Understanding Economics: Resource Allocation and Human Behavior

1. Module 1 – What is Economics?

2. Economics is the study of human behavior. How people allocate limited resources to produce goods and services to satisfy unlimited needs and wants.

3. Key terms Factors of Production Scarcity vs. shortage Need vs. want Good vs. Service Trade-off vs. Opportunity Cost Entrepreneur

4. Four Factors of Production (resources) • Land • All Natural resources Example - Oil, Coal, Trees • Labor • People producing a good or service Example – Auto worker, Lawyer, Teacher • Capital (2 kinds) Human Capital • Training for Labor Example – College Education, Seminars Physical Capital • Tools used by labor to make goods and services Example – Computers, Buildings, Factories, desks

5. Four Factors of Production (cont) • Entrepreneurship • A person who uses the factors of production to create a new product or service Example – Landscaping business, owning and running a beauty salon

6. Definition of Economics….The study of human behavior. How people allocate limited resources* to produce goods and services to satisfy unlimited needs and wants. *The four factors of production are resources that are limited.

7. Scarcity vs. shortage Scarcity is permanent But not necessarily a small amount Example: Ocean water Shortage is temporary But temporary may be days, weeks months or even years

8. Need vs. Want Need = gotta have it Want = nice to have it For each person to decide Cellphone example The study of human behavior. How people allocate limited resources to produce goods and services to satisfy unlimited needs and wants.

9. Good vs. Service Good Tangible Generally produced with physical skills, physical capital Examples….a car, a desk, an airplane Service Intangible Generally produced with knowledge, human capital Examples…Medical services, legal services, education

10. Trade-off vs. Opportunity Cost Trade-off = All the choices given up Opportunity Cost = Most valuable choice (trade-off) given up Examples Your time Cafeteria The study of human behavior. How people allocate limited resources to produce goods and services to satisfy unlimited needs and wants. Because resources are limited, you have to make choices.

11. “There is no free lunch.” There are always trade-offs.

12. Entrepreneur Uses resources (factors of production) to produce goods and services to satisfy needs and wants

13. Entrepreneur • Uses resources (factors of production) to produce goods and services to satisfy needs and wants

14. Entrepreneur Uses resources (factors of production) to produce goods and services to satisfy needs and wants Examples La Salle HS Jack FM Bank ATM Amazon.com

15. Quick Review…1. 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; a scarcity results from falling prices.(c) A shortage is a lack of all goods and services; a scarcity concerns a single item.(d) There is no real difference between a shortage and a scarcity.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

16. Article Search Economic Terms

17. Worksheet Chapter 1, Section 1

18. Student videos • http://www.youtube.com/watch?v=fdM8ssBvNxU

19. THREE MINUTE BREAK http://www.online-stopwatch.com/full-screen-stopwatch/ Be back when time expires or detention awaits you.

20. Production Possibilities Curve • Graph showing the trade-offs (i.e. possible production outcomes)

21. Production Possibilities Curve • Graph showing the trade-offs (i.e. possible production outcomes). Trade offs is a key concept. More of one good or service, less of the other. Product (good or service) B Product (good or service) A

22. Production Possibilities Curve • Why is the production possibilities curve “bowed out”?

23. Production Possibilities Curve • Why is the production possibilities curve “bowed out”? • ANSWER: The Law of Increasing Opportunity Costs

24. Production Possibilities Curve • Why is the production possibilities curve “bowed out”? • ANSWER: The Law of Increasing Opportunity Costs • As you produce more of one product (Good or Service A), the cost (opportunity cost) increases.

25. Production Possibilities Curve • Why is the production possibilities curve “bowed out”? • ANSWER: The Law of Increasing Opportunity Costs • As you produce more of one product (Good or Service A), the cost (opportunity cost) increases. • WHY you might ask • Example

26. A production possibilities graph shows the cost of producing an item. To produce the first eight million tons of watermelons cost of 1 million pairs of shoes. The Trade Off (the real cost) of producing the first eight million tons of watermelons (to go from 0 to 8) is the one million tons of watermelons that you give up (going from 15 to 14) Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 8 14 c (14,12) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) d (18,9) 0 5 10 15 20 25 Watermelons (millions of tons) Point A Point B A B At Point A you can produce 0 watermelons and 15 million pairs of shoes. At Point B you can produce 8 million tons of watermelons and 14 million pairs of shoes.

27. Trade-offs Why would the entrepreneur choose to produce more watermelons? What is the cost of that decision? What is the benefit? Why does Apple choose to produce more iPads? What is the cost of that decision? What is the benefit?

28. What is the cost to produce the first million pair of shoes? Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 8 14 c (14,12) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) d (18,9) 0 5 10 15 20 25 Watermelons (millions of tons)

29. Law of Increasing Costs…Revisited The Law of Increasing Opportunity Costs - As you produce more of one product (Good or Service A), the cost (opportunity cost) increases. • The cost of first million shoes cost 200,000 tons of watermelons • The cost of the fifteenth million (still one million shoes) cost eight million tons. THE COST INCREASED

30. Law of Increasing Costs…Continued Why is that the case?

31. Law of Increasing Costs…Continued Why is that the case? Because the entrepreneur uses the best shoe making resources (most productive factors of production) for making shoes first…the worst / least productive last. As such, it requires more resources to produce the last ton.

32. Production Possibilities Graph 25 20 15 10 5 S Shoes (millions of pairs) a (0,15) b (8,14) c (14,12) g (5,8) d (18,9) A point of underutilization e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) • Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently. Efficient is on the production possibilities curve. Anywhere on the curve but on the curve.

33. Production Possibilities Graph 25 20 15 10 5 Future production Possibilities frontier T S a (0,15) Shoes (millions of pairs) b (8,14) c (14,12) d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) • Growth If more resources become available, or if technology improves, an economy can increase (more stuff) its level of output and grow. When this happens, the entire production possibilities curve “shifts to the right.”

34. Guns or Butter Phrase used by economists to describe trade-offs. Military Goods (guns) Consumer Goods (Butter)