Chapter 1-Scarcity, Choice, and Opportunity Cost



Chapter 1-What is Economics?

Section 1—Scarcity and Factors of Production

Economics- the science that studies how people seek to satisfy their needs + wants by making choices

Economics is divided into 2 branches:

Microeconomics- deals w/ human behavior and choices as they relate to small units- an individual, a business firm, a single market

Macroeconomics- deals w/ human behavior and choices as they relate to the entire economy

Scarcity + Choice

Needs-necessary for survival…air, food

Wants- things that we desire to have…not necessary for survival

-cars, clothes, money

-tangible wants can be felt or touched…computer, cash

-intangible wants cannot be felt or touched…love, friendship

-cannot be satisfied by wishing

-problem---> wants are unlimited

People cannot have everything they want or need….must make choices

Scarcity- people’s wants are greater than the resources available to satisfy those wants

-economic fact of life

Scarcity = Wants/needs > Resources

Choices of which wants have to be made…Scarcity ---> Choices

-shortage is not scarcity

-occurs when producers cannot or will not offer goods + services at current prices

Resources/Factors of Production- anything that is used to produce goods and/or services

-needed to produce goods and services

-limited

Land-land and natural resources: H2O, minerals, undeveloped land, animals, and forest

Labor-physical + mental talents that people contribute to the production of goods + services

-dentist work, mechanic, airplane pilot

Capital-produced goods that can be used as resources for further production

Physical Capital…building, tools, pencil, computers, $$

Human Capital…knowledge + skills gained thru education + experience

Entrepreneurship

-special talent that some people have for searching out and taking advantage of new business opportunities and for developing new products and new ways of doing things

Section 2—Opportunity Cost

Trade-Offs- a situation in which more of one thing necessarily means less of something else.

-all of the alternatives we give up when we choose 1 course of action over another

Individuals…Businesses…Society-guns + butter

Every time you make a choice you incur an Opportunity Cost

- the most valued opportunity or alternative you give up to do something

Rule Number 1…Scarcity --->Choices --->Opportunity Costs

Thinking at the Margin

-deciding how much more or less to do of something

-Increase the opportunity cost of doing something ---> Do less of it

-Decrease the opportunity cost of doing something ---> Do more of it

Section 3—Production Possibilities Curve

Production Possibilities Curve-A graph showing alternative ways to use an economy’s productive resources

|Guns |Butter |

|0 |15 |

|8 |14 |

|14 |12 |

|18 |9 |

|20 |5 |

|21 |0 |

Production Possibilities Frontier shows combinations of producing more than 1 good or service

-using factors of production to make 1 product means fewer resources left to make another

Efficiency

-using resources in such a way as to maximize production of goods/services

-PPF represents an economy working at its most efficient level of production

-point inside the PPF indicated underutilization of resources

Growth

-shifts the PPF to the right…becomes future ppf

-can also shift to the left

Cost

-is opportunity cost…

-law of increasing cost states that as production switches from 1 item to another, more and more resources are necessary so opportunity cost increases

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