Basic Economic Concepts

Basic Economic Concepts

Basic Economic Concepts

Have you ever been asked to be in two places at the same time? Perhaps one friend would like you to go to a concert, but your mom offers to take you to the movies. If anything like that has ever happened to you, then you understand the most basic economic problem, which is known as scarcity. Scarcity is the fundamental economic problem of having unlimited wants and limited resources.

Basic Economic Concepts

Trade-offs and Opportunity Costs When faced with more wants than available resources, people have to make choices. These choices are known as trade-offs. Consider the situation of wanting to go to a concert and to a movie (your wants), but only having a limited amount of time (your resource). If you decide to go to the movies, you will have to give up going to a concert. There were other things you could have done as well, such as cleaning your room, or studying for a test. All of the things you did not do are the trade-offs you made.

Trade-offs and Opportunity Costs (continued)

Among the trade-offs, you will find the opportunity cost to your decision. When you hear the word cost, you most likely think about money or the price of something. In economic terms, cost can also refer to something you must give up in order to pursue a different opportunity. You make a decision and a choice, but at the same time you have to give up an alternative. You can look at opportunity cost as the value of the next-best alternative when a decision is made. It's your second choice, or the choice you almost made.

Trade-offs and Opportunity Costs (continued)

Related to opportunity cost is the consequence, which is a result or effect of this decision. These can be either positive or negative. For example, the opportunity cost of buying sodas for all of your friends might be that you don't have money to buy gas for your car. The consequence might be your inability to drive your friends to the movies later in the week. Opportunity cost is not always a number. It can be the result of any action. Opportunity costs come down to what you "pay" or give up by choosing a single alternative as opposed to your next-best option.

Trade-offs and Opportunity Costs (continued)

It can be difficult to understand why opportunity cost is important, so let’s look at an example:Manny decides he wants to sell candy bars to his classmates, and he has $20 to buy his merchandise. He goes to the store and sees that he can buy 40 candy bars for $20. He also sees he can buy a gift for his girlfriend, or even the jeans he has been wanting.

Trade-offs and Opportunity Costs (continued)

When Manny buys the candy bars, his trade-offs are the gift for his girlfriend and the jeans he wanted. So which of those is the opportunity cost? Well, it depends on which thing was Manny’s second choice. If his girlfriend’s birthday was the next day, the gift is probably his second choice. This is important because it means the candy bars cost Manny more than $20. Really, the candy bars cost Manny $20 plus a gift for his girlfriend.

Trade-offs and Opportunity Costs (continued)

As you can see, Manny had the problem of scarcity, so he had to decide how to allocate his resources. In this case, he decided to buy the candy bars to sell. In theory, for his decision to be worth it, he has to make enough money on the candy bars to get his $20 back and also make up for the fact that he did not buy his girlfriend a gift. This is an important concept for businesses that have to decide how to use their resources, and we will explore it more as we study economics.

Terms to Know

Opportunity Cost

Scarcity

Choices

variety of selections; making decisions

the gains lost (not necessarily monetary) by choosing one course of action over another

the condition of lacking adequate supply for the demand of a particular good or service

Time is the scarcest resource in any organization.

Trade-offs and Opportunity Costs (continued)

Three Basic Economic Questions

As When individuals and businesses are trying to decide how to allocate resources, they ask themselves three questions:

1. WHAT to produce
2. HOW to produce
3. FOR WHOM to produce

These questions are referred to as the three basic economic questions. Remember Manny? He wanted to sell candy bars to his classmates. He answered the three questions and decided his “what” was candy bars, his “how” was investing his capital to buy them, and his “for whom” was his classmates.

Factors of Production

As Just like individuals, businesses and countries face the problem of scarcity and make decisions about how to allocate their resources. All of the resources that exist are known as the factors of production. Generally, those factors are divided into four categories: land, labor, capital, and entrepreneurship.

Factors of Production(continued)

Land includes all of the natural resources and land resources available. It even includes sunshine, which can be used to produce solar energy or inspire people to visit your area for the good weather. Labor includes all of the work that people do. Capital is money and anything worth money, such as machinery and buildings. The fourth category of production is entrepreneurship.

Factors of Production(continued)

Entrepreneurs are the people who have an idea for a new product or service and invest their own resources, such as time and money, to start a business. These people are taking on a personal financial risk in the hope that they will see a financial reward.

Review the following information to learn about the four factors of production: natural resources, capital, human labor, and entrepreneurship.

Capital

Entrepreneurial

Human

Natural

skill of developing new and successful business ventures, accompanied by willingness to risk loss in order to realize profit or gain

human-made goods that are used as resources to produce other products, or financial assets applied for production

physical labor and skills of people who help produce goods and services

resources found in nature

Examples: farmland, forests, natural gas, minerals, animals, deserts, oceans

Examples: farmer, assembly-line worker, designer, truck driver, computer technician, teacher

Examples: computers, machinery, tools, factories, buildings, trucks, trains, ships, investment funds

Examples: Henry Ford (automobiles), Steve Jobs (Apple computing), Sam Walton (Walmart)

Business Product Statistics

Here are some interesting statistics related to successful businesses and products. As you read, keep in mind the four economic factors of production, and think about which examples would apply.

• Subway sandwich shops are among the fastest growing franchises in the United States.

• More than half of Americans purchased private label brands rather than higher-priced brand name products during the 2008 economic downturn. For example, Great Value is the private brand label of Walmart. Many Americans continued to purchase private label products after the recession.
• H&M clothing stores bring in annual revenue of more than $18 billion.
• Males 12 to 19 years of age consume an average of 868 cans of soda per year each.
• Over 43 million baseball hats are sold in the United States each year.