1.1 Scarcity and Opportunity Costs

Economics

The science of scarcity

Scarcity

we have unlimited wants but limited resources → must make choices

TINSTAAFL

“there is no such thing as a free lunch”

economic concept that states nothing is truly without a cost

Goods

physical objects that satisfy needs & wants

1. Consumer Goods - physical objects that satisfy needs & wants

2. Capital Goods - purchased by businesses to produce their products

   • used over and over again

Services

actions or activities that one person performs for another

Rational choice

marginal benefit ≥ marginal costM

Marginal Cost

• the cost of a one-unit increase in an activity

• what you give up in return for something

  • money, time, etc.

Marginal Benefit

• the gain of a one-unit increase in an activity

• what you get in return for something

  • money, time, etc.

As you consume more of a product, the marginal benefit for it _______ with each instance of consumption.

decreases

Trade-off

ALL the alternatives that we give up when we make a choice

Opportunity Cost

the ONE most desirable alternative (or trade off) given up when you make a choice

• like your second best option

Four Factors of Production

Land, labor, capital, entrepreneurship

Land

All natural resources that are used to produce goods and services

• ex. water, sun, plants, animals

Not just land, but anything that comes from the land

Income is rent

Labor

any effort a person devotes to a task for which that person is paid

• ex. lawyers, doctors, teachers, waiters, etc.

Income is wages and is the largest source of income for most people.

Capital

an asset that can improve productivity

2 Types

1. Physical capital - any human-made resource that is used to create other goods and services (tools, tractors, machinery, buildings, factories, etc)

2. Human capital - any skills or knowledge gained by a worker through education and experience

Income is interest

Entrepreneurship

the ability to innovate and discover new ways of utilizing resources

• ex. Henry Ford, Bill Gates, inventors, store owners, etc.

1. take the initiative

2. innovate

3. act as the risk bearers

   • so they can PROFIT!

     • Profit = Revenue - Costs

Income is profit