Create mutiple choice questions that covers all of this content: Unit 2 -
Fundamentals of
Economics

LN 1 - Scarcity and the
Production Equation

● Microeconomics: The part of economic theory that deals with
behavior and decision-making by small units such as individuals
and firms.

● Macroeconomics: The part of economic theory dealing with the
economy as a whole and decision-making by large units such as
governments and unions.
Some important
terminology:

A

● Some of our wants are necessary for survival (food, water,
shelter)
● Beyond the necessities, what we desire to own or experience in
our lives is limited only by our imaginations.
● Our ability to satisfy our wants is limited (time, money).
Unlimited Wants + Limited Resources = Scarcity
Review: Our wants always exceed our
resources

D

Review: Scarcity is Unavoidable
Scarcity would exist even if everyone in the world was a billionaire.

Scarcity will always exist because labor, raw materials, tools and time are in limited supply.

E

Shortage: When there is not enough of a good or service available to
satisfy all of the willing buyers at the current price.
● Why do shortages occur?
○ Fads/trends
○ War
○ Natural disasters
● Shortages are temporary
○ Ends once production is resumed or a new source of
supply is found.

Don’t confuse “shortages” with the concept of
scarcity. Shortages are temporary , but scarcity is
forever

F

Big Idea: Scarcity forces us to make
choices about what we produce

● Because of scarcity, we have to make decisions
about the way that our limited resources will be
used.
● Three basics questions:
1. What to produce
2. How to produce it
3. For whom to produce

Scarcity will always exist because labor, raw materials, tools and time are in
limited supply.

G

WHAT to produce:

Guns vs. Butter
EXAMPLE 1:

Housing allocation towards various
socioeconomic groups.
EXAMPLE 2:

H

Items that are produced can be divided
into two broad categories:
1. Services: Tasks that people pay others to perform
for them.
IE: Dog groomer, doctor, mechanic, lawyer

2. Goods: Physical objects made for sale.

Much of economics is concerned with economic
products - goods and services (g/s) that are useful,
relatively scarce, and transferable to others.

Scarcity will always exist because labor, raw materials, tools and time are in
limited supply.

I

How to produce:

Mass production w/
automation vs manual
labor?
EXAMPLE 1:

Expensive green energy vs cost efficient

fossil fuels?
EXAMPLE 2:

J

For whom to produce: ● Based on who can
afford to buy them?
● Based on need? ● “First-come, first
serve?”
EXAMPLE : How are
products distributed?

K

The Factors Of Production ● One reason people cannot
satisfy all their wants and
needs is the scarcity of
productive resources.
● The factors of production are
the resources required to
produce the goods and
services that we want.

L

The Factors Of Production
Economists divide the factors of production
into three basic categories: ● Land - natural resources ● Labor - the time and effort people
devote to producing g/s in exchange for
wages
● Physical Capital - goods that are used
as resources for further production; the
tools, machines, and buildings used in
the production process.
We will elaborate on these next time we
meet.

M

The Production Equation
Production Equation:
Land + Labor + Capital = Goods and Services ● Inputs: The scarce
resources that go into
the production process
● Outputs: The goods and
services produced using
the factors of production

N

The Production Equation
What about entrepreneurship?
● Sometimes considered the fourth factor of production.
● Entrepreneurs combine land, labor and capital in NEW ways to produce
goods and services.
● Often involve being willing to take risks when starting a new business.

O

Inputs, Outputs, and the Production Equation
Production Equation:
(Land + Labor + Capital) + Entrepreneurship = New Goods and Services

P.1

Key Term Check-In
Consumer: A person who uses goods and services to satisfy
wants and needs.
Consumer Goods: Physical goods that are intended for final use
by individuals; OUTPUTS
Services: Refers to tasks that consumers pay others to perform
for them; OUTPUTS
Capital Goods: Goods that are used in the production process
(aka physical capital); INPUTS
Labor: Refers to tasks producers pay others to perform as part
of the production process; INPUTS

P.2

Test Your Understanding
Which of the following BEST describes an
example of a service?

a. Purchasing shoes from a sales person
b. Purchasing a purse at the mall
c. A painter is hired to paint Warriors
bobbleheads in a bobblehead factory
d. Purchasing a manicure from the local nail
salon

P.3

Productivity:
The measure of the amount of output produced by a
given amount of inputs during a specific period of time.
Productivity is stated as a ratio of output per unit of
input.
Productivity = Output/Input

Q

Productivity:
1. When we increase productivity, we get more
output from the same inputs.
● Example: Finding a way to get more out of
every tree harvest (input) would leads to
more board feet of lumber (output) per
week.

Brainstorm: How can producers increase
productivity? Remember, you can’t change the
inputs.

R

Increased productivity = greater economic
efficiency ● Because the factors of production are
scarce, we can’t produce all of the goods
and services people might want. But by
using these inputs more efficiently, we can
produce MORE goods and services.
● So...increasing productivity promotes
economic efficiency, which refers to using
resources in a way that produces the
maximum amount of goods and services.