What is Economics Economics The study of Choices

What is Economics ? Economics – The study of Choices How do we make choices when faced with limited resources?

Economics • Needs – Essential for survival – Examples - • Wants – Not essential for survival – Desires

Economics • Goods – Physical Objects Consumer Durables Consumer Non-Durables • Services – actions or activities for another • Why do we have to make choices? – Scarcity

Economics • Scarcity – limited quantities of resources meeting unlimited wants – Scarcity will always exist • Shortage – When a good or service is unavailable

Economics Shortage – When a good or service is unavailable – Cannot or will not be offered at current price – Temporary or long term* – Examples – Natural Disasters, Wars, Christmas

Economics • Factors of Production – resources used to make goods & services – Land – Labor – Capital • 2 types of Capital – Physical Capital - buildings and tools (capital goods)

Economics • Benefits of Physical Capital 1. Extra Time More machines – job gets done quicker More space – workers feel safer 2. More Knowledge Workers can adapt to new capital easier 3. More Productivity More time + more knowledge = more productive Workers can do more stuff

Economics - Human Capital – investment in workers adding knowledge and skills through education. Demand is high for educated workers. Entrepreneurs Business leaders who pull resources together to create new goods and services or make existing stuff better.

Economics • Factors of Production at work – Capital – Land – Labor – Entrepreneurs

Making Decisions • Trade-off: Alternative you give up whenever you choose one thing over another – Individuals – Businesses – Societies • “Guns or Butter” decision: choosing between more military goods or consumer goods

Making Decisions - Many trade offs to each decision - One alternative is usually more desirable - Opportunity cost: the most desirable alternative given up because of a decision - “what you cannot have” - Can make decisions using a decision-making grid

Decision-making Grid Sleep Late Decision Benefits Opportunity Cost Sleep late Wake up to study

The Margin • Thinking at the margin: deciding how much more or less to do – Not all decisions are yes/no – Most involve adding or subtracting a resource • i. e. one more machine, acre, or tool

Thinking at the Margin Options Benefit Opportunity Cost 1 st hour of extra study time C on the test 1 hour of sleep 2 nd hour of extra study time B on the test 2 hours of sleep 3 rd hour of extra study time B+ on the test 3 hours of sleep

The PPC • Production Possibilities Curve: a line showing combinations of goods that a society can produce – Graphs two goods or services – Used to show efficiency, growth, opportunity cost, & scarcity

The PPC • Efficiency: using resources to maximize the production of goods or services – Any point on the curve represents efficient use • All resources are used – Underutilization: using fewer resources than we can • Represented by any point inside the curve

The PPC • Growth: caused by change in quality or quantity of our resources – also caused by changes in technology – Shifts right (expands) or shifts left (shrinks) • Opportunity cost – any point on the PPC • Law of increasing costs: as we shift from making one Good to another, the cost increases

An Example: The PPC

An Example: The PPC