economics next chapter 1 copyright © by houghton mifflin harcourt publishing company the economic...
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Economics
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Chapter 1
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The Economic Way of Thinking
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Economics
Chapter 1
KEY CONCEPT• Scarcity is the situation that exists because wants are unlimited and resources are limited.
Chapter 1: The Economic Way of Thinking
WHY THE CONCEPT MATTERS• The concept of scarcity is an issue you confront in everyday life. Suppose you have $20 to
cover the cost of lunches for the week. How would you use the money to cover your wants Monday through Friday? How would buying a late afternoon snack for $1 on two of the days affect your lunch choices?
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Economics
Chapter 1
Section-1
KEY CONCEPTS• Wants — desires that can be met by consuming products• Needs — things necessary for survival• Scarcity — lack of resources available to meet all human wants not a temporary shortage• Economics — study of how people use resources to satisfy wants
— examines how individuals and societies choose to use resources — organizes, analyzes, interprets data about economic behaviors — develops theories, economic laws to explain economy, predict future
Scarcity: The Basic Economic ProblemWhat Is Scarcity?
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Economics
Chapter 1
Principle 1: People Have Wants• People make choices about all their needs and wants• Wants are unlimited, ever changing
What Is Scarcity?
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Economics
Chapter 1
Principle 2: Scarcity Affects Everyone• Scarcity affects which goods and services are provided• Goods — physical objects that can be bought• Services — work one person does for another for pay• Consumer — person who buys good or service for personal use• Producer — person who makes a good or provides a service
What Is Scarcity?
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Economics
Chapter 1
KEY CONCEPTS• Scarcity affects society and producers as well as individuals• Society must answer three basic economic questions: — what will be produced?
— how will it be produced? — for whom will it be produced?
Scarcity Leads to Three Economic Questions
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Economics
Chapter 1
Question 1: What Will Be Produced?• Societies must decide on mix of goods to produce — depends in part on their natural resources• Some countries allow producers and consumers to decide• In other countries, governments decide• Must also decide how much to produce; choice depends on societies’ wants
Scarcity Leads to Three Economic Questions
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Economics
Chapter 1
Question 2: How Will It Be Produced?• Decisions on production methods involve using resources efficiently — decisions influenced by a society’s natural resources• Societies adopt different approaches — with unskilled labor force, might use labor-intensive methods
— with skilled labor force, might use capital-intensive methods
Scarcity Leads to Three Economic Questions
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Economics
Chapter 1
Question 3: For Whom Will It Be Produced?• How goods and services are distributed involves two questions — how should each person’s share be determined? — how will goods and services be delivered to people?
Scarcity Leads to Three Economic Questions
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Economics
Chapter 1
KEY CONCEPTS• Factors of production — resources needed to produce goods and services — include land, labor, capital, entrepreneurship — supply is limited
The Factors of Production
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Economics
Chapter 1
Factor 1: Land• Land means all natural resources on or under the ground — includes water, forests, wildlife, mineral deposits
The Factors of Production
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Economics
Chapter 1
Factor 2: Labor• Labor is all the human time, effort, talent used to make products — physical and mental effort used to make a good or provide a service
The Factors of Production
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Economics
Chapter 1
Factor 3: Capital• Capital is a producer’s physical resources — includes tools, machines, offices, stores, roads, vehicles
— sometimes called physical capital or real capital• Workers invest in human capital — knowledge and skills — workers with more human capital are more productive
The Factors of Production
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Economics
Chapter 1
Factor 4: Entrepreneurship• Entrepreneurship — vision, skill, ingenuity, willingness to take risks• Entrepreneurs anticipate consumer wants, satisfy these in new ways — develop new products, methods of production, marketing or distributing
— risk time, energy, creativity, money to make a profit
The Factors of Production
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Economics
Chapter 1
Explain the relationship between the terms in each of these pairs:• wants and scarcity• consumer and producer• factors of production and entrepreneurship
Reviewing Key Concepts
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Economics
Chapter 1
Section-2
KEY CONCEPTS• Economic choices shaped by — Incentives — benefits that encourage people to act in certain ways
— Utility — benefit or satisfaction gained from using a good or service• To make choices, people economize: — make decisions according to best combination of costs and benefits
Economic Choice Today: Opportunity CostMaking Choices
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Economics
Chapter 1
Factor 1: Motivations for Choice • People motivated by incentives, expected utility, desire to economize• They weigh costs against benefits to make purposeful choices — motivated by self-interest: look for ways to maximize utility
Making Choices
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Economics
Chapter 1
Factor 2: No Free Lunch • All choices have a cost — choosing one thing means giving up another, or paying a cost
— cost can take form of money, time, other thing of value
Making Choices
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Economics
Chapter 1
KEY CONCEPTS • Trade-off is alternative people give up when they make a choice — usually means giving up some, not all, of a thing to get more of another
Trade-Offs and Opportunity Cost
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Economics
Chapter 1
Example 1: Making Trade-Offs • Shanti wants to earn college credit over summer — semester-long university course offers more credits
— six-week high school course leaves time for vacation
Trade-Offs and Opportunity Cost
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Economics
Chapter 1
Example 2: Counting the Opportunity Cost • Opportunity cost is value of next-best alternative a person gives up — not the value of all possible alternatives• Dan chooses to work for six months so he can travel for six months — opportunity cost: six months of salary
Trade-Offs and Opportunity Cost
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Economics
Chapter 1
KEY CONCEPTS • Cost-benefit analysis — examination of costs, expected benefits of choices — one of most useful tools for evaluating relative worth of economic choices
Analyzing Choices
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Economics
Chapter 1
Example: Max’s Decision-Making Grid • Decision-making grid shows what one gets, gives up with each choice• Max’s grid shows all possible choices for his free hours each week — lists choices, benefits and opportunity cost of each choice• With time, costs and benefits change; also goals and circumstances — Changes influence decisions, make people alter original choices
Analyzing Choices
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Economics
Chapter 1
Example: Marginal Costs and Benefits • Marginal cost — lists choices, benefits and opportunity cost of each choice• Marginal benefit — additional benefit of using one more unit of a good or service
Analyzing Choices
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Economics
Chapter 1
Explain the relationship between the terms in each of these pairs:• incentive and utility• trade-off and opportunity cost• marginal cost and marginal benefit
Reviewing Key Concepts
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Economics
Chapter 1
Section-3
KEY CONCEPTS• Economic models — simplified representations of economic forces• Production possibilities curve (PPC) is one model — maximum goods or services that can be produced from limited resources
— also called production possibilities frontier
Analyzing Production PossibilitiesGraphing the Possibilities
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Chapter 1
KEY CONCEPTS• PPC based on assumptions that simplify economic interactions — resources are fixed
— all resources are fully employed — only two things can be produced — technology is fixed
Graphing the Possibilities
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Economics
Chapter 1
Production Possibilities Curve • PPC runs between extremes of producing only one item or the other• Data is plotted on a graph; lines joining points is PPC — shows maximum number of one item relative to other item• PPC shows opportunity cost of each choice
— more of one product means less of the other
Graphing the Possibilities
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Economics
Chapter 1
KEY CONCEPTS• Concepts revealed by PPC: — Efficiency — producing the maximum amount of goods and services possible
— Underutilization — producing fewer goods and services than possible
What We Learn from PPCs
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Chapter 1
Example: Efficiency and Underutilization • Each point on PPC represents efficiency — points inside curve mean underutilization; outside curve cannot be met• Law of increasing opportunity costs
— as production switches from one product to another, more resources needed to increase production of second product
What We Learn from PPCs
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Economics
Chapter 1
Example: Increasing Opportunity Costs • Increase in opportunity cost — each new unit costs more than last one• Reasons for increasing cost of making more of one product — need new resources, machines, factories
— must retrain workers• Costs paid by making less and less of other product
What We Learn from PPCs
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Economics
Chapter 1
Example: A Shift in the PPC • A country’s supply of resources changes over time — Example: U.S. in 1800s grew, gained resources, workers, new technology
— new resources mean new production possibilities beyond frontier• Increased production shown on PPC as shift of curve outward• Increase in total output called economic growth
Changing Production Possibilities
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Economics
Chapter 1
Explain how each term is illustrated by the production possibilities curve:• underutilization• efficiency
Reviewing Key Concepts
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Economics
Chapter 1
Section-4
KEY CONCEPTS• Statistics — numerical data or information — show patterns of human behavior• Economic models help organize and interpret data
The Economists ToolboxWorking with Data
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Economics
Chapter 1
Using Economic Models • Economic models focus on a limited number of variables — thus based on assumptions and use simplification
— expressed in words, graphs, equations
Working with Data
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Economics
Chapter 1
Using Charts and Tables • Economists look for statistical relationships, trends, connections• Charts and tables display data in rows and columns — can reveal patterns by showing numbers in relation to other numbers
Working with Data
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Economics
Chapter 1
Using Graphs • Graphs use two sets of variables: along horizontal, vertical axes• Line graphs useful for showing changes over time — in economics, line referred to as a curve, even if straight• Bar graphs good for showing comparisons• Pie graph (or pie chart, circle graph) shows numbers in relation to whole
Working with Data
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Economics
Chapter 1
KEY CONCEPTS • Microeconomics — studies behavior of individual players in an economy — includes individuals, families, businesses• Macroeconomics — studies behavior of economy as a whole — topics include inflation, unemployment, aggregate demand and aggregate supply
Microeconomics and Macroeconomics
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Economics
Chapter 1
Microeconomics • Microeconomics examines specific, individual elements in an economy — prices, costs, profits, competition, consumer and producer behavior• Some Topics of Interest: business organization, labor markets, environmental issues
Microeconomics and Macroeconomics
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Economics
Chapter 1
Microeconomics • Microeconomics examines specific, individual elements in an economy — prices, costs, profits, competition, consumer and producer behavior• Some Topics of Interest: business organization, labor markets, environmental issues
Microeconomics and Macroeconomics
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Economics
Chapter 1
Microeconomics • Macroeconomics studies sectors — combination of all individual units — Includes consumer, business, public or government sectors• Macroeconomics studies national or global topics: — monetary system, business cycle, tax policies, international trade
Microeconomics and Macroeconomics
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Economics
Chapter 1
KEY CONCEPTS • Positive economics — describes and explains economic behavior as it is — uses verifiable facts; does not make judgments• Normative economics — studies what economic behavior should be — makes value judgments to recommend future actions
Positive Economics and Normative Economics
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Economics
Chapter 1
Positive Economics • Positive economics uses scientific method — observe data, hypothesize, test, refine, continue testing• Statements tested against real-world data — proved (or strongly supported) or disproved (or strongly questioned)
Positive Economics and Normative Economics
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Economics
Chapter 1
Normative Economics • Normative economics studies facts, asks if course of action is good• Recommendations differ because values they are based on also differ
Positive Economics and Normative Economics
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Economics
Chapter 1
Seeing the Invisible• An Inquiry into the Nature and Causes of the Wealth of Nations, 1776 — challenged mercantilism; argued for free trade• Invisible hand guides free marketplace, benefits sellers and buyers — people pursue own economic self-interest — producers sell at prices that satisfy them and that consumers will pay
Adam Smith: Founder of Modern Economics
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Economics
Chapter 1
Explain the differences between the terms in each of these pairs: • statistics and economic model• macroeconomics and microeconomics• positive economics and normative economics
Reviewing Key Concepts
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Economics
Chapter 1
Background• Chicago’s O’Hare Airport is one of the busiest airports in the United States.• Delays at O’Hare are commonplace.• Considerable debate over the best solution to improve efficiency.
Case Study: The Real Cost of Expanding O’Hare Airport
What’s the Issue• What are the real costs involved in airport expansion? Study these sources to determine
the costs tied to the expansion of O’Hare airport.
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Chapter 1
Case Study: The Real Cost of Expanding O’Hare Airport {continued}
Thinking Economically1. Explain the real cost of expanding O’Hare Airport. Use information presented in the
documents to support your answer.2. Who are the most likely winners and losers as a result of the O’Hare expansion? Explain
your answer.3. How might supporters of expansion use a production possibilities model to strengthen
their case?
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Print Slide Show
1. On the File menu, select Print 2. In the pop-up menu, select Microsoft
PowerPoint If the dialog box does not include this pop-up, continue to step 4
3. In the Print what box, choose the presentation format you want to print: slides, notes, handouts, or outline
4. Click the Print button to print the PowerPoint presentation