Chapter 2 Economic Decision Making

Objectives In the course of reading this chapter and participating in the classroom activity, students will explain how unlimited wants and scarce resources influence decision making. distinguish the goods and services, factors of production, and tradeoffs visible in common places and everyday situations. evaluate tradeoffs in and determine opportunity costs of various decisions. analyze and interpret production possibilities frontiers. apply the economic way of thinking to their own lives.

Preview 5 goods you wish you had What is keeping you from these goods? ________________

Why is What We Want Scarce? Why can’t we have everything we want? We can't get everything we want because there is a limited amount of resources to fulfill our wants. 2. All goods (physical objects) and services (activities provided by others) are scarce because the resources needed to produce them are scarce. Why is What We Want Scarce?

Why is What We Want Scarce? 3. What is the difference between a shortage and scarcity? A shortage is a temporary condition that occurs when there is less of a good or service available than people want at the current price. Why is What We Want Scarce?

Why is What We Want Scarce? 4. What are some of the causes of shortages? Wars, prices, fads, media craze, natural disasters, changes in productivity Why is What We Want Scarce?

You buy a Babe Ruth rookie baseball card for $500,000. You have to take the bus to school because your mom and dad have the cars. You have to buy a kiwi strawberry smoothie on Friday instead of peach. You pay over $500 for an original Nintendo gaming system. Shortage or Scarcity?

How Do We Satisfy Economic Wants? What are factors of production? The productive resources that go into producing goods and services are called factors of production. The production equation land + labor + capital = goods and services Inputs Outputs How Do We Satisfy Economic Wants?

How Do We Satisfy Economic Wants? Land Resources “Gifts of Nature” Perpetual – sources that won’t run out EX) sunlight, wind Renewable – sources that can be replaced as they are used EX) forests, fish Nonrenewable – once these sources are used, they are gone forever EX) fossil fuels, natural gas, coal How Do We Satisfy Economic Wants?

How Do We Satisfy Economic Wants? Labor Resources The time and effort people devote to producing goods could be physical (planting trees, building houses) or mental (programming games, writing legal briefs) How Do We Satisfy Economic Wants?

How Do We Satisfy Economic Wants? Capital Resources physical capital (also known as real capital) – the manmade goods, such as tools, which are used to produce other goods (tools, machines, buildings, screwdrivers, supercomputers, factories, roads, airports, etc.) Human capital – the skills and knowledge a person has acquired through experience and/or education (take away everything from a person and just leave them with) How Do We Satisfy Economic Wants?

How Do We Satisfy Economic Wants? Capital Resources financial capital-money used for investment or production (stocks, bonds, real estate, or businesses) How Do We Satisfy Economic Wants?

What are some job characteristics of an entrepreneur? __________________________________ Who are some entrepreneurs?

How Do We Satisfy Economic Wants? Entrepreneurs combine land, labor, and capital to produce goods and services. They often supply vision, take risks, and provide the drive needed to turn ideas into realities. Entrepreneurs + (land + labor + capital) = goods and services How Do We Satisfy Economic Wants?

Maximizing Utility: What we want when we choose? People often have to make tough decisions to maximize the utility of their decisions Utility – the satisfaction or gain made from a decision Also gain utility by making choices that, while not all that pleasurable, are likely to improve our lives

Tradeoffs: What we give up when we choose?  The classic example used by economists is the guns-versus-butter tradeoff, in which a society must choose between using its resources to produce guns (military goods) or butter (civilian goods).  If the society chooses guns, it maximizes its security, but at the cost of lowering living standards. If it chooses butter, the society maximizes living standards, but at the cost of reducing security. https://www.youtube.com/watch?v=7nINpWIHN6E Tradeoffs: What we give up when we choose?

What Do We Give Up When We Make a Choice? Opportunity Cost – what it cost you to give up the next best option Whether you have 2 alternatives or 200, the opportunity cost is the next best option, this is really a personal thing Price-Amount buyer (or consumer) pays Cost-Amount seller pays to produce a good What Do We Give Up When We Make a Choice?

What Do We Give Up When We Make a Choice? Marginal Utility – the extra pleasure/satisfaction you get with one more of something Negative Utility – when one more of something actually does not bring you happiness Law of diminishing marginal utility – as the quantity of a good or service consumed increases, the benefits for the consumer of each additional unit decreases What Do We Give Up When We Make a Choice?

What Do We Give Up When We Make a Choice? It is Friday night. Your only chunk of free time all weekend is tonight from 6:00 to 11:00. Before deciding how you will spend this time, consider these factors: You have $50 to spend. You have an economics test on Monday. This is the last football game of the season. It is your mother’s birthday. Someone you like has asked you out on a date. Your favorite band is in town tonight. Fill in a table like the one below showing how you plan to spend your time. Create your own activities or choose from the list of possible activities. If you choose an activity from the list, use the given time and price. Possible Activities Football game: 3 hours, $5 Dinner: 2 hours, $20 per person Movie: 2 hours, $10 per person Concert: 4 hours, $40 Study for test: variable time, $0 Hang out at friend’s house: variable time, $0 Work at job: variable time, earn $10 per hour Family time: variable time, $0 What Do We Give Up When We Make a Choice?

What Do We Give Up When We Make a Choice? Time Activity Price Opportunity Cost 6:00pm   7:00pm 8:00pm 9:00pm 10:00pm What decisions did you have to make in this exercise? What constraints did you face when making these decisions? For each decision you made about how to spend your time, what did you have to give up? What Do We Give Up When We Make a Choice?

How Can We Measure What We Gain and Lose When Making Choices? A production possibilities frontier (PPF) is a graph that shows how an economy might use its resources to produce two goods. https://www.youtube.com/watch?v=tW4G5IPpzFY&list=PLpCVxuSvh3c8GGcuHlJrnvkKS2-Aau2Lr&index=3 How Can We Measure What We Gain and Lose When Making Choices?

How Can We Measure What We Gain and Lose When Making Choices? A PPF is used to calculate the opportunity cost of moving production from one point to another. How Can We Measure What We Gain and Lose When Making Choices?

How Can We Measure What We Gain and Lose When Making Choices? Every point on a PPF represents an efficient use of the resources. The area under the curve represents an attainable but inefficient use of resources. The area above the curve represents an unattainable goal based off current resources. How Can We Measure What We Gain and Lose When Making Choices?

How Can We Measure What We Gain and Lose When Making Choices? Increases in productivity, a measure of the output of a system, can shift the PPF outward. How Can We Measure What We Gain and Lose When Making Choices?

PPF Curve Practice p. 006

PPF Curve Practice A B C D E

PPF Curve Practice What is the opportunity cost of increasing wheat production by 200 pounds by moving production from Point B to Point C? What is the opportunity cost of increasing wheat production by 200 points by moving production from Point C to Point D? How would the line change if they found a way to produce more wheat? Draw it on the graph with a different color. How would new computer technology affect the line? Draw it on the graph with a different color.

PPF Curve Practice How would the line change if they found a way to produce more wheat? Draw it on the graph with a different color. How would new computer technology affect the line? Draw it on the graph with a different color.