Unit 2A: Fundamental Economic Concepts

Economics: a social science studying the allocation of scarce resources and goods. Scarce: in short in supply and wanted. Scarcity exists when unlimited wants exceed limited productive resources. Scarcity is a problem all societies face. Product scarcity often causes producers to raise prices.

Resources/Factors of Production: the inputs––land(natural resources), labor, capital, and entrepreneurship––used by a society to produce outputs.

1) Entrepreneurs are risk-takers who combine the land, labor, and capital into new products. 2) Land is the society’s limited natural resources—landforms, minerals, vegetation, animal life, and climate.

(3) Human resources- include labor and human capital. Labor- human workers employed by entrepreneurs to apply their skills, efforts and abilities to produce. Entrepreneurs pay laborers wages for their efforts.

Human Capital- the knowledge and talents of laborers The most important thing to increasing financial or economic growth is increasing human capital.

(4) Physical capital includes the man-made tools, equipment, factories or other manufactured goods used to produce other goods or services. Financial capital- money used to buy capital goods.

You list examples Resources/Factors of Production Land (natural resources)- Capital- Entrepreneurship- Labor-

Producers make outputs, which are often finished products such as hamburgers and cars that consumers buy. These finished products are called consumer goods. Goods made to produce something else for profit are called capital goods.

Entrepreneurs take huge risks in starting a business. They often borrow money to make capital investments for their company. If the business fails, they lose their investment. The main reason entrepreneurs take these risks in order to earn a profit. Labor makes wages, entrepreneurs make profit.

All the money an entrepreneur takes in is called revenue. The revenue minus all costs is the entrepreneur's profit.

Other Motivations One additional motivation for entrepreneurship is to improve society by creating jobs. Braves Create Jobs Some entrepreneurs are motivated to improve society by innovation. Regardless, Entrepreneurs have to be innovative so that people purchase their products instead of their competitors. Profit motive causes new innovations.

When one makes a decision, scarcity causes him to give up doing something else. When he takes action causing him to give up other alternatives, he is making a trade-off. Opportunity cost is the next best alternative given up when individuals, businesses and governments confront scarcity by making choices.

BASIS FOR COMPARISON TRADE-OFF OPPORTUNITY COST Meaning Trade-off implies the exchange of one thing to get the another. Opportunity cost implies the value of choice foregone, to get something else. What is it? The choices sacrificed. The value of next best alternative. Represents What is given up to get what is wanted? What could have been done, with what was given up?

If Pablo’s Pizza Buffet only has 40 lbs If Pablo’s Pizza Buffet only has 40 lbs. of dough, if they make more pizzas, they can’t make as many breadsticks. The loss of breadsticks is the opportunity cost.

Marginal costs-the cost of procuring one more item. Every Taco @ Taco Palace is $1. If Teddy orders 3 tacos and pays 3 dollars, his marginal cost for a taco is $1.

Marginal Benefit- the benefit associated with procuring (getting or making) one more item. Teddy would be willing to pay $3 for the first taco because he is hungry. His marginal benefit is $3, even though the taco cost him $1. After Teddy has eaten 4 tacos his marginal benefit is only .50 cents for the 5th because he is so full.

A rational decision occurs when the marginal benefits of an action equal or exceed the marginal costs. If Teddy bought a 5th taco his decision would be irrational, because the marginal costs outweigh the benefits.

In the following model WalMart pays Google for internet ads per mouse click. RPC (revenue per click) is the money they generate every time someone visits their site. This is their marginal benefit. CPC (cost per click) is the money they have to pay the internet company for clicks on their site. This is their marginal cost.

WalMart has the greatest marginal benefit with fewer number of clicks WalMart has the greatest marginal benefit with fewer number of clicks. But continues to make money all the way up to 2,000 clicks.

Therefore, the rational decision would be to only buy 2,000 ad clicks from the company, because at this point they have made their maximum profit.

Andy decides to spend $10 on a fishing pole instead of buying Opie a birthday present. What was Andy’s opportunity cost? Opie’s Birthday Present What is his marginal cost? $10 What is his marginal benefit? Catching the Big One

An incentive is a cost or benefit that motivates a decision or action by consumers, firms or government. Incentives can be positive or negative, but produce a very predictable outcome.

If Smitty is told he will get grounded if he takes a cookie out of the jar, he is less likely to open the jar. If Smitty is told he will get a new bicycle if he makes an A, he is likely to study harder.

Higher prices give consumers (buyers) an incentive to buy less and firms an incentive to produce more. Many people will work longer or harder for higher wages, but firms will try to hire a lower quantity of workers if wages are higher. Governments will spend more money on military if they feel threatened by a foreign leader. If a government wants to encourage producers to make a product, they may pay them part of their costs to make it.

Before the 1800s people grew their own food and made most of the things they needed at home by hand. Today, specialization allows people to concentrate on a single activity or area of expertise.

People gain knowledge and skills in a certain area, which allows them to do a better, faster, and more efficient job producing products and performing services. Specialization expands the efficiency of a society and boosts production.

Examples of Specialization: There are bankers, teachers, and doctors who do their own specialized job. Companies specialize in making specific products, allowing them to make the best product at the lowest cost. Regional specialization occurs when a specific area specializes in an industry to make a profit. Ex. Florida tourism, California grapes, Nebraska corn

Division of Labor improves productivity by arranging workers so that individual workers do fewer tasks than before. Assembly lines allow a factory to increase production by allowing workers to focus on a specific task.

Specialization allows individuals to reap the benefits of voluntary exchange. Voluntary exchange- choosing to trade goods or services for something else of value (usually money). Voluntary exchange allows those who specialize to gain access to the products they desire (as long as they are legal).

Example: Mrs. Rios puts in a hard day teaching Espanol, gets paid $6 and exchanges her specialization (teaching service) voluntarily for a value meal.

Voluntary exchange encourages producers to find ways to increase productivity (amount made) and efficiency, so that they can generate greater profit. This encourages technological inventions and innovations to be produced to satisfy these needs. For example, today computers are smaller, houses are built faster, and food is processed more effectively because of voluntary exchange and the need for profit.

Both parties benefit from voluntary exchange as long as it is non-fraudulent (both sides were totally honest with what they were trading).

Businesses must decide when it is worthwhile to produce a good or service and when it would not be profitable. A production possibilities curve depicts how much of a particular product can be produced given the limited amount of resources at a company’s or individual's disposal.

The line on the graph represents the full potential—the frontier—when the economy employs all of these productive resources.

In this graph, if the business produces more wheat, it has the trade-off of producing less robots.

If this business was producing at point D, but decides to produce at point C, it makes more Radios, but its opportunity cost is 20 TVs.

Identifying possible alternatives allows an economy to examine how it can best put its limited resources into production.

In this case, the economy’s overall standard of living would be lower. An economy pays a high cost if any of it resources are idle. It cannot produce on its frontier and it will fail to reach its full production potential. In this case, the economy’s overall standard of living would be lower. Clifford PPC

Point C demonstrates an inefficient use of resources the economy may be characterized by high unemployment. C might occur if a machine @ a factory broke or workers went on strike. Point D is currently not achievable in the graph with the current resources available.

Economic growth made possible by more resources, a larger labor force, or an increase in education causes a new frontier for the economy. The curve shifts outward (to the right)

An outward shift means more production and a higher standard of living for an economy or more profit for a company.