Economic Choices Goal 7

What is Economics? Study of …how individuals, businesses and nations can best use their limited resources How people can get the most of wants and needs from the limited amount available and at the lowest cost

Needs and Wants NEEDS WANTS must haves to survive food, clothing, shelter, water, etc. WANTS all goods and services a person desires and would have if they could unlimited wants…but limited resources to obtain our wants

Resources Things humans can put to productive use Money, people (labor), time, information, machines and natural resources

Natural Resources Raw materials in nature used to produce what humans need or want Timber, water, iron ore, crude oil, natural gas, coal, fish, uranium, and arable (farmable) land

Resources (cont’d) renewable nonrenewable replenished/replaced over time ex: timber **Can be expended if not given a chance to renew** nonrenewable cannot be replenished over time ex: petroleum takes millions of years to form

So… people are forced to make decisions/choices about how to spend their limited resources.

Basic Economic Questions What to produce? How will I produce it? For whom will it be produced?

4 Factors of Production Elements of any business allows resources to be properly processed in order to produce things that are needed/wanted Capital, Entrepreneurship, Land and Labor (CELL)

Factors of Production CAPITAL Structures and equipment involved in the manufacturing process Ex: nail guns, machinery, computer, grills, tools, lighting and assembly lines

Factors of Production Entrepreneurship creative, managerial, and risk-taking capabilities involved in starting up and running a business Ex: organizing the business, developing the business model, raising funds to open for business human activity **May be labor, but not all labor is entrepreneurship** Ray Kroc and McDonald’s Bill Gates and Microsoft www.tcocd.de/History/paulbill.jpg http://www.businessweek.com/magazine/content/04_27/art04_27/0427_18innova.jpg

Factors of Production Land property on which production plant is built all natural resources involved “more than the ground you stand on”

Factors of Production Labor contribution of human workers to the production process mental and physical efforts highly skilled and unskilled labor Ex: open-heart surgery, assembly-line work, janitorial services, and writing a book

Productivity rate at which goods/services can be produced (time) key factor in determining economic growth increased productivity = more goods available to buyers and financial rewards for laborers

Why factors of production?

7.2 Scarcity and Decision-Making What is scarcity? Scarcity- lack of adequate resources to obtain all of one’s wants and needs Different from rare (happens from time to time, but not desired) Ex. Hurricanes are rare not scarce even though only a few occur every year

Examples of Scarcity Gold is scarce. -people are willing to pay a lot -Scarcity helps to establish pricing. -more scarce an item the greater the item cost

Pricing Pricing- sets monetary value on producers’ output by establishing the amount of money they will be willing to exchange their goods and services with consumers scarcity increases (by becoming rare or by people wanting more than is available) = price increases

Producers and Consumers Consumer- economic actor purchasing or receiving goods/services Producers- economic actor who makes or provides the goods/services *must consider various factors when setting prices

Salaries vs. Wages Money paid to people in exchange for their labor to produce output: Salaries- paid a set amount, not tied to hours or amount produced Wages-paid by the hour, tied to amount of hours worked or amount produced

Goods and Services Goods- material products made to satisfy wants and needs ex: hot dogs, frisbees, automobiles, medicines, textbooks Services- activities performed to satisfy wants and needs ex: medical care, education, trash pick up, massages

Producers want to sell goods for highest price Consumers want to pay the smallest amount

Result of Scarcity Economic actors (households, businesses, governments) must often make choices between two or more options that offer less than they would like Due to limited resources… we must make decisions between options… consumers follow the decision-making model

Decision Making Model Define the problem List the alternatives State the Criteria Evaluate the alternatives trade-off and opportunity costs of each Make a decision

Evaluating Alternatives Open book to page 6 trade-offs- the act of giving up one thing to have another opportunity costs- the alternative option that is lost when one makes the decision

7.3 Evaluating Alternatives Open Blue Book to page 152-153 trade-offs- the act of giving up one thing to have another opportunity costs- the alternative option that is lost when one makes the decision

7.3 Costs and Decisions facing Producers Blue Book page 153 (READ with a partner) Reggie and his lemonade stand Provides lemonade: For some it’s a want For some it’s a need In all circumstances it provides immediate gratification (instant/short term satisfaction)

Costs to Producers Variable costs- costs that go up or down when the amount of products produced changes Fixed costs- costs that never change depending on the amount produced

Variable Costs Total Costs Fixed Costs

Motivating Producers Incentives- form of encouragement to influence economic decisions Marginal Cost- cost of producing “one more unit”

7.4 Increasing Productivity Productivity- ability to turn input into output in a certain amount of time How can we increase productivity??? specialization business organization technology

Specialization of Labor Specialization – devoting certain resources to a specific task Division of labor- splitting up work into smaller and more specialized tasks Increases efficiency, quality of output and amount produced

Specialization con’t Industrialization began in America in the early 1900s… Factory- facility designed and used for producing particular goods and services Mass production- production of large quantities of a particular good Production is cheaper and faster

Business Organization Before, individual merchants would produce and sell their own products… business organization allows owners to gain profits from production and pay their laborers a monetary wage/salary

Business Organization Entrepreneurs- owners or chief executives Management- workers who specialize in managing and directing laborers Laborers- individuals whose labor produces goods or services Assembly line – putting together a product piece by piece Every laborer has a specific task Increases production Decreases the price of the good

Henry Ford’s Assembly Line http://www.gpschools.org/ci/depts/eng/k5/ford/1913_assembly_line.jpg Ford made automobiles affordable to the “average man” and revolutionized the production of automobiles. http://people.hofstra.edu/geotrans/eng/ch1en/conc1en/assemblyft.html

Increasing Productivity - technology Technology- the application of scientific breakthroughs to commerce and industry ex. Eli Whitney’s cotton gin innovation- something that profoundly changes and improves the way things are done (ex. Henry Ford’s assembly line) invention- any new form of technology created to meet a need (ex. cotton gin) http://www.eliwhitney.org/cotton.htm

Other reasons for economic growth Investments in human capital (that which makes laborers more productive) Improved health care, education, training unskilled workers- workers whose jobs require minimal amounts of training and few specific skills (ex. waiters, construction workers, garbage collectors, fast food workers) skilled workers- workers whose jobs require greater training or education and more skills (ex. doctors, engineers, teachers and executives)

Blue vs. White collar workers Blue collar jobs- occupations that require manual labor ex: electricians, plumbers, factor workers some are considered skilled White collar jobs- jobs that typically do not require manual labor most are considered skilled

Workers for machines Many factories have turned from using human workers to using robotics… …because it completes the same task for less cost. automation- process of replacing human labor with machines robotics – machines that can be programmed to produce goods without the need for constant human interaction

An industry greatly impacted by automation is agriculture. agribusiness- replacing small, labor-intensive family-owned farms with larger, capital-intensive company-owned farms What are the trade-offs of innovation and invention?

7.5 Impact of Investment What is investment? Have you ever invested? Investments increase productivity Investments- use resources that could bring immediate benefits for gaining greater benefits at a later time Buy stocks or put money into 401K at work

Investments by firms/businesses Capital investment- investing in capital goods and human capital Capital goods- products used to make other goods or provide services Bolts, metal, plastic, wiring, van Allow workers to do more in a given timeframe Consumer goods- items purchased for final use by individuals, households, and firms Skis, toaster, bottle of soda RECYCLING- (capital or consumer goods)

Laborers’ investments How can laborers increase productivity?? Physical condition Education and Training -increase knowledge, skills and value as workers -employers are willing to pay more -you invest now to help yourself in the future May take place in a classroom, using a book or on the job through real-world experiences

Investments With investments…come trade-offs and opportunity costs Investments are made when the likely return is thought to be more valuable than the otherwise immediate gratification.

Output v. Input- determines the opportunity cost of lost production To decide how to spend money (investments v. production/ consumption), businesses compare cost of investment versus the estimated future benefits. Producer Price Index- Maintained by US government Used to estimate costs of goods Measures average changes in prices for different goods Output v. Input- determines the opportunity cost of lost production Input- factors of production used to make a good or service Output- amount of the good or service made

What conclusion might you make about output vs. input? The more you put in the more you get. BUT…in the short-run, the law of diminishing returns occurs. Law of Diminishing Returns- as more and more of a variable input (input whose amount/frequency changes) is combined with a fixed input (unchanging input), the amount per input decreases. EX: chefs in the kitchen; bubble gum

7.6 Economic Systems Market Economy- Producers are free to produce what they want and consumers may choose what they consume Producers and consumers make these choices in a market organized exchange of goods, services and resources within a given region and time Theoretically…the US is an example

Exchange- trade of one thing for another Producers have an incentive to produce what consumers want…$$$ Profit motive Over the long-run, consumers control what products are produced via consumer sovereignty (producers base production on how much consumers demand the product) May use advertising

Adam Smith and Wealth of Nations Scottish economist Published Wealth of Nations – defense of free market economies Market is led by incentives: Producers-make most money Consumers- buy goods/services for lowest price

The “Invisible Hand” “Invisible Hand”- unseen force directing the market produced the most efficient output of goods and services Relies on Conditions: Competition Private property Allow free enterprise (freedom to buy and sell)

Capitalism Capitalism is a social system based on the recognition of individual rights (from Capitalism.org) most of the means of production are privately owned and production is guided and income distributed largely through the operation of markets (from Britannica Encyclopedia)