFT