Would you rather Study or go to the movies Eat a salad or French fries Buy a new phone or a new outfit How do you decide Economics The study of scarcity and choice Economists ask How do we satisfy our needs and wants by making choices ID: 782486
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Slide1
Economics
A Review
Slide2What is Economics?
Would you rather…
Study or go to the movies?
Eat a salad or French fries?Buy a new phone or a new outfit?How do you decide?
Slide3Economics
The study of scarcity and choice.
Economists ask: How do we satisfy our needs and wants by making choices?
Slide4Scarcity
The limited nature of society's resources
All things are scarce…except for our wants and needs.
Slide5Wants vs. Needs
Wants--Desires that can be satisfied by consuming a good or service
Needs--Basic requirements for human survival
Slide6Scarcity vs. Shortage
Shortages—Production is slowed or stopped intentionally or unintentionally
Can be temporary or long-term
Scarcity is infinite
Slide7Factors of Production
The things we need to produce:
Land—all natural resources
Labor—effort for which a person is paidCapital—all human made resources
Slide8Human vs. Physical Capital
Human Capital—Skills and Knowledge
Physical Capital—buildings and Tools
Slide9Entrepreneurs
A person who starts up and takes on the risk of a business
Slide10Opportunity Cost
The most desirable alternative trade-off as the result of a decision
Everything involves a trade-off
Slide11Decision at the Margin
More than two options typically exist.
Thinking at the margin is thinking about the next step forward.
Marginal Cost--The cost added by producing one additional unit of a product or service.Marginal Benefit--The additional benefit associated with an action.
When the cost is no longer worth the benefit, stop.Rational Decisions happen when the marginal benefits of an action are greater than or equal to the marginal costs.
Slide12Guns or Butter?
Should countries invest in national defense or consumer goods?
Remember…all resources are scarce.
A Production Possibility Curve can answer this question
Slide13Production Possibility Curve
Show different ways to use resources
Used for analyzing trade-offs
Slide14Production Possibility Curve
Scenario
Donuts
Cupcakes
A
25
0
B
23
7
C
17
13
D
14
17
E
6
21
F
0
25
Slide150
5
10
15
20
25
30
5
10
15
20
25
30
A
B
C
D
E
F
Production Possibility Frontier
G
Point of Inefficiency
Point of Impossibility
H
Slide16What Do Production Possibility Curves Do?
Demonstrate Efficiency
Demonstrate Growth
Demonstrate Opportunity Costs
Slide17Efficiency
The production possibility frontier represents maximum efficiency.
Outside of the line does not yet exist.
Inside the line represents inefficiency, or an underutilization of resources.
Slide18Growth
The frontier represents production at a specific time.
If the availability of the factors of production increases, the line will move up to demonstrate growth.
Slide19Cost
What we give up when we make a choice
Law of Increasing Opportunity Cost— “As more of a particular product is produced, the opportunity cost in terms of what must be given up of other goods increases.”
Slide20Production Possibility Frontiers
Consider available resources AND technology
“By means of the plough two men, with the assistance of three horses, will cultivate more ground than twenty could do with the spade. A miller and his servant, with a wind or water mill, will at their ease grind more corn than eight men could do, with the severest
labour
, by hand mills.” –Adam SmithOperate under the assumption that all things are equalHelp decide when to produce and when to trade
Slide21Voluntary Exchange
The principle that people may decide what, when, and how they want to buy and sell
Compliments Specialization—The development of skills in a specific kind of work; division of labor
“It was the division of
labour which probably gave occasion to the invention of the greater part of those machines, by which labour is so much facilitated and abridged.” –Adam Smith