Fundamental Economic Concepts

Students will explain why limited resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses and governments

What is Economics?
Economics is the study of how people make choices to satisfy their wants

Give some examples1. 2. 3.

What are the Fundamental Concepts of Economics?

Scarcity- occurs because there are unlimited wants but only limited resources to satisfy those wants. 1. Resources- are all the things people can use to make goods or products. 2. Goods- include things such as food, clothing, homes, furniture, cars and computers. 3. Limits- there is a limit to all resources and because of this people, businesses and governments must make a decision how they are going to allocate their resources to satisfy wants.

What are the Fundamental Concepts of Economics?

4. Allocation- distribution of resources in a systematic way. 5. Shortages- occur when producers will not or cannot offer goods or services at current prices (NOT THE SAME AS SCARCITY)

6. Services- Actions or activities one person performs for another

7. Capital Goods- Capital goods refer to real products that are utilized in the production of other products. Capital goods include factories, machinery, tools, and various buildings 8. Consumer Goods- used for the masses- include cars, CDs and clothing

Opportunity Costs

Trade Off- people have to give up something to gain something all the time (RESOURCES) Opportunity Costs- the next most important thing you give up to get something. Give an Example 1. 2. 3.

The Four Factors of Production

Factors of Production- resources that are used to make all goods and services. 1. Land (natural)- All natural resources that are used to produce goods and services. 2. Labor (human)- Any effort a person devotes to a task for which that person is paid. 3. Capital- Any human-made resource that is used to create other goods and services. a. Physical Capital- all the tools, machines, and other equipment a business needs b. Human Capital- the skills and knowledge of a companys workers

Four Factors of Production

4. Entrepreneur- is a person who starts and manages a business. 1. Come up with the ideas how to produce something people want to buy. 2. Organize the land, labor, capital resources needed to produce the goods or services. 3. Take the risk of investing money in the hope of making a profit. Give Examples 1. 2. 3.

What is the right decision?

Student Decision-making Grid
Sleep late Benefits Enjoy more sleep Have more energy during the day Alternatives Wake up early to study Better grade on test Teacher and parental approval Personal satisfaction

Decision

Sleep late

Wake up early to study for test

Opportunity cost Benefits forgone

Extra study time Better grade on test Teacher and parental approval Personal satisfaction

Extra sleep time Enjoy more sleep Have more energy during the day

Lets Make Some Choices!!!!

Land Labor Capital

What is a Production Possibilities Curve?

Production Possibility Curve- A production possibilities graph shows alternative ways that an economy can use its resources. 1. The production possibilities frontier is the line that shows the maximum possible output for that economy.
Production Possibilities Graph
Watermelons (millions of tons) Shoes (millions of pairs) 25

Shoes (millions of pairs)

20 15 10 5

5 10 15 20 Watermelons (millions of tons)

25

What can happen in an economy?

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. 1. Underutilization- any point that is inside the line; using fewer resources than the economy is capable of using. 2. Growth- If more resources become available, or if technology improves, an economy can increase its level of output and grow. When this happens, the entire production possibilities curve shifts to the right.

Economy contd
3. Cost- A production possibilities graph shows the cost of producing more of one item. When we choose one option over another. 4. Law of increasing costs- this law states that as production switches from one item to another, more and more resources are necessary to increase production of the second item.

Cost Benefit, and Voluntary Exchange

Rational Decisions- When we weigh the benefits and costs of each option. 1. Cost-Benefit Analysis- when people choose the option were the benefits outweigh the costs.

2. Marginal Benefits- additional pleasure is gained but not needed .

When the marginal benefits you receive from a decision are equal to or greater that the marginal costs, you are making a rational decision

Thinking on the Margin

Options Benefit Opportunity Cost

1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time

Grade of C on test Grade of B on test Grade of B+ on test

1 hour of sleep 2 hours of sleep 3 hours of sleep

Specialization

Specialization- when people focus on one kind of service or product Voluntary Exchange- When people who specializes buy and sell goods to each other. Division of Labor- Each person does one part of a job to create a larger product.