The fundamental problem of economics is scarcity The world has finite resources limited Peoples wants are unlimited but the earth does not have the resources to provide for unlimited wants A 3 Economic Questions ID: 623362
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Slide1
Scarcity
The fundamental problem of economics is scarcityThe world has finite resources (limited)People’s wants are unlimited, but the earth does not have the resources to provide for unlimited wantsSlide2
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 wantsHave to decide how they will allocate resources Are they going to produce more military equipment or focus on the building of roadsSlide3
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?Slide4
Factors of Production
B. Factors of Production: resources required to produce the things we want
i.
Land: natural resources (oil, sand, fertile fields, wood, etc)Slide5
2.
Capital: Any Human-made resource used to produce goods and services
a.
Physical Capital: tools, equipment, factories, etc used to produce goods/servicesb. Human capital: The labor, the skills and knowledge of people used to produce goods/servicesSlide6
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
EntrepreneursSlide7
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 consideratione.g. Emily can decide between going to the movies, buying a CD, or going to lunchIf she decides to go to the movies she is forgoing buying a CD and going to lunch
Hi, I’m Econ EmilySlide8
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-offsSlide9
Production Possibilities: Scarcity and Opportunity Costs in ActionSlide10
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…Slide11
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 sleepSlide12
Margins
i.
Thinking at the Margin:
Making your decision based how much benefit you will gain or lose from adding or subtracting one unit (minute, hour, dollar, etc)
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
What units are we comparing here??
What does the student get if they 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 time? How does this affect the student’s decision making?Slide13
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.Slide14
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 curve1. Fixed TimeEX: time is not extended for decades2. Fixed Resources
Society has all of the resources it needs to produce the goods3. Maximum EfficiencyWorkers are efficiency Slide15
Charting A Production Possibility Curve
Watermelons
(millions of tons)
Shoes
(millions of pairs)
0
15
8
14
14
12
18
9
20
5
21
0Slide16
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)
Shoes
(millions of pairs)
0
15
8
14
14
12
18
9
20
5
21
0
How many millions of pairs of shoes do we give up to produce
8 million
tons of watermelons?
How many ADDITIONAL millions of pairs of shoes do we give up to produce
14 million
tons of watermelons?
How many ADDITIONAL millions of pairs of shoes do we give up to produce
18 million
tons of watermelons?
How many millions of tons of watermelons am I getting for that cost of 1 million pairs of shoes?
How many additional millions of tons of watermelons am I getting for that cost of 2 million pairs of shoes?
How many additional millions of tons of watermelons am I getting for that cost of 3 million pairs of shoes?Slide17
Underutilization
V. Efficiency
A.
Underutilization: Point inside the production possibility curve that shows when an economy is using less resources than it is capable ofWhat would be an example of a production combination that would show underutilization on our graph?
http://glencoe.com/sites/common_assets/advanced_placement/mcconnell_18e/solman_video_mov/prod_poss_curve2.mov Slide18
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 in PPC to left