What Is Economics?

 Economics is the study of how people satisfy their needs and

wants.
 Needs – something that is necessary for survival
 Wants – something we desire but is not
essential to survival
 Goods – physical objects
 Services – action or activities that one person performs for
another

Scarcity and Shortages

 Scarcity occurs when there are limited quantities of resources
to meet unlimited needs or desires
 Shortages occur when producers will not or cannot offer
goods or services at current prices
The Factors of Production

 Land All natural resources that are used to produce

goods and services.
 Labor Any effort a person devotes to a task for which
that person is paid.
 Capital Any human-made resource that is used to
create other goods and services.
 Physical capital (capital goods)
 Human capital- knowledge and skills a worker gains
through education and experience.
 The Factors of Popcorn
Production

Land Labor Capital

Popping Corn The human effort needed Corn-Popping

to pop the corn Device

Vegetable Oil
Trade-offs and Opportunity
Cost
 Trade-offs are all the alternatives that we give up
whenever we choose one course of action over others.
 The most desirable alternative given up as a result of a
decision is known as opportunity cost.

All individuals and groups of people make decisions that

involve trade-offs.
 The Decision-Making Grid
 Economists encourage us to consider the benefits and costs of our
decisions.

Karen’s Decision-making Grid

Alternatives

Sleep late Wake up early to study

Benefits • Enjoy more sleep • Better grade on test

• Have more energy during the day • Teacher and parental approval
• Personal satisfaction

Decision • Sleep late • Wake up early to study for test

Opportunity cost • Extra study time • Extra sleep time

Benefits forgone • Better grade on test • Enjoy more sleep
• Teacher and parental approval • Have more energy during the day
• Personal satisfaction
 Thinking at the Margin
 When you decide how much more or less to do, you are
thinking at the margin.

Options Benefit Opportunity Cost

1st hour of extra Grade of C on 1 hour of

study time test sleep

2nd hour of extra Grade of B on 2 hours of

study time test sleep

3rd hour of extra Grade of B+ on 3 hours of

study time test sleep
Production Possibilities
 A production possibilities graph shows alternative
ways that an economy can use its resources.
 The production possibilities frontier is the line that
shows the maximum possible output for that
economy.
Production Possibilities Graph

Watermelons Shoes 25
(millions of tons) (millions of pairs)

0 15 20
Shoes (millions of pairs)

8 14 15 a (0,15)
b (8,14)
14 12 c (14,12)
10
d (18,9)
18 9
5
20 5 A production e (20,5)
possibilities frontier
21 0 f (21,0)
0 5 10 15 20 25
Watermelons (millions of tons)
 Efficiency
 Efficiency means using Production Possibilities Graph

resources in such a 25

way as to maximize
the production of 20

Shoes (millions of pairs)

goods and services. 15
S

a (0,15)
 An economy producing b (8,14)
10 c (14,12)
output levels on the g (5,8) d (18,9)
production possibilities 5 e (20,5)
frontier is operating A point of
underutilization f (21,0)
efficiently. 0 5 10 15 20 25
Watermelons (millions of tons)
 Growth
 Growth If more Production Possibilities Graph

resources become 25

available, or if T
Future production
Possibilities frontier

technology improves, 20

Shoes (millions of pairs)

an economy can 15
S

increase its level of a (0,15)

b (8,14)

output and grow. 10 c (14,12)

d (18,9)
 When this happens, 5
the entire production e (20,5)

possibilities curve f (21,0)

“shifts to the right.” 0 5 10 15 20 25

Watermelons (millions of tons)
Cost
 Cost A production possibilities graph
shows the cost of producing more of one
item.
 To move from point c to point d on this
graph has a cost of 3 million pairs of shoes.
Production Possibilities Graph

Watermelons Shoes 25
(millions of tons) (millions of pairs)
Shoes (millions of pairs)

20
0 15

8 14 15

14 12 c (14,12)
10
18 9 d (18,9)

20 5 5

21 0
0 5 10 15 20 25
Watermelons (millions of tons)
The Law of Increasing Costs

 This law states that as we shift factors of production

from making one good or service to another, the cost of
producing the second item increases.

https://www.youtube.com/watch?v=3e8FnO8Codg