Chapter 2—Scarcity and the World of Trade Offs i. What is scarcity? ii. Production factors iii. Economic goods iv. Opportunity cost v. Efficiency 1. What is scarcity a. Scarcity- situation in which people don’t have the means to satisfy all their desires b. Production- conversion of resources into products that can be used in consumption 2. Factors in production There are 4 factors in production—land, labor, capital, and entrepreneurship a. Land- natural resources available from nature (location, original fertility and minerals, topography, climate, water, and vegetation) b. Labor- productive contributions of humans who work c. Capital- resources used in production. There are 2 kinds of capital—physical capital and human capital i. Physical capital—manufactured resources and equipment used in production ii. Human capital—accumulated training and education needed to do the job d. Entrepreneurship- human resources that perform a job (organizing, managing, assembly, making decisions and taking risks) 3. Economic Goods Goods- things from which individuals derive satisfaction or happiness Economic goods- goods that the demand exceeds the supply Services- tasks performed by individuals, often for someone else 4. Opportunity cost a. Opportunity cost- the next best alternative that must be sacrificed to obtain something or satisfy a want b. Production possibilities curve- curves representing all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality c. Technology- total pool of applied knowledge concerning how goods and services canbe produced 5. Efficiency a. Efficiency- producing maximum outputs at a minimum cost b. Productive efficiency- when an economy is producing the maximum outputs with their technology and resources c. Inefficiency point- any point below the production possibilities curve, at which the use of resources is not generating the maximum output6. Other things a. Law of increasing additional cost- says that opportunity cost increases as people attempt to produce more of that good b. Consumption- use of goods and services for personal satisfaction c. Specialization- working at a relatively defined, limited endeavor (law, medicine, accounting) d. Comparative advantage- ability to produce a good or service at a lower opportunity cost compared to other producers e. Absolute advantage- ability to produce more units of a good or service using a given amount of labor or resource inputs or it is also producing the same quantity of a good/ service using fewer units of labor or resource inputs f. Division of labor- segregation of resources into different tasks (automobile workers put on bumpers, another puts on the doors, and another