Chapter 1Chapter 1

The Economic Way of The Economic Way of ThinkingThinking

Scarcity: The Basic Economic ProblemScarcity: The Basic Economic Problem

• Have you ever wanted something new?Have you ever wanted something new?• All consumers have All consumers have wantswants, which are , which are

desires that can be desires that can be satisfiedsatisfied by by consuming a good or a service. consuming a good or a service.

• Can you live without these wants?Can you live without these wants?• The things that are necessary for The things that are necessary for

survivalsurvival, such as food, clothing & , such as food, clothing & shelter are called shelter are called needsneeds..

• EconomicsEconomics is the study of how is the study of how individuals and societies satisfy their individuals and societies satisfy their unlimited wants with limited resources.unlimited wants with limited resources.

Wants or Needs?

ScarcityScarcity

• We as consumers always We as consumers always demanddemand more, no matter how much we have more, no matter how much we have already. already.

• Our wants are Our wants are unlimitedunlimited, but resources , but resources to produce them are, the result of this to produce them are, the result of this difference is: difference is: ScarcityScarcity

• Scarcity exists when there is not Scarcity exists when there is not enough enough resourcesresources to satisfy human to satisfy human wantswants

Two Principles of ScarcityTwo Principles of Scarcity

Principle 1Principle 1 – people make choices – people make choices about things they about things they desiredesire – both wants – both wants and needs.and needs.

• Food is Food is necessarynecessary for survival, but we for survival, but we make choices as to they type make choices as to they type (gourmet, frozen, or at a (gourmet, frozen, or at a restaurantrestaurant)).. The same is true with The same is true with clothes.clothes.

Two Principles of ScarcityTwo Principles of Scarcity

Principle 2Principle 2 – Scarcity affects – Scarcity affects everyoneeveryone..

• Our wants are Our wants are unlimitedunlimited, but resources , but resources are are scarcescarce, therefore , therefore choiceschoices have to have to be made as to what goods and services be made as to what goods and services will be available.will be available.

Goods and ServicesGoods and Services

• Goods areGoods are physical physical ((tangibletangible) ) objects that can objects that can be purchasedbe purchased– FoodFood– ClothingClothing– FurnitureFurniture

• Services are Services are workwork that one person that one person performs for performs for another for another for payment. payment. ((intangibleintangible))– Sales clerksSales clerks– Technical Technical

supportsupport– TeachersTeachers– DoctorsDoctors

Is this a good or service?

Three Economic QuestionsThree Economic Questions

a.) a.) What will be produced?What will be produced?

b.) b.) How will it be produced?How will it be produced?

c.) c.) For whom will it be produced?For whom will it be produced?

What Will Be Produced?What Will Be Produced?• A society must decide what A society must decide what goodsgoods and and

servicesservices it will provide. it will provide.• The goods and services it produces The goods and services it produces

usually depend on usually depend on natural resourcesnatural resources it possesses. it possesses.

• Some countries, like the US, allow Some countries, like the US, allow producersproducers and and consumersconsumers to decide to decide production and consumption. production and consumption.

• In other countries, In other countries, CubaCuba and and North North KoreaKorea, the consumers plays little or no , the consumers plays little or no part in answering the question. Instead, part in answering the question. Instead, the the governmentgovernment decides what goods decides what goods and services will be produced. and services will be produced.

Examples of What Will Be Produced

• United States (people decide)

• Cuba (government decides)

How Will It Be Produced?How Will It Be Produced?

• Once a society decides what it will Once a society decides what it will produceproduce, it must then decide how these , it must then decide how these goods and services will be produced.goods and services will be produced.

• Countries with Countries with highly skilledhighly skilled workers, workers, would not use would not use labor-intensivelabor-intensive methods methods in agriculture. Instead they would utilizein agriculture. Instead they would utilize machinerymachinery and few workers. and few workers.

• DevelopingDeveloping countries with countries with unskilled unskilled workers would usually adopt labor-workers would usually adopt labor-intensive farming methodsintensive farming methods

Examples of How It Will Be ProducedExamples of How It Will Be Produced

• US AgricultureUS Agriculture • Chinese Chinese AgricultureAgriculture

For Whom Will It Be Produced?For Whom Will It Be Produced?

• This determines how goods and services are This determines how goods and services are distributeddistributed among people in society. among people in society.

• Two questions need to be asked: Exactly Two questions need to be asked: Exactly how how muchmuch should people get, and How should people get, and How should their share be should their share be delivereddelivered to them? to them?

• This leads to distribution systems: This leads to distribution systems: roadsroads, , rail systems, rail systems, seaportsseaports, and airports., and airports.

• The The United StatesUnited States government and government and producersproducers both help answer this question. both help answer this question.

• Countries like China and the former Countries like China and the former Soviet Soviet UnionUnion did not allow producers to help did not allow producers to help answer this question.answer this question.

Examples of For Whom It Will Be Examples of For Whom It Will Be ProducedProduced

• I – 75 Atlanta, GAI – 75 Atlanta, GA • Chinese Chinese Transportation Transportation

Factors of ProductionFactors of Production

• In order to understand how In order to understand how societies answer the first two societies answer the first two basic questions – Economists basic questions – Economists have identified factors of have identified factors of production.production.

a.a. LandLand

b.b. LaborLabor

c.c. CapitalCapital

d.d. EntrepreneurshipEntrepreneurship

Land Land

• Land is all Land is all natural resourcesnatural resources found on or under the ground found on or under the ground used to produce goods and used to produce goods and services.services.

• Examples are: Examples are: waterwater, forests, , forests, wildlife, minerals, wildlife, minerals, gasgas, and, and oil oil

LaborLabor

• Labor is all the human Labor is all the human timetime, effort, , effort, and and talent talent that go into the making that go into the making of products.of products.

• Examples are: Garbage collectors, Examples are: Garbage collectors, factory workers, factory workers, constructionconstruction workers, teachers, and workers, teachers, and doctorsdoctors. .

CapitalCapital• Capital is all the Capital is all the resourcesresources made and used by people made and used by people

to to produceproduce and and distributedistribute goods and services. goods and services.• Examples are: Examples are: ToolsTools, machinery, , machinery, factoriesfactories, ,

offices,warehouses, stores, roads.offices,warehouses, stores, roads.• These are These are physicalphysical resources so they are sometimes resources so they are sometimes

called physical or called physical or realreal capital. capital. • Human capital is the Human capital is the knowledgeknowledge and and skillsskills gained gained

through experience. through experience. • Examples are: College degrees and job training

EntrepreneurshipEntrepreneurship• Entrepreneurship is Entrepreneurship is

the combination of the combination of visionvision, skill, , skill, ingenuity, and ingenuity, and willingnesswillingness to take to take risks necessary to risks necessary to create and run new create and run new businesses. businesses.

• They anticipate the They anticipate the wants of consumers, wants of consumers, then then satisfysatisfy these these wants in new ways.wants in new ways.

Identify the Factors of Production

Trade-offs Trade-offs

• For every choice you make, you give up For every choice you make, you give up somethingsomething

• A A trade-offtrade-off is the alternative (other is the alternative (other choice or option) that people give up choice or option) that people give up when they make choices.when they make choices.

Opportunity Cost

• Any time you make a choice, it will Any time you make a choice, it will involve costs.involve costs.

• An An Opportunity CostOpportunity Cost is the value of is the value of something that is given up to get something that is given up to get something else that is wanted.something else that is wanted.