Economics: Scarcity, Trade-offs, and Production

Scarcity and Economic Choices

Even in affluent societies, everyone must make economic choices due to limited funds.
Economics studies how individuals, businesses, and governments make choices with limited resources.
Scarcity forces choices by making us decide which options are most important.

Need: Something essential for survival (e.g., food, medical care).
Want: Something desired but not necessary for survival (e.g., video games, stylish haircuts).
Goods: Physical objects produced (e.g., food, clothing, video games).
Services: Actions performed for others (e.g., medical care, haircuts).
Scarcity: Limited amounts of goods and services are available to meet unlimited wants.
Economics: The study of how people seek to satisfy their needs and wants by making choices.
Shortage: Consumers want more of a good or service than producers are willing to make available at a particular price. Shortages can be temporary or long-term.
Entrepreneur: People who decide how to combine resources to create new goods and services.
Factors of Production: Resources used to make all goods and services (land, labor, and capital).
Land: All natural resources used to produce goods and services (e.g., fertile land, oil, iron, coal, water, forests).
Labor: Effort people devote to tasks for which they are paid (e.g., medical care, classroom instruction).
Capital: Any human-made resource used to produce other goods and services.
- Physical Capital: Human-made objects used to create other goods and services (e.g., buildings, equipment).
- Human Capital: Knowledge and skills a worker gains through education and experience.

Entrepreneurs combine resources to create new goods and services, fueling economic growth.
Entrepreneurs take risks, develop new ideas, and start businesses.
Factors of production are the resources used to make goods and services: land, labor, and capital.
Jean-Baptiste Say considered the risk-taking entrepreneur as a fourth factor of production.

Capital is divided into physical and human capital.
Physical capital includes buildings, equipment, and tools.
Human capital includes knowledge and skills gained through education and experience.
Both physical and human capital are required for an economy to produce goods and services effectively.

Businesses that buy and use physical capital usually become more productive.
Human capital, such as technical knowledge, also increases productivity.
Many businesses provide training for their employees to enhance human capital.
Capital saves time and money. For example, a dishwasher saves time washing dishes.
Investing in technology saves time, and workers gain new knowledge.
With extra time and more knowledge, there is more productivity.

All goods and services are scarce because the resources used to produce them are scarce.
Land, labor, and capital are all limited, and each has alternative uses.

Every decision involves trade-offs, where one benefit is given up to gain another.
Trade-offs involve easily measured items like money, property, or time, but also intangible values like enjoyment or job satisfaction.
Governments also make trade-offs, such as "guns or butter," which describes the choice between military and domestic needs.
The reason for trade-offs is scarcity: goods and services are limited, but needs and wants are unlimited.
The most desirable alternative somebody gives up as a result of a decision is the opportunity cost.
A decision-making grid can help determine if you are willing to accept the opportunity cost of a choice.

Many decisions involve adding or subtracting one unit, such as one hour or one dollar.
Thinking at the margin means deciding how much more or less to do.
Decision makers have to compare the opportunity costs and the benefits in a cost/benefit analysis.
The marginal cost is the extra cost of adding one unit.
The marginal benefit is the extra benefit of adding the same unit.
As long as the marginal benefits exceed the marginal costs, it pays to add more units.
Employers think at the margin when they decide how many extra workers to hire.

Economists use a production possibilities curve to decide what and how much to produce.
A production possibilities curve is a graph that shows alternative ways to use an economy's productive resources.
Example: Government economists in Capeland must decide whether to use the nation's scarce resources to manufacture shoes or to grow watermelons.
The line on the graph is called the production possibilities frontier, shows combinations of the production of both shoes and watermelons. Any spot on that line represents a point at which Capeland is using all of its resources to produce a maximum combination of those two products.
This line, called the production possibilities frontier, shows combinations of the production of both shoes and watermelons.
Any spot on that line represents a point at which Capeland is using all of its resources to produce a maximum combination of those two products.
There are trade-offs along the production possibilities frontier because the factors of production are scarce.

Production possibilities curves can show how efficient an economy is and whether it is growing.
Efficiency is the use of resources to maximize the output of goods and services.
Any point inside the production possibilities frontier indicates underutilization, or the use of fewer resources than the economy is capable of using.

If the quantity or quality of land, labor, or capital changes, then the curve will move.
When an economy grows, economists say that the production possibilities frontier has shifted to the right.
When a country's production capacity decreases, the curve shifts to the left.

Graphs determine the cost involved in a decision which means it's opportunity cost.
The opportunity cost of moving from producing no watermelons to producing 8 million tons of watermelons is 1 million pairs of shoes.
Every additional step of switching from shoes to watermelons has an increasing cost.
The law of increasing costs states that as production shifts from making one item to another, more and more resources are necessary to increase production of the second item, so the opportunity cost increases.
Some resources are better suited for use in farming, while others are more appropriate for manufacturing.

A country's resources include its land and natural resources, its workforce and physical and human capital.
Technology is the process used to create goods and services.
Many governments spend money investing in new technology, education, and training so that people can develop and use new technologies.
Highly skilled workers can increase efficiency and lead to economic growth.