SCARCITY

2 Categories of Economics

The study of the The behavior of

choices of entire economies
households, (nations )
companies, and
Example: Inflation,
individual markets
Unemployment,
Example: Cell Phone GDP
market, Airline
Industry, Microsoft
Paradox of Value
What determines value?
 Who Makes Economic
Decisions?

Government
 Economic Choices

Physical objects  Actions or activities

Examples: Pizza, Car, performed by a fee
Shoes Examples: Lawyer,
Hairstylist, Cab driver
 Factors of Production
• Natural Resources (land)
• Human Resources (labor)
• Capital Resources (capital)
• Entrepreneurship
 Natural Resources (land)
• Items provided by nature, in the Earth or
the Earth’s atmosphere, that can be used
to produce goods and services
• Must be scarce and some form of
payment is necessary for its use
 Human Resources (labor)

Any human effort that goes into the

production of a good or service. Can be
physical or intellectual.
 Capital Resources
Manufactured materials used to create
products, including capital goods AND
the money used to purchase them.
• Capital Goods – The buildings, structures, machinery,
and tools used in the production process
 Entrepreneurship

 Assembles the
factors of production
 Takes the necessary
risk in starting a new
business or
developing an
innovative product or
service
 Opportunity Cost
• Trade offs and Opportunity Costs—
– Trade off—One good is sacrificed for
another; the sacrifice is a trade off.
– Opportunity Cost—The value of the next
best alternative given up to obtain an item
including the time, money or any opportunities
lost associated with it.
– Most choices have many alternatives
– They all are trade offs but only the 2nd best
choice is the opportunity cost.
Opportunity Costs Example
You have $50 and it’s Friday night:
Work
Go out on a date
Pizza and games with the family
Hang out with friends
Get all of your homework for Monday done
early
 Cost/Benefit Analysis
Friday Night Choices Benefits: Financial, Costs: Financial,
Social, Educational, Social, Educational,
Future, Family Future, Family
Work

Date

Family Night

Friends

Homework
 Production Possibilities
• Trade offs and opportunity costs can be
illustrated using a Production
Possibilities Curve.
• PPC—shows all the possible
combinations of 2 goods or services.
Two assumptions:
1. Fixed resources
2. Maximum efficiency.
Current Production Possibilities
• Current Production Possibilities Curve
—Shows the possible production options
that would be available if a company
concentrated their resources on two
possible alternatives.
Economy Luxury
A 0 5 mil
B 2.75 mil 4.25 mil
C 4.5 mil 3 mil
D 6 mil 1.5 mil
E 7 mil 0
 Productivity
Definition: The level of output that results from a
given level of input.

Productivity Goal

Efficiency – The use of the smallest

amount of resources to produce
the greatest amount of output
 Economic Growth
• The curve “shifts to the right” to show new
production possibilities when
1.Increases in quality or quantity of
resources (population, labor participation,
immigration, physical capital)
2.New Technology (software, robotics,
innovation and invention)
3.Increases in Human Capital (training,
education)
 Circular Flow Model
Product Market Factor Market

• The transfer of • The transfer of

goods and services resources like land,
in exchange for a labor, and capital in
money payment exchange for a
(revenue) money payment
(rent, wages,
interest, profit)
Circular Flow Model