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Lecture:1 Foundations of Economics What Comes To Your Mind When You Hear The Word SCARCE?

1) Economics deals with the allocation of scarce resources to fulfill society's needs and wants. Adam Smith is considered the father of modern economics and advocated for free markets with minimal government interference. 2) There are four factors of production: natural resources, labor, capital, and entrepreneurship. A production possibilities curve illustrates the tradeoffs an economy faces in allocating these scarce resources between different goods. 3) The production possibilities frontier shows the maximum possible output combinations an economy can achieve when all resources are fully employed. The curve shape is due to the law of increasing opportunity costs - the more an economy focuses on one good, the more resources it must give up in producing the other good.

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54 views

Lecture:1 Foundations of Economics What Comes To Your Mind When You Hear The Word SCARCE?

1) Economics deals with the allocation of scarce resources to fulfill society's needs and wants. Adam Smith is considered the father of modern economics and advocated for free markets with minimal government interference. 2) There are four factors of production: natural resources, labor, capital, and entrepreneurship. A production possibilities curve illustrates the tradeoffs an economy faces in allocating these scarce resources between different goods. 3) The production possibilities frontier shows the maximum possible output combinations an economy can achieve when all resources are fully employed. The curve shape is due to the law of increasing opportunity costs - the more an economy focuses on one good, the more resources it must give up in producing the other good.

Uploaded by

Sufyan Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Lecture:1 Foundations of

Economics
What comes to your
mind when you hear the
word SCARCE?

What is Economics?
A science

that deals with the


allocation, or use, of scarce resources
for the purpose of fulfilling societys
needs and wants.
Addison-Wesley

Adam Smith (1723 1790)


O Known

as father of modern economics


O Wrote the first and most important books on the subject
of economics, An Inquiry into the Nature and Causes of
the Wealth of Nations (1776)
O Smith believed in free market
(free market is one where consumers may buy what they
like and producers may produce what they like, with no
government interference)
Smith suggested that a laissez-faire (dont
interfere) approach should be followed, leaving
customers and producers to make their own
decisions

What is Economics?
So

then the big two concepts are


that:
Resources are scarce!
Society has unlimited needs and
wants!
Economics decides the best way of
providing one to the other

Scarcity
Definition
A situation

in which the amount


of something actually available
would not be sufficient to satisfy
the desire for it, if it were
provided free of charge.

Factors of Production

There

are 4 factors that must all be


used to produce anything
Natural Resources (also referred to
as land)

Factors of Production

Labor

effort of a person for which


they are paid

Factors of Production

Capital

human-made resources
used to create other goods

Factors of Production

Kinds of Capital
Physical Capital Also called
Capital Goods, objects that are
used to produce other goods

Factors of Production

Human Capital knowledge or


skills workers get from education
and experience

Factors of Production

Entrepreneurship

person who
takes a risk in combining the other
3 factors to create a new good

Making Economic Decisions


Every

decision we make involves


trade-offs alternatives that we
must give up when we make a
choice
Example

I could stay up for 3


hours playing Halo, study, or sleep.

1.1 QUIZ
Number your paper 1 - 6
1.

Which of the following are factors of


production?
a.
b.
c.
d.

Capital and Land


Scarcity and shortages
Technology and productivity
economics and business decisions

Answer is
a.

capital and land

Next question
2.

Which of the following is an example of


using physical capital to save time and
money?
a.

hiring more workers to do a job?


b. building extra space in a factory to simplify
production
c. switching from oil to coal to make
production cheaper
d. lowering workers wages to increase profits

Answer is
b.

building extra space in a factory to


simplify production

next question
3.

To what part of an industry does a


workers education contribute?
a.
b.
c.
d.

technology
physical capital
human capital
scarce resources

Answer is
c.

human capital

next question
4.

Which of the following is an


entrepreneur?
a.

a person who earns a lot of money as a


singer or dancer
b. a person who creates a game and sells it
to a game manufacturer
c. a person who starts an all-organic cleaning
supplies business that employs others
d. a person who works as a highly paid
computer programmer

Answer is
c.

a person who starts an all-organic


cleaning supplies business that employs
others

Next
5.

What is the difference between a


shortage and scarcity?
a.

A shortage can be temporary or long-term,


but scarcity always exists.
b. A shortage results from rising prices;
scarcity results from falling prices.
c. A shortage is a lack of all goods and
services; scarcity concerns a single item.
d. There is no real difference between a
shortage and scarcity

answer
a.

A shortage can be temporary or longterm, but scarcity always exists!

next.
6.

What does an economist mean by the


term LAND?
a.

farmland only
b. food crops grown on farmland as well as
the farmland itself
c. goods and services that are produced form
the land
d. all natural resources used to produce
goods and services

answer
d.

all natural resources used to produce


goods and services!

Opportunity Cost

FIVE appealing VACATION


Destinations

Hawaii

Paris

Dunns River
Falls, Jamaica

Ireland

Alaska

Volunteer: What is
your first choice?
What is your second

Making Economic Decisions


The

most desirable of the options you


pass up is called the Opportunity
Cost
Rank sleep, studying, and playing
video games 1st, 2nd, and 3rd on a list
for what you value the most

Making Economic Decisions


1st

Place is what
you would
choose to do
2nd Place is your
opportunity cost
(you give it up to
do option 1)

Making Economic Decisions


What

other option do you have other


than using 3 hours for one task?
You could split your time among
multiple activities!
Thinking at the Margin decision
involving adding one unit and
subtracting one unit, rather than all or
nothing

Making Economic Decisions


Options

Benefit

Opportunity Cost

0 hours studying,
3 hours sleeping

F on Test

None

1 hours studying,
2 hours sleeping

C on Test

1 hour of sleep

2 hours studying,
1 hour sleeping

B on Test

2 hours of sleep

3 hours studying

B+ on Test

3 hours of sleep

Making Economic Decisions


There

is a point at which you are


paying the same increase in cost, but
seeing lower benefits
You must make the decision as to
whether the cost is worth it
This same process is used by
businesses and consumers to make
decisions

QUIZ time
Number your paper 1 - 4
1.

The economic concept of guns or butter


means that
a.

a person can spend extra money either on sports


equipment or food.
b. a company must decide whether to manufacture
guns or butter
c. a government must decide whether to produce
more or less military or consumer goods
d. a government can buy unlimited military and
civilian goods if it is rich enough

answer
c.

a government must decide whether to


produce more or less military or consumer
goods trade off . due to scarcity!

next..
2.

If a person who wants to buy a


compact disc (CD) has just enough money
to buy one, and chooses CD A instead of
CD B, then CD B is the
a.
b.
c.
d.

trade-off
opportunity cost
decision at the margin
opportunity at the margin

answer is
b.

opportunity cost

next
3.

A decision-making grid is a visual way

of:
a.
b.
c.
d.

examining opportunity costs


selling goods or services
making marginal decisions
identifying shortages

answer is ..
a.

examining opportunity costs!

next
4.

A decision is made at the margin when


each alternative considers
a.

a different trade-off than the others


b. where the most costly alternative will be.
c. what the all or nothing alternative will be.
d. cost and benefit ranked in progressive
units.

answer
d.

cost and benefit ranked in progressive


units

Section 1.3 Production Possibilities


Curves

GRAPHS.
WHY do

graphs sometimes show


information more clearly than text or
tables?

Production Possibilities
Production

Possibilities Graph
shows alternatives to what an
economy can produce
Lets say we can produce 2
things: Guns and Butter

Production Possibilities

Production Possibilities
Production

Possibilities Graph
shows alternatives to what an
economy can produce
The outer red line shows the
maximum possible output with any
given combination
This is the Production Possibilities
Frontier (or Curve)

Production Possibilities
To move

from
one point to
another, the
economy must
make tradeoffs

Production Possibilities
Any

point along the line shows the


economy operating at maximum
efficiency
Any point below the line is
underutilization they are not getting
all that they could
Any point above the line is presently
impossible, until new resources are
available

Production Possibilities
Why

does the graph curve instead of


making a straight line?
Law of Increasing Costs as
production increases for one item,
more and more resources are
necessary to increase production of
the second item! The
OPPORTUNITY COST increases

Production Possibilities
Every

resource is best suited for


certain types of goods
Farmland

and cows make butter


Metals and factories make guns and
many times you hear about butter vs.
guns due to military spending on
weaponry using resources
To convert butter production to guns,
you must sell the cows and build new
factories on the land

quiz time
Number

your paper 1 4

1.

A production possibilities curve shows


the relationship between the production of:
a.
b.
c.
d.

farm goods and factory goods


two types of farm goods
two types of factory goods
any two categories of goods

answer
d.

any two categories of goods.

next
2.

The line on a production possibilities


curve showing the relative amounts of two
types of goods produced using all
resources is called the
a.
b.
c.
d.

production possibilities frontier


opportunity cost line
utilization of resources
maximum possible production line

answer
a.

production possibilities frontier

question
3.

The law of increasing costs means that as


production shifts from one item to another,

a.

the cost of production gets cheaper and cheaper.


b. the cost of producing an item stays the same no
matter how many are produced.
c. more and more resources are necessary to
increase production of the second item
d. the land costs of increasing production rise much
more steeply than do the labor costs

answer is
c.

more and more resources are


necessary to increase production of the
second item

and last question


4.

The curve usually seen in a production


possibilities frontier can be explained by:
a.
b.
c.
d.

growth in the economy


underutilization of resources
increasing an economys efficiency
the law of increasing costs

final answer is
d.

the law of increasing costs!

An economy that is efficient is


producing

the maximum amount of goods


and services .. now thats efficient!

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