INTRODUCTION TO ECONOMICS - LESSON#2

Economics; Another Perspective
Š Economics is the study of the choices made by people who are faced with scarcity.
Š Scarcity is a situation in which resources are limited but can be used in different ways;
so one good or service must be sacrificed for another.
Society’s Choices
Š The decisions of producers, consumers and government determine how an economic
system answers three fundamental questions:

1. What products do we produce?
2. How do we produce these products?
3. Who consumes the products?
   Factors of Production
   Factors of production are the resources that are used to produce goods and services:
4. Natural resources:
   The things created by acts of nature such as land, water, mineral, oil and gas
   deposits, renewable and nonrenewable resources.
5. Labor:
   The human effort, physical and mental, used byworkers in the production of goods
   and services.
6. Physical capital.
   All the machines, buildings, equipment, roads and other objects made by human
   beings to produce goods and services.
7. Human capital:
   The knowledge and skills acquired by a worker through education and experience.
8. Entrepreneurship:
   The effort to coordinate the production and sale of goods and services.
   Entrepreneurs take risk and commit time and money to a business without any
   guarantee of profit.
   The Production Possibilities Frontier
   (PPF)
   The PPF curve shows the possible
   combinations of goods and services
   available to an economy, given that all
   productive resources are fully and efficiently
   employed.
   When the economy is at point i, resources
   are not fully employed and/or they are not
   used efficiently. Point gis desirable because
   it yields more of both goods, but not
   attainable given the amount of resources
   available. Point dis one of the possible
   combinations of goods produced when
   resources are fully and efficiently employed.
   Scarcity and the PPF
   To increase the amount of farm goods by
   10 tons, we must sacrifice 100 tons of
   factory goods.
   The PPF curve is bowed out because
   resources are not perfectly adaptable to the
   production of the two goods. As we
   increase the production of one good, we
   sacrifice progressively more of the other.