Section 3: Economic Choices and Decision Making, p. 19
Choices are explained in terms of trade-offs, or alternatives that are available whenever a decision is made. The cost of every decision is measured in terms of its opportunity cost, which is the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. Trade-offs can be analyzed with a production possibilities frontier, a diagram representing various combinations of goods and services an economy can produce when all its resources are in use. Furthermore, economists use cost-benefit analysis to evaluate choices.
Guide to Reading
Section Preview
Content Vocabulary
Academic Vocabulary
Reading Strategy
Identifying
People in the News
The Grease Pits of Academia
Trade-Offs and Opportunity Cost, p. 20
Trade-Offs
The Death of Economics Trade-Offs, 6:00
This video by Christopher Barnatt discusses how the "green trade-off", the "consequence behind the price" and "challenges beyond economic solutions" may mean the end of economics as as primary decision making mechanism.
Opportunity Costs
Opportunity Cost, 3:39
Opportunity cost is one of the most critical concepts in economics - outside of economics, it's an often-overlooked component when costs are considered.
The opportunity cost of any alternative is defined as the cost of not selecting the "next-best" alternative. Let's consider a few examples of opportunity cost:
* Suppose that you own a building that you use for a retail store. If the next-best use of the building is to rent it to someone else, the opportunity cost of using the business for your business is the rent you could have received. If the next-best use of the building is to sell it to someone else, the annual opportunity cost of using it for your own business is the foregone interest that you could have received (e.g., if the interest rate is 10% and the building is worth $100,000, you give up $10,000 in interest each year by keeping the building, assuming that the value of the building remains constant over the year -- depreciation or appreciation would have to be taken into account if the value of the building changes over time).
* The opportunity class of attending college includes:
o the cost of tuition, books, and supplies (the costs of room and board only appear if these costs differ from the levels that would have been paid in your next-best alternative),
o foregone income (this is usually the largest cost associated with college attendance), and
o psychic costs (the stress, anxiety, etc. associated with studying, worrying about grades, etc.).
* If you attend a movie, the opportunity cost includes not only the cost of the tickets and transportation, but also the opportunity cost of the time required to view the movie.
When economists discuss the costs and benefits associated with alternative activities, the discussion generally focuses on marginal benefits and marginal costs. The marginal benefit from an activity is the additional benefit associated with a one-unit increase in the level of an activity. Marginal cost is defined as the additional cost associated with a one-unit increase in the level of the activity. Economists assume that individuals attempt to maximize the net benefit associated with each activity.
If marginal benefit exceeds marginal cost, net benefit will increase if the level of the activity rises. Therefore, rational individuals will increase the level of any activity when marginal benefit exceeds marginal costs. On the other hand, if marginal cost exceeds marginal benefit, net benefit rises when the level of the activity is decreased. There is no reason to change the level of an activity (and net benefit is maximized) at the level of an activity at which marginal benefit equals marginal cost.
Reading Check
Summarizing
How are trade-offs and opportunity cost related?
Production Possibilities, p. 21
Scarcity implies the existence of tradeoffs. These tradeoffs can be illustrated quite nicely by a production possibilities frontier.
For simplicity, it is assumed that a firm (or an economy) produces only two goods (this assumption is needed only to make the representation feasible on a two-dimensional surface -- such as a graph on paper or on a computer screen). When a production possibilities curve is drawn, the following assumptions are also made:
1. there is a fixed quantity and quality of available resources,
2. technology is fixed, and
3. there are no unemployed nor underemployed resources
Very shortly, we'll also see what happens when these assumptions are relaxed.
For now, though, let's consider a simple example. Suppose that a student has four hours left to study for exams in two classes: introductory microeconomics and introductory calculus. The output in this case is the exam score in each class. The assumption of a fixed quantity and quality of available resources means that the individual has a fixed supply of study materials such as textbooks, study guides, notes, etc. to use in the available time. A fixed technology suggests that the individual has a given level of study skills that allow him or her to translate the review materials into exam scores. A resource is unemployed if it is not used. Idle land, factories, and workers are unemployed resources for a society. Underemployed resources are not used in the best possible way. Society would have underemployed resources if the best brain surgeons were driving taxis while the best taxi drivers were performing brain surgery.... The use of an adjustable wrench as a hammer or the use of a hammer to pound a screw into wood provide additional examples of underemployed resources. If there are no unemployed or underemployed resources, efficient production is said to occur.
The table below represents possible outcomes from each various combination of time studying each subject:
Notice that each additional hour spent studying either calculus or economics results in smaller marginal improvements in the grade. The reason for this is that the first hour will be spent studying the most essential concepts. Each additional hour is spent on the "next-most" important topics that have not already been mastered. (It is important to note that a good grade on an economics examination requires substantially more than four hours of study time.) This is an example of a general principle known as the law of diminishing returns. The law of diminishing returns states that output will ultimately increase by progressively smaller amounts as additional units of a variable input (time in this case) are added to a production process in which other inputs are fixed (the fixed inputs here include the stock of existing subject matter knowledge, study materials, etc.).
To see how the law of diminishing returns works in a more typical production setting, consider the case of a restaurant that has a fixed quantity of capital (grills, broilers, fryers, refrigerators, tables, etc.). As the level of labor use increases, output may initially rise fairly rapidly (since additional workers allow more possibilities for specialization and reduces the time spent switching from task to task). Eventually, however, the addition of more workers will result in progressively smaller increases in output (since there is a fixed amount of capital for these workers to use). It is even possible that beyond some point workers may start getting in each others way and output may decline ("too many cooks may spoil the broth...." sorry.... I couldn't resist).
In any case, the law of diminishing returns explains why your grade will increase by fewer points with each additional hour that you spend studying.
The points in the table above can be represented by a production possibilities curve (PPC) such as the one appearing in the diagram below. Each point on the production possibilities curve represents the best grades that can be achieved with the existing resources and technology for each alternative allocation of study time.
Let's consider why the production possibilities curve has this concave shape. As the diagram below indicates, a relatively large improvement in economics grade can be achieved by giving up relatively few points on the calculus exam. A movement from point A to point B results in a 30-point increase in economics grade and only a 10-point reduction in calculus grade. The marginal opportunity cost of a good is defined to be the amount of another good that must be given up to produce an additional unit of the first good. Since the opportunity cost of 30 points on the economics test is a 10-point reduction in the score on the calculus test, we can say that the marginal opportunity cost of one additional point on the economics test is approximately 1/3 of a point on the calculus test. (If in doubt, note that if 30 points on the economics exam have an opportunity cost of 10 points, each point on the economics test must cost approximately 1/30th of 10 points on the calculus test -- approximately 1/3 of a point on the calculus test).
Now, let's see what happens a second hour is transferred to the study of economics. The diagram below illustrates this outcome (a movement from point B to C). As this diagram indicates, transferring a second hour from the study of mathematics to the study of economics results in a smaller increase in economics grade (from 30 to 45 points) and a larger reduction in calculus grade (from 75 to 55). In this case, the marginal opportunity cost of a point on the economics exam has increased to approximately 4/3 of a point on the calculus exam.
The increase in the marginal opportunity cost of points on the economics exam as more time is devoted to studying economics is an example of the law of increasing cost. This law states that the marginal opportunity cost of any activity rises as the level of the activity increases. This law can also be illustrated using the table below. Notice that the opportunity cost of additional points on the calculus exam rises as more time is devoted to studying calculus. Reading from the bottom of the table up to the top, you can also see that the opportunity cost of additional points on the economics exam rises as more time is devoted to the study of economics.
One of the reasons for the law of increasing cost is the law of diminishing returns (as in the example above). Each extra hour devoted to the study of economics results in a smaller increase in the economics grade and a larger reduction in the calculus grade because of diminishing returns to time spent on either activity.
A second reason for the law of increasing cost is the fact that resources are specialized. Some resources are better suited for some some types of productive activities than for other types of production. Suppose, for example, that a farmer is producing both wheat and corn. Some land is very well suited for growing wheat, while other land is relatively better suit for growing corn. Some workers may be more adept at growing wheat than corn. Some farm equipment is better suited for planting and harvesting corn.
The diagram below illustrates the PPC curve for this farmer.
At the top of this PPC, the farmer is producing only corn. To produce more wheat, the farmer must transfer resources from corn production to wheat production. Initially, however, he or she will transfer those resources that are relatively better suited for wheat production. This allows wheat production to increase with only a relatively small reduction in the quantity of corn produced. Each additional increase in wheat production, however, requires the use of resources that are relatively less well suited for wheat production, resulting in a rising marginal opportunity cost of wheat.
Now, let's suppose that this farmer either does not use all of the available resources, or uses them in a less than optimal manner (i.e., either unemployment or underemployment occurs). In this case, the farmer will produce at a point that lies below the production possibilities curve (as illustrated by point A in the diagram below).
In practice, all firms and all economies operate below their production possibilities frontier. Firms and economies, however, generally attempt to get as close to the frontier as possible.
Points above the production possibilities cannot be produced using current resources and technology. In the diagram below, point B is not obtainable unless more or higher quality resources become available or technological change occurs.
An increase in the quantity or quantity of resources will cause the production possibilities curve to shift outward (the curve should shift outwards for both wheat and corn). This type of outward shift could also be caused by technological change that increases the production of both goods.
Thus, for the production of both goods: an increase in the quantity or quantity of resources will cause the production possibilities curve to shift outward.
In some cases, however, technological change will only increase the production of a specific good. The diagram below illustrates the effect of a technological change in wheat production that does not affect corn production.
Identifying Possible Alternatives
Fully Employed Resources
The Cost of Idle Resources
Opportunity Cost, p. 22
Economic Growth
Reading Check
Synthesizing
How can the production possibilities frontier be used to illustrate economic growth?
Thinking Like an Economist, p. 23
Build Simple Models
Apply Cost-Benefit Analysis, p. 24
Cost/Benefit Analysis, 5:24
Here's a short little video that explains the economic concept of Cost/Benefit Analysis, made by high school students for their economics class. We do not own the music, "My Life Would Suck Without You" by Kelly Clarkson. Also, our use of an H.E.B. store as our filming location was a matter of convenience. We did not intend to promote or disparage the store in any way.
How to Fix Health Care: Lasik Surgery For The Medical Debate, 8:43
Can a market-based health care system work? We can begin to answer this question by looking at Lasik, a medical procedure that's not covered by health insurance. And has gotten better—and cheaper—over time.
"How to Fix Health Care" proposes three simple reforms that will put us on a path to a health-care system that's better, more affordable, and more accessible. And get this—these market-based reforms can be implemented without creating new government programs or raising taxes.
Take Small, Incremental Steps
The Road Ahead
Topics and Issues
Economics for Citizenship, p. 25
Understand the World Around Us
Reading Check
Determining Cause and Effect
How do you think our society would be different if citizens did not study economics?
In an interconnected world of finite resources, understanding the principles that govern the allocation of goods and services—economics—is essential. Although economics has not traditionally been a part of the liberal arts core, informed citizenship in the 21st century requires instruction in economic principles and the fundamentals of the marketplace.
Yet, most colleges and Universities do not require Economics study. Schools receive credit for Economics if they require a course covering basic economic principles, preferably an introductory micro- or macroeconomics course taught by faculty from the economics or business departments.
Sustainable Energy Systems: Scale, Tradeoffs, and Co-Benefits, 1:03:53
October 14, 2009 - Sally Benson, director of the Global Climate and Energy Project, Pamela Matson, dean of the Stanford School of Earth Sciences, Lynn Orr, director of the Precourt Institute for Energy, Stephen Schneider, Stanford professor of Interdisciplinary Environmental Studies, James Sweeney, director of the Precourt Energy Efficiency Center, and Buzz Thompson, co-director of the Woods Institute for the Environment, discuss the interconnected aspects of future sustainable energy systems with a focus on the scales, tradeoffs, and co-benefits involved.
The concepts of goods, services, consumers, markets, factor markets, product markets, productivity, economic growth, and economic interdependence are explained and are linked in the circular flow diagram. Productivity is necessary for economic growth, and growth takes place when specialization and the division of labor are present. In addition, human capital, the sum of our skills, abilities, health, and motivations are other important components of growth.
We were introduced to goods in the last section. A good is said to be an economic good (also known as a scarce good) if the quantity of the good demanded exceeds the quantity supplied at a zero price. In other words, a good is an economic good if people want more of it than would be available if the good were available for free.
A good is said to be a free good if the quantity of the good supplied exceeds the quantity demanded at a zero price. In other words, a good is a free good if there is more than enough available for everyone even when the good is free. Economists argue that there are relatively few, if any, free goods.
Services
Consumers
Reading Check
Interpreting
How are goods, services, and consumers related?
Value, Utility, and Wealth, p. 14
The Paradox of Value
Utility
Value
Wealth
Reading Check
Summarizing
How are value and utility related?
The Circular Flow of Economic Activity, p. 15
Circular flow model, 4:21
A brief video using the circular flow model to illustrate the basic nature of product markets and factor markets.
Factor Markets
Factor Markets, 3:01
The video is about factor markets. In economics factor markets are also termed as resource markets referring to the place where, the factors of production are bought and sold. The factors of production include land, labor, capital, raw materials and management. All the factors have a consideration and each factor's consideration is addressed in a differently.
Product Markets
Reading Check
Explaining
What roles do factor markets and product markets play in the economy?
Productivity and Economic Growth, p. 16
Writers Talk Ross Gittins: Higher productivity, 3:45
Economics journalist Ross Gittins talks about his book Gittinomics and ways to create higher productivity.
Productivity
Investing in Human Capital
Division of Labor and Specialization, p. 17
In The Wealth of Nations, Adam Smith argued that economic growth occurred as a result of specialization and division of labor. If each household produced every commodity it consumed, the total level of consumption and production in a society will be small. If each individual specializes in the productive activity at which they are "best," total output will be higher. Specialization provides such gains because it:
* allows individuals to specialize in those activities in which they are more talented,
* individuals become more proficient at a task that they perform repeatedly, and
* less time is lost switching from task to task.
Increased specialization by workers requires a growth in trade. Adam Smith argued that growing specialization and trade was the ultimate cause of economic growth.
Adam Smith and David Ricardo argued that similar benefits accrue from international specialization and trade. If each country specializes in the types of production at which they are best suited, the total amount of goods and services produced in the world economy will increase. Let's examine these arguments a bit more carefully.
There are two measures that are commonly used to determine whether an individual or a country is "best" at a particular activity: absolute advantage and comparative advantage. These two concepts are often confused. An individual (or country) possesses an absolute advantage in the production of a good if the individual (or country) can produce more than can other individuals (or countries). An individual (or country) possesses a comparative advantage in the production of a good if the individual (or country) can produce the good at the lowest opportunity cost.
Economic Interdependence
Let's examine an example illustrating the difference between these two concepts. Suppose that the U.S. and Japan only produced two goods: CD players and wheat. The diagram below represents production possibilities curves for these two countries. (These numbers are obviously hypothetical).
Notice that the U.S. has an absolute advantage in the production of each commodity. To determine who has a comparative advantage, though, it is necessary to compute the opportunity cost for each good. It is assumed that the production possibilities curve (PPC) is linear to simplify this discussion (we will talk about the PPC in greater detail in a subsequent lesson).
The opportunity cost of one unit of CD players in the U.S. is 2 units of wheat. In Japan, the opportunity cost of one unit of CD players is 4/3 of a unit of wheat. Thus, Japan possesses a comparative advantage in CD player production.
The U.S. however, has a comparative advantage in wheat production since the opportunity cost of a unit of wheat is 1/2 of a unit of CD players in the U.S., but is 3/4 of a unit of CD players in Japan.
If each country specializes in producing the good in which it possesses a comparative advantage, it can acquire the other good through trade at a cost that is less than the opportunity cost of production in the domestic economy. For example, suppose that the U.S. and Japan agree to trade one unit of CD players for 1.6 units of wheat. The U.S. gains from this trade because it can acquire a unit of CD players for 1.6 units of wheat, which is less than the opportunity cost of producing CD players domestically. Japan gains from this trade since it's able to trade one CD player for 1.6 units of wheat while it only cost Japan 4/3 of a unit of wheat to produce a unit of CD players.
If each country produces only those goods in which it possesses a comparative advantage, each good is produced in the global economy at the lowest opportunity cost. This results in an increase in the level of total output.
Reading Check
Analyzing
What role does specialization play in the productivity of an economy?
French thinkers known as physiocrats focused on economic reforms. Like the philosophes, physiocrats based their thinking on natural laws. The physiocrats claimed that their rational economic system was based on the natural laws of economics.
Physiocrats rejected mercantilism, which required government regulation of the economy to achieve a favorable balance of trade. Instead, they urged a policy of laissez faire (les ay fehr), allowing business to operate with little or no government interference. Physiocrats also supported free trade and opposed tariffs.
Scottish economist Adam Smith greatly admired the physiocrats. In his influential work The Wealth of Nations, he argued that the free market should be allowed to regulate business activity. Smith tried to show how manufacturing, trade, wages, profits, and economic growth were all linked to the market forces of supply and demand. Wherever there was a demand for goods or services, he said, suppliers would seek to meet that demand in order to gain profits. Smith was a strong supporter of laissez faire. However, he felt that government had a duty to protect society, administer justice, and provide public works. Adam Smith’s ideas would help to shape productive economies in the 1800s and 1900s.
Division of Labor
Smith, a Scottish economist, argued that economies function most efficiently and fairly when individuals are allowed to pursue their own interests.
One person may decide to be a baker, another a merchant. One person may choose to sell his land, another to farm it. But all of these private decisions, made by rational, self-interested individuals, Smith argued, combine to produce a healthy, growing economy.
Invisible Hand
The great threat to economic growth, Smith argued, was government intervention—the government telling people what to do would only muck up the works. Government intervention distorted the natural and rational exercise of free, prudent choice. When left to their own natural operation, the private decisions made by thousands of rational economic players were tied into prosperous harmony by the “invisible hand” of the market.
Wealth of Nations
If you haven't read his famous book, it's absolutely worth checking out, whether or not you consider yourself a disciple of the free market. The Wealth of Nations is, without a doubt, one of the most important books of all time. And the ideas it contained played a powerful role in shaping the development of American economic thought. The book is relevant it matters today what he wrote.
Adam Smith's metaphor of the invisible hand remains one of the most important and influential ideas in economics, even today. As Americans have recently grappled with questions about how government should and should not intervene in the economy, many have turned to Smith for guidance.
What would Adam Smith think about the stimulus bill? About universal government-organized health insurance? About bailouts for companies judged "too big to fail"?
Cf. Adam Smith, http://www.shmoop.com/economic-systems/botw/resources?d=http://www.econlib.org/library/Enc/bios/Smith.html
In the Circular Flow, 2:56
A song/video made for a high school economics class. It was recorded by one person for all five parts using Audacity. The song is from the original "In the Still of the Night" recorded by the Five Satins and later covered by Boyz II Men.
Sometimes, a Song Says it Better: Billionaire, by Travis McCoy, 3:31
Travis wants to be a billionaire. Adam Smith would be proud.
Assigned seating chart and randomly generated student classroom number (this is separate from your regular student I.D. number; it is for the purposes of this class only).
Your class number will consist of three numbers: the first number designates the Period, the second number is the row you sit in, and the third number is your seat in that row.
For example, if a student in 1st Period is sitting in the first row (my left), and in the first seat, their number will be #111. Likewise, the student sitting in 8th Period, in the sixth row, in the sixth seat, will be #866. Every student should easily be able to determine their class number.
The number is used for anything you post online so no one can identify you other than the people you know right in class with you. Of course, nothing about your real name, school, or any personal information about you should ever be posted online.
Textbooks:
Textbooks are available in the room and you will have an assigned textbook.
In addition, I have material online and will supply work that can be done in-class as well. Anything you need is available in-class; any material available online is a supplement to in-class work. My policy towards technology is that all material and supplements should be accessible or tried: no technology is required.
Answer the question. Note that it can be answered online, emailed to me at gmsmith@shanahan.org, or as a hard copy. All three ways of doing your HW are acceptable. Nonetheless, it is most likely easiest to answer online.
Grading:
The class grade is calculated automatically by GradeConnect using the Category Weighted Assessments feature.
"Each assessment is assigned to a category (ex [sic] Tests, Labs, Presentations,etc [sic]) and the category is assigned a weight (ex [sic] Tests - 40%, Presentations - 20%, etc). Individual assessment weights are then automatically calculated by GradeConnect.com based on these category weights."
Tests 65%
HW & Daily Class Work 20%
Quizzes 15%
Grading is based on Quizzes, Tests, and other participatory work such as in-class work, daily participation, and other assignments.
Quizzes are smaller exams and may be unannounced.
Tests are always scheduled, announced well in advance, and worth more points.
Homework & Daily in-class work is required. There is HW and Daily in-class work due every day. HW is due daily barring absence, and with your absence, HW is due the day you return.
If you are absent for a longer period simply inform me and we can make separate arrangements. HW is posted and available online even when you are absent.
Emailed HW and daily in-class assignments might be best, but it is not required if you do not have access to a computer. I am in seven places during our eight period day thus I am not tethered to a specific room. I am connected online most of the day so I generally will be available.
Class participation includes debate, discussion, reactions, games, and projects of various sorts, details will be provided as we come to these more involved assignments.
All written work follows the Honor Code stating:
This is my work and I have not cheated in any way.
Access to a bathroom during class time is a privilege, not a right, and of course it is necessary in case of an emergency. The admonition here is that you are to remain on task throughout the period. You should not have access to materials for other classes or other distractions in this class. I consider this behavior to be defiance and you will receive demerits.
Students are using learning tools--such as the creation of an avatar--that reflects the use of vastly different materials than the types of learning aids that students traditionally used. In fact, learning for your generation is so different than previous learners that you have often been described as the "Digital Generation" (the first generation living entirely since the Internet has been invented) or as the "Millennials" (since you were born around the turn of the Millennium). Your cohort is characterized by:
Doting parents
Confidence
Connected
Open to Change
Value Collaboration
The list describes the leading characteristics of the Digital Millenials. Next, we will consider what endeavors you should strive for as a student. In short, your task as a student should be the (what was described by Sr. last year as Quadrant D) dedicated endeavors that Sr. reviewed at our Faculty Orientation this week to (they are listed in descending order):
Create
Evaluate
Analyze
Apply
Understand
Remember
You will realize that you have arrived as a student when you can apply yourself to real world, unpredictable situations. I am fond of saying that the old chaos is the new normal. In short, this is the unpredictable world that we are living in currently. Events are taking place rapidly, change is constant, and the challenges are enormous. Yet, this is an exciting time to be studying disciplines such as history or Economics for their practical application.
Principles of Macroeconomics by John Kane - Department of Economics, SUNY-Oswego has an abundance of material useful for economics notes and PowerPoint presentations.
A similar set of resources, PowerPoint, Flash, and QuickTime, are available for Microeconomics as well.
Schmoop for Economics includes, plain-spoken analysis, charts galore, and role-playing games where you make the tough decisions. Music videos to help burn key concepts into your memory.
Economics is a social science that deals with the fundamental economic problem of scarcity—a condition caused by the combination of seemingly unlimited wants and limited resources. Because of this, people are forced to make choices and decisions about how they will use their resources. People have needs such as food, clothing, and shelter; people have wants, which are nonessential ways of expressing needs. The notion of TINSTAAFL, which stands for There Is No Such Thing As A Free Lunch, is often used to remind us that resources are scarce and that we must make careful economic decisions regarding WHAT, HOW, and FOR WHOM to produce. Other concepts relevant to economics are the four factors of production: land, capital, labor, and entrepreneurs. And the four key elements to this study are description, analysis, explanation, and prediction.
Section 2: Basic Economic Concepts
The concepts of goods, services, consumers, markets, factor markets, product markets, productivity, economic growth, and economic interdependence are explained and are linked in the circular flow diagram. Productivity is necessary for economic growth, and growth takes place when specialization and the division of labor are present. In addition, human capital, the sum of our skills, abilities, health, and motivations are other important components of growth.
Section 3: Economic Choices and Decision Making
Choices are explained in terms of trade-offs, or alternatives that are available whenever a decision is made. The cost of every decision is measured in terms of its opportunity cost, which is the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. Trade-offs can be analyzed with a production possibilities frontier, a diagram representing various combinations of goods and services an economy can produce when all its resources are in use. Furthermore, economists use cost-benefit analysis to evaluate choices.
Prayer
Current Event
Chapter 1: What Is Economics?
Estimated Length of Study in Class Days: 8
Chapter Overview
Section 1: Scarcity and the Science of Economics
Economics is a social science that deals with the fundamental economic problem of scarcity—a condition caused by the combination of seemingly unlimited wants and limited resources. Because of this, people are forced to make choices and decisions about how they will use their resources. People have needs such as food, clothing, and shelter; people have wants, which are nonessential ways of expressing needs. The notion of TINSTAAFL, which stands for There Is No Such Thing As A Free Lunch, is often used to remind us that resources are scarce and that we must make careful economic decisions regarding WHAT, HOW, and FOR WHOM to produce. Other concepts relevant to economics are the four factors of production: land, capital, labor, and entrepreneurs. And the four key elements to this study are description, analysis, explanation, and prediction.
Why It Matters, p. 4
The BIG Idea
The Essential Question in the chapter launch activity ties in to the Big Idea and helps students think about and understand important chapter concepts.
Activity: Launching the Chapter, p. 4
Students should brainstorm common needs and wants such as food items, clothing or entertainment expenses. Explain why each item proves important to many people.
Essential Question
How do limitations on people's time and income affect these needs and wants?
In addition, the Hands-On Chapter Project relates the content from each section to the Big Idea. This Chapter Project is:
1. What was the effect of Hurricane Katrina on the local economy?
2. What is the problem?
3. What do recruiters have to do to find workers?
Loss of jobs
Housing
Pursue job fairs
Definition of Economics
The first thing that we should discuss is the definition of "economics." Economists generally define economics as the study of how individuals and societies use limited resources to satisfy unlimited wants. To see how this concept works, think about your own situation. Do you have enough time available for everything that you wish to do? Can you afford every item that you would like to own? Economists argue that virtually everyone wants more of something. Even the wealthiest individuals in society do not seem to be exempt from this phenomenon.
This problem of limited resources and unlimited wants also applies to society as a whole. Can you think of any societies in which all wants are satisfied? Most societies would prefer to have better health care, higher quality education, less poverty, a cleaner environment, etc. Unfortunately, there are not enough resources available to satisfy all of these goals.
Thus, economists argue that the fundamental economic problem is scarcity. Since there are not enough resources available to satisfy everyone’s wants, individuals and societies have to choose among available alternatives. An alternative, and equivalent, definition of economics is that economics is the study of how such choices are made.
Section 1: Scarcity and the Science of Economics, p. 5
Guide to Reading
Section Preview
Content Vocabulary
Academic Vocabulary
Interactive Graphic Organizers, Chapter 1, Section 1 - Reading Strategy, p. 5 (Cf. Fill-in, p. 7).
WHAT to Produce
HOW to Produce
FOR WHOM to Produce
People in the News
Teens in the Red
The Fundamental Economic Problem, p. 6
Scarcity
Scarcity, 2:54
According to the video, why are goods and services scarce? What is in short supply? What three elements supply the economy?
Scarcity & Choice (Shhh, the volume is low), 4:36
According to the video, what is Economics? What is scarcity? Can you provide an example of a choice that is not rational nor is it in your self-interest?
Definition of Economics
Definition of scarcity
Needs and Wants
TINSTAAFL (There Is No Such Thing As A Free Lunch)
Reading Check
Contrasting
What's the difference between a need and a want?
Three Basic Questions, p. 7
WHAT to Produce
HOW to Produce
FOR WHOM to Produce
Reading Check
Analyzing
Why are societies faced with the three basic questions of WHAT, HOW, and FOR WHOM?
The Factors of Production, p. 8
Graphic Organizer: Chapter 1, Section 1 - Review, The (4) Factors of Production, p. 8
p. 8: Descriptions of Land, Capital, Labor, and Entrepreneurs
Land
Capital
Labor
Entrepreneurs, p. 9
A good is said to be an economic good (also known as a scarce good) if the quantity of the good demanded exceeds the quantity supplied at a zero price. In other words, a good is an economic good if people want more of it than would be available if the good were available for free.
A good is said to be a free good if the quantity of the good supplied exceeds the quantity demanded at a zero price. In other words, a good is a free good if there is more than enough available for everyone even when the good is free. Economists argue that there are relatively few, if any, free goods.
An item is said to be an economic bad if people are willing to pay to avoid the item. Examples of economic "bads" include things like garbage, pollution, and illness.
Goods that are used to produce other goods or services are called economic resources (and are also known as inputs or factors of production). These resources are often categorized into the following groups:
1. Land,
2. Labor,
3. Capital, and
4. Entrepreneurial ability.
The category of "land" includes all natural resources. These natural resources include the land itself, as well as any minerals, oil deposits, timber, or water that exists on or below the ground. This category is sometimes described as including only the "free gifts of nature," those resources that exist independent of human action.
The labor input consists of the physical and intellectual services provided by human beings. The resource called "capital" consists of the machinery and equipment used to produce output. Note that the use of the term "capital" differs from the everyday use of this term. Stocks, bonds, and other financial assets are not capital under this definition of the term.
Entrepreneurial ability refers to the ability to organize production and bear risks.
The resource payment associated with each resource is listed in the table below:
Economic Resource Resource Payment
land rent
labor wages
capital interest
entrepreneurial ability profit
And, again here below:
Production
Reading Check
Interpreting
What would happen if one of the factors of production was missing?
The Global Economy & You
Global Entrepreneurs Drive the Economy
The Scope of Economics
Description
Analysis, p. 10
Explanation
Prediction
Reading Check
Explaining
Why is economics considered to be a social science?
The freedom to make our own economic decisions, including our occupations, employers, and when and where we work, is one of our most cherished freedoms. Information available on the World Wide Web makes these choices increasingly easier to explore. One useful source is the Occupational Outlook Handbook from the U.S. Bureau of Labor Statistics. It has detailed information on hundreds of occupations—from "able seamen" to "zoologists"—including job descriptions, earnings, job outlooks, and educational requirements. It is never too early to think about an occupation. The Handbook may even help you to decide which courses you want to take before you graduate. One occupation you might want to consider is that of an economist. Economists have one of the higher paying jobs in the economy and it's a career worth considering.
The class will be divided into four groups and one of the questions below will be assigned to your group. Your group is expected to find a suggested answer to your assigned question.
1. Read the description under "Nature of the Work." Then, describe several aspects of the job that appeal to you.
2. If you were to decide to become an economist, what other academic disciplines would you have to study in college? Why is this so?
3. Where do economists find employment, and what salaries can economists expect to make?
4. What are the opportunity costs that you are likely to encounter if you decide to become an economist?
There is an abundance of economics resources for Mankiw (edition 5e) as well.
The outro video is a student project on scarcity.
Tyler Gaston - Scarcity, 4:37
ECN211 Macroeconomics Video Project
'Scarcity' - words and music by Tyler S. Gaston
~Lyrics~
When theres nothing to do, nothing to say, when nothing in life is going your way thats economics, oh, scarcity
When you want that car, that will get you far, but all youve found you got an empty penny jar thats economic, oh scarcity,
Scarcity, nothing in the world for free yeah scarcity, cause money dont grow on trees yeah scarcity just look around and see
When you want that grade, and your bed to be made, but wasted all that time tryin to hit a fade thats economics, oh scarcity,
When you want that steak, and then that cake, but give the hungry kids a break thats economics, oh scarcity
Scarcity, nothing in the world for free yeah scarcity, cause money dont grow on trees yeah scarcity just look around and see
With so many wants, and much fewer needs, its up to you what kind of life youll lead thats economics, oh scarcity,
So make the choice, and make it wise, cause you may not get another try thats economics, oh scarcity
Scarcity, nothing in the world for free yeah scarcity, cause money dont grow on trees yeah scarcity just look around and see
Energy Crisis: Resource Scarcity, Oil Wars & Climate Change, 1:25:18
Participants: George Soros; Mary Kaldor; Yahia Said; Sir Nicholas Stern. Chaired by Howard Davies
Description: This event seeks to promote their political agenda and thinking about energy security, and marks the launch of the publication Oil Wars, edited by Mary Kaldor, Terry Karl and Yahia Said.
July 4, 2007 at the London School of Economics.
(Audio only unfortunately)
Sometimes, a Song Says it Better: Welcome to Paradise, by Green Day, 3:46
Once you move out of your parent’s home, you may be “feelin' so alone” and find the creature comforts that Mom and Dad have are scarce.
Dear Mother
Cant you hear me whining?
It's been 3 whole weeks
Since I have left your home
This sudden fear has left me trembling
'cause now it seems that I am out here on my own
& I'm feelin so alone
Pay attention to the cracked streets & the broken homes
Some call it slums some call it nice
I wanna take you through a wasteland I like to call my home
Welcome to paradise
A gunshot rings out at the station
Another urchin snaps & left dead on his own
It makes me wonder why I'm still here
For some strange reason it's now feelin like my home
& I'm never gonna go
Pay attention to the cracked streets & the broken homes
Some call it slums some, call it nice
I wanna take you through a wasteland I like to call my home
Welcome to paradise
Dear Mother
Can you hear me laughing?
It's been 6 whole months
Since I have left your home
It makes me wonder why I'm still here
For some strange reason it's now feelin like my home
& I'm never never gonna go
Pay attention to the cracked streets & the broken homes
Some call it slums, some call it nice
I wanna take you through a wasteland I like to call my home
Welcome to paradise
Paradise....
Lyrics are reproduced for educational purposes only; copyright remains in the hands of the legal owners.
