Scarcity and the Factors of Production What is economics? What is economics? How do economists define scarcity? How do economists define scarcity? What.

Scarcity and the Factors of Production

•What is economics?

•How do economists define scarcity?

•What are the three factors of production?

What Is Economics?

•Economics is the study of how people seek to satisfy their needs and wants by making choices.

•For example:

• You must choose how to spend your time (sleeping, playing sports, working, doing homework).

• Businesses must choose how many people to hire and what to produce.

• Governments have to decide how to best use resources like land and money.

Why must people make such choices? The reason is scarcity.

Scarcity vs. Shortages

•Scarcity limited quantities of resources to meet unlimited wants.

•Scarcity always exists because all goods (physical objects - shoes) and services (actions - haircuts) we produce are scarce. This is because resources used to make goods and services are scarce.

•Shortages occur when producers will not or cannot offer goods or services at current prices (can be short or long term). Bad crop causes shortage of rice. It’s a shortage if they make more.

The 3 Factors of ProductionThe resources used to make goods and services are:

•Land All natural resources that are used to produce goods and services (coal, water, soil, trees, sugar).

•Labor Any effort a person devotes to a task for which that person is paid (shoveling, painting, driving).

•Capital Any human-made resource that is used to create other goods and services (building, saw, skills, ability).

Physical capital = buildings, tools, machines. Human capital = knowledge, skills, and abilities workers obtain through education and experience. Labor is capital at work.

The Factors of Popcorn Production

Land

Popping Corn

Vegetable Oil

Labor

The human effort needed to pop the corn

Capital

Physical: Corn-PoppingDevice

Human: Corn-producing skills

Entrepreneurs

• An entrepreneur = an ambitious leader who decides to combine land, labor, and capital to produce new goods and services (Bill Gates, Henry Ford, Fred Meijer, owner of Harding’s, etc.).

John D. Rockefeller

Cornelius Vanderbilt

Section 1 Assessment

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

Section 1 Assessment

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

Opportunity Cost

•Does every decision you make involve trade-offs?

•How can a decision-making grid help you identify the opportunity cost of a decision?

•How will thinking at the margin affect decisions you make?

Trade-offs and Opportunity Cost

•Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.

•The most desirable alternative given up as a result of a decision is known as opportunity cost.

All individuals and groups of people make decisions that

involve trade-offs.

Trade-offs and Opportunity Costs

• Economists use the phrase “guns or butter” to describe the fact that a nation must decide to produce more or less military or consumer goods.

The Decision-Making Grid•Economists encourage us to consider the benefits and costs of our decisions.

Benefits •Enjoy more sleep•Have more energy during the day

•Better grade on test•Teacher and parental approval•Personal satisfaction

Decision •Sleep late •Wake up early to study for test

Opportunity cost •Extra study time •Extra sleep time

Benefits forgone •Better grade on test•Teacher and parental approval•Personal satisfaction

•Enjoy more sleep•Have more energy during the day

Sleep late Wake up early to study

Alternatives

Karen’s Decision-making Grid

Thinking at the Margin

•When you decide how much more or less to do, you are thinking at the margin.

Options

1st hour of extra study time

2nd hour of extra study time

3rd hour of extra study time

Benefit

Grade of C on test

Grade of B on test

Grade of B+ on test

Opportunity Cost

1 hour of sleep

2 hours ofsleep

3 hours of sleep

Section 2 Assessment

1. Opportunity cost is

(a) any alternative we sacrifice when we make a decision.

(b) all of the alternatives we sacrifice when we make a decision.

(c) the most desirable alternative given up as a result of a decision.

(d) the least desirable alternative given up as a result of a decision.

2. Economists use the phrase “guns or butter” to describe the fact that

(a) a person can spend extra money either on sports equipment or food.

(b) a person must decide whether to manufacture guns or butter.

(c) a nation 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.

Section 2 Assessment

1. Opportunity cost is

(a) any alternative we sacrifice when we make a decision.

(b) all of the alternatives we sacrifice when we make a decision.

(c) the most desirable alternative given up as a result of a decision.

(d) the least desirable alternative given up as a result of a decision.

2. Economists use the phrase “guns or butter” to describe the fact that

(a) a person can spend extra money either on sports equipment or food.

(b) a person must decide whether to manufacture guns or butter.

(c) a nation 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.

Production Possibilities Graphs

•What is a production possibilities graph?

•How do production possibilities graphs show efficiency, growth, and cost?

•Why are production possibilities frontiers curved lines?

Graphs

• Economists use graphs to analyze the choices and trade-offs that people make. Why? Because graphs help us see how one value relates to another value.

• During WWII, consumer goods were in short supply as the nation shifted resources to increase production of planes, ships, artillery, and ammunition. Ration coupons were used to ensure that civilians got a fair share of consumer goods.

Watermelons (millions of tons)

Shoes(millions of pairs)

Sh

oe

s (

mil

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pa

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Production Possibilities Graph

Watermelons (millions of tons)

0

a (0,15)

15

8 14b (8,14)

14

18

20

21

12

9

5

0

A productionpossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

Production Possibilities•A production possibilities graph shows alternative ways that an economy can use its resources.

•The production possibilities frontier is the line that shows the maximum possible output for that economy.

Sh

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Watermelons (millions of tons)

Production Possibilities Graph

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S

Sh

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s (

mil

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Watermelons (millions of tons)

Production Possibilities Graph

g (5,8)

A point of underutilization

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S

EfficiencyEfficiency means using resources to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.

•Each point on the line represents a trade-off.

•Using the factors of production to make one product means that fewer resources are left to make something lese.

Underutilization is using fewer resources than the economy is capable of using. Ex: laid-off workers.

Sh

oe

s (

mil

lio

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pa

irs

)

25

20

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0 252015105

Watermelons (millions of tons)

Production Possibilities Graph

T

Future production

Possibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S

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.”

•An aging population, loss of land in a war, etc. would decrease level of output and shift the curve to the left.

Watermelons (millions of tons)

Shoes(millions of pairs)

Sh

oe

s (

mil

lio

ns

of

pa

irs

)

25

20

15

10

5

0 252015105

Production Possibilities Graph

Watermelons (millions of tons)

14

18

20

21

12

9

5

0

0 15

8 14

c (14,12)

d (18,9)

Cost

•Cost A production possibilities graph shows the cost of producing more of one item. What is the cost of moving from point c to point d on this graph?

ANSWER: 3 MILLION PAIRS OF SHOES

Watermelons (millions of tons)

Shoes(millions of pairs)

Sh

oe

s (

mil

lio

ns

of

pa

irs

)

25

20

15

10

5

0 252015105

Production Possibilities Graph

Watermelons (millions of tons)

14

18

20

21

12

9

5

0

0 15

8 14

c (14,12)

d (18,9)

Cost•Each time we grow more watermelons, the sacrifice in terms of shoes increases. This is called the 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.

• This happens because some resources are better suited for farming, while others are suited for manufacturing. Moving from factory production means that farmers must use resources that are not suitable for farming (less fertile land). This law explains why production possibilities frontiers are curved.

As we move along the curve, we trade off more and more to get less and less additional output.

Section 3 Assessment

1. A production possibilities frontier shows

(a) farm goods and factory goods produced by an economy.

(b) the maximum possible output of an economy.

(c) the minimum possible output of an economy.

(d) underutilization of resources.

2. An economy that is using its resources to produce the maximum number of goods and services is described as

(a) efficient.

(b) underutilized.

(c) growing.

(d) trading off.

Section 3 Assessment

1. A production possibilities frontier shows

(a) farm goods and factory goods produced by an economy.

(b) the maximum possible output of an economy.

(c) the minimum possible output of an economy.

(d) underutilization of resources.

2. An economy that is using its resources to produce the maximum number of goods and services is described as

(a) efficient.

(b) underutilized.

(c) growing.

(d) trading off.