Scarcity Study Guide What is economics? Economics is the study of how people and societies choose to use limited resources to try to satisfy unlimited wants.

This is the concept of scarcity: humans possess unlimited wants while we have limited resources. The earth has a finite (limited) amount of resources.

Because of scarcity societies therefore have the following 3 economic questions all societies must answer:

1. What to produce? 2. How to produce? 3. Who receives the products?

The difference between scarcity and shortage is that scarcity always exists and a shortage is temporary.

Factors of Production

Land – natural resources that are available from nature. (Timber, water, and minerals) Labor - productive contributions of humans who can work, involving physical and mental activities. Capital – all manufactured resources including buildings, equipment, machines, tools, and improvement to land that are used for production. Human Capital – involves accumulated training and education of workers. Entrepreneurship – involves human resources that perform the functions of raising capital, organizing, managing, assembling other factors of production, and making basic business policy decisions. The entrepreneur is a risk taker. (Bill Gates – Henry Ford)

Wants v. Needs

Needs: things individuals need to survive ex: food, shelter, clothing

Wants: things, either tangible or intangible, that people desire but are not necessary for survival

Good and Services

Goods: physical (tangible) objects that can satisfy people’s wants

Services: actions (intangibles) that one person performs for another to satisfy wants

RELATED CONCEPTS

A. Price Prices are paid by consumers and determine who receives the production. Money is the tool used by consumers and producers to help the economic process of exchanging goods and services. Money is a medium of exchange and measure of value.

B. Substitute Goods: are used when extreme scarcity causes a good cost to become high or goods you buy when you can’t get what you want.

Example: Good Car Good ______Substitute good: Bicycle Substitute ______Motorcycle ______Bus ______C. Complementary Goods: exist when they are used in conjunction with each other or goods which go with or complement another good. example: Good Car example: Good ______Complementary good: Insurance Complementary good ______Gasoline ______Tires ______

Causes of change in resource availability

- strike or labor interruption - drop in production - cutoff of supply from another country - insect or weather interruption - drought or flooding causing destruction of resources

Opportunity Cost Because of the concept of scarcity, individuals, businesses and societies must make trade-offs: sacrificing one good or service to purchase or produce another.

This brings us to the concept of opportunity cost: the next best alternative given up as a result of a decision.

Decisions we make everyday involve opportunity cost. Ex: Phyllis has the choice to sleep in late or get up early to study for her economic exam.

What is the opportunity cost if Phyllis chooses to sleep in?

What is the opportunity cost if Phyllis gets up early to study? ______

For each of the following choices, which alternative would you choose? Sleep late or wake up early to eat breakfast? Sleep late or wake up early to go to Starbucks? Sleep late or wake up to pick up a friend on the way to school? Sleep late or wake up early to go on a ski trip?

Most likely you did not choose “sleep late” for all four options. Your decision depended on the specific opportunity cost- whatever you were willing to sacrifice. When we select one alternative we have to sacrifice at least one thing and forgo its benefits. What is the opportunity cost for each example?

Thinking at the Margin When economists look at decisions, they point out one more characteristic in addition to opportunity cost. Many decisions involve adding one unit or subtracting one unit, such as one minute or one dollar. When economists decide how much more or less to do, they are thinking at the margin.

This is also referred to as marginal analysis: making decisions based on the impact of the next dollar spent or the change one more unit would bring about

Ex: If Phyllis is “thinking at the margin” when trying to decide to sleep in late or get up to study she should look at the opportunity cost of each extra hour of studying and compare it to the benefit.

Options Benefit Opportunity Cost

1st hour of study time Earns a C on Econ test One hour of sleep 2nd hour of study time Earns a B on Econ test Two hours of sleep 3rd hour of study time Earns a B+ on Econ test Three hours of sleep

Marginal Utility- additional amount of satisfaction that comes from adding each additional unit.

“Guns or Butter”- a phrase that refers to the trade-off which nations face when choosing whether to produce more or less military or consumer goods.

Productions Possibilities Curves

-A graph that shows alternative ways to use an economy’s resources.

Point A (any point inside the line) on the graph represents a point where resources are underutilized (all are not used). Point B (any point on the line) on the graph represents a point where resources are being used efficiently (all resources are being used) Point C (any point outside the line) on the graph represents a point which is impossible with the available resources.

Movement of the line Line moves down and left: if resources are lost – ie. Loss of land in a war Line moves up and right: if resources are gained – ie. New forms of technology are developed, cheaper labor enters the market. Study Guide – Economic Systems

Economic Systems – method used by a society to produce and distribute goods and services. a. The primary role of an economic system is to determine the allocation of limited resources. b. The function is to produce and distribute goods and services.

Basic Economic Questions 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services?

Markets allow people to buy what they need to consume and sell specialized goods and services they produce.

Types and characteristics of Economic systems: 1. Traditional Economy: a. uses habit, ritual or custom to answer the basic economic questions b. revolves around the family c. resistant to change at both individual and community level d. low standard of living e. agricultural and hunting practices are often main economic activities f. little if nothing saved for later

2. Market Economy a. use the buying and selling of goods to answer the economic questions. b. Specialization leads to the need to purchase the things we want. c. No country today has a market economy d. invisible hand (Adam Smith) through competition and people acting in their own self interest the consumer will be able to get the products they want at a price that closely reflects the cost of producing them. As if an invisible hand made it happen. (Invisible hand is the self-regulating nature of the market place.)

 Self-interest is the motivating force behind a free market.  Free markets need some government regulation to ensure 2 things: -that businesses act fairly and - provide for things that the marketplace does not address.

Advantages of a market economy: a. Economic efficiency – because it is self regulating it is responsive to changing conditions. Producers make only what consumers want and at a price consumers are willing to pay. b. Economic Freedom – freedom for workers, consumers and producers c. Economic Growth – Entrepreneurs are always looking for profitable opportunities so they pursue new ideas and products. d. Consumer sovereignty – consumers decide what will be produced because the producer will only produce those items that the consumer will buy. e. It offers a wide variety of goods and services.

Disadvantages of a market economy a. Concern for the old/young disadvantaged of the society. b. Profit motive can lead some producers to create substandard products c. Stiff competition can lead to businesses going bankrupt

3. Command Economy a. also called Centrally planed economy b. The government answers the economic questions by owning both the land and capital and in effect the labor by determining where individuals work and what they are paid. c. No country today has a command economy d. Uses posters for propaganda to get workers motivated Advantages of command economy a. ability to switch resources quickly to new products (ie from consumer to military) b. Each person has a job c. Government provides all the basic needs for all citizens

Disadvantages of Command Economy a. no incentive for workers ( No innovation) Government posters – propaganda b. generally can not meet consumer demands and is slow to respond to consumer needs and wants. c. Does not reward innovation

4. Mixed Economy a. All countries today have a mixed economy b. The economic questions are decided through a combination of the buying and selling of goods within government regulations. c. The amount of government regulation varies greatly by country (ie Hong Kong very little/North Korea great controls)

 In a mixed society were the market governs the day to day economic life while the government regulates social conditions and provides health care, this is commonly known as a welfare state.

Characteristics of the American Economy:

1. Property rights a. Individuals own the factors of production b. Guaranteed in the 5th and 14th amendments

2. Profit motive a. force that encourages people and organizations to improve their material well- being. Incentive of manufacturers. b. rewards innovation by letting creative companies grow c. improves productivity by allowing more efficient companies to make more money. Financial gain.

3. Consumer sovereignty a. consumers decide what will be produced because the producer will only produce those items that the consumer will buy.

4. Competition a. To attract customers a producer must lower prices and improve quality or consumers will go to another producer to purchase the product. This interaction between consumer and producer regulates the market (purpose).

5. Self-Interest a. people worry about their own well being when they are involved in market activities. You have the opportunity to become rich or to lose money when you become a business owner. Self interest is the motivating force in a free market.

6. Role of Government a. Constitutional responsibilities to protect property rights, contracts, and other business activities in our free enterprise system. b. Make sure consumers have access to information on products c. Protection of social problems of pollution and unsafe foods d. Safety net for disadvantaged and protection from unforeseen situations (is unemployment insurance and disability payments)

7. Specialization a. Concentration of the productive efforts on a limited number of activities. It makes the economy more efficient.