UNIT 2: The Choice is Yours! Basic economic concepts, choices, rational decision making, investment in education/training, etc

Scarcity 2

Scarcity SCARCITY: a condition that exists when UNLIMITED needs/wants exceed the LIMITED available resources The central problem in economics, all things revolve around scarcity Must be a want/need for the item and a limited amount There are DEGREES of scarcity If there is a lot of something that no one wants, it is less scarce than something MANY people want 3

Factors of Production (Productive Resources) 4

Factors of Production Write down everything you can think of that would be needed to make a pencil like this. 5

What went into this? Rubber (from Malaysia) machines metal Someone who put all of this together. wood graphite 6

4 Categories of Productive Resources (Factors of Production) LAND LABOR CAPITAL ENTREPRENUERSHIP Natural resources wood, rubber, graphite, land, animals Human resources, people Mental and physical Can be called HUMAN capital The person or group responsible for putting the other 3 together to produce something Motivated by profit to take a risk A produced good used in the production of another good Machines, computers, buildings, etc NOT MONEY!!!!!!!!!!!!!!!!! 7

Opportunity Costs

Opportunity Costs OPPORTUNITY COSTS: the value of the NEXT BEST alternative given up when a choice is made NEXT BEST is key, the cost is not everything you give up Opportunity cost is not always money

Opportunity Costs Examples Mr. Cannon really wants to BOTH: $3,500 $1,500

Opportunity Costs Examples He decides to spend his money on: $3,500 What was the price he paid? What was his opportunity cost?

Opportunity Costs DVD set of a TV Show($60) New outfit ($85) You have $100 to spend at the mall, rank the following in the order (1, 2, 3) you would purchase them. DVD set of a TV Show($60) New outfit ($85) New pair of shoes ($65)

Production Possibilities Curve (PPC)

PPC a graph that shows the trade-off between two production options Cell Phones PPC Microwaves a graph that shows the trade-off between two production options A visual representation of OPPORTUNITY COSTS 2 Assumptions: The company/country is ONLY producing the two goods on the graph The company/country desires to use ALL of their resources

PPC – an example 500 300 Suppose a country makes Pencils and Pens. If they devoted ALL of their resources to pencils, they could make 500 a day …..to pens, they could make 300 a day 500 300

PPC – an example The country/business can produce anywhere on the line when they use ALL of their resources 500 Pencils Pens 300

PPC – an example If the country is producing ONLY pencils, and they want pens, they have to give up pencils. 500 450 Pencils The more pens they want….. 200 Pens 125 200 300

PPC – an example Y At point X, the country or business is producing below its possibilities and is INEFFICIENT 500 Pencils X At point Y, the country or business is producing beyond its possibilities and is NON-SUSTAINABLE. 200 Pens 75 300

Economic Growth Not 1 magical thing, combination of several factors Capital Goods Consumer Goods Not 1 magical thing, combination of several factors Increasing overall productivity is key

Productivity and Economic Growth

Productivity We measure productivity as the relationship of inputs to outputs For a business it’s the cost of all their resources compared to their revenue For a country it’s the cost of all of their resources as compared to their GROSS DOMESTIC PRODUCT (GDP)

Which business is MOST productive? # of Workers #of Tractors Wheat Harvested 200 25 2,000bales 50 2 550bales 100 5 1,250bales B1 B2 B3 23

Which business is MOST productive? Assume labor is $80/person Each Tractor is $2,000 A bale of Wheat sells for $15 24

Which business is MOST productive? Labor = $80 x 200 = $16,000 Tractors = $2000 x 25 = $50,000 TOTAL INPUT = $66,000 Revenue = $15 x 2,000 = $30,000 TOTAL OUTPUT = $30,000 NET LOSS = $36,000 25

Which business is MOST productive? Labor = $80 x 50 = $4,000 Tractors = $2,000 x 2 = $4,000 TOTAL INPUT = $8,000 Revenue = $15 x 550 = $8,250 TOTAL OUTPUT = $8,250 NET GAIN = $250 26

Which business is MOST productive? Labor = $80 x 100 = $8,000 Tractors = $2,000 x 5 = $10,000 TOTAL INPUT = $18,000 Revenue = $15 x 1,250 = $18,750 TOTAL OUTPUT = $18,750 NET GAIN = $750 27

To Summarize 18,000 18,750 750 Business 1 INPUT OUTPUT GAIN/LOSS 66,000 30,000 -36,000 Business 2 INPUT OUTPUT GAIN/LOSS 8,000 8,250 250 Business 3 INPUT OUTPUT GAIN/LOSS 18,000 18,750 750 Business ____ is MOST productive 3 28

Improving Productivity INVEST IN EDUCATION/TRAINING Train/educate workers Specialization, new techniques, ability to USE technology Improve entrepreneurship Better organization of resources, motivational tools, leadership, worker morale INVEST IN CAPITAL & TECHNOLOGY More factories, tools, machines, etc Faster machines, multi-tasking devices, machines with larger capacity 29

Historic examples Cotton Gin in America Before Cotton Gin: 1 man = 1 pound of clean cotton After Cotton Gin: 1 man = 50 pounds of clean cotton

Historic examples Assembly Line Before AL: .08 car frame in an hour (1913) After AL: .67 car frame in an hour (1914)

Wheat Harvesting (Bushels in 1 hour) Historic Examples Wheat Harvesting (Bushels in 1 hour) 1800 1900 2000 .26 .96 25

Economic Growth For countries, we look at economic growth in terms of GROSS DOMESTIC PRODUCT (GDP) and GDP PER CAPITA GDP = dollar amount of all goods and services produced in an economy GDP Per Capita = GDP divided by the population What makes an economy grow?

Literacy Rates Country Literacy Rate Bahamas 95.6% Australia 99% Bolivia 86% US Sudan 61% GDP per capita $25,000 $36,300 $4,000 $48,500 $2,200

Factors Affecting Economic Growth High Investment in physical and human capital Greater economic freedom lower taxes, fewer regulations, protecting property rights Strong Incentives to Save Competitive Markets Political Stability Free Trade

Economic Growth Not 1 magical thing, combination of several factors Capital Goods Consumer Goods Not 1 magical thing, combination of several factors Increasing overall productivity is key

RATIONAL DECISION MAKING

Rational Decision Making Analyzing costs and benefits before making a decision MARGINAL thinking is key What is the cost/benefit of my NEXT decision Marginal means “additional”, NOT total Past decisions don’t matter this affects PRODUCERS AND CONSUMERS A rational decision is made when the marginal benefit is equal to or greater than the marginal cost

Example: Mr. J’s Petting Zoo To start his Zoo, Mr. J rents a piece of land with a fence for $100 a month. This cost remains the same no matter what. He gets one animal donated from a local animal shelter. Food for one animal costs $50 a month. With this animal he gets 200 visitors who pay $1 each to visit his zoo.

Example: Mr. J’s Petting Zoo After the first month, Mr. J’s cost/benefit table looks like this: # of animals Fixed cost Marginal Cost Total Revenue Marginal Revenue (Marginal Benefit) $100 $0 1 $50 $200 Should Mr. J buy the first animal? Yes, because his marginal benefit is greater than his marginal cost.

Example: Mr. J’s Petting Zoo After the first month, all Mr. J has to compare is the marginal cost of additional animals to the marginal revenue. A 2nd animal will costs another $50. But will bring in another 100 people. # of animals Marginal Cost Marginal Revenue (Marginal Benefit) 1 $50 $200 2 $100 3 $75 A 3rd animal will cost $50. But will bring in 75 more people.

Example: Mr. J’s Petting Zoo How many animals should he get? # of animals Marginal Cost Marginal Revenue (Marginal Benefit) $0 1 $50 $200 2 $100 3 $75 4 $65 5 $55 6 $48 7 $35

Example: Mr. J’s Petting Zoo How many animals should he get? # of animals Marginal Cost Marginal Revenue (Marginal Benefit) TOTAL Cost Total REVENUE Profit $0 100 -100 1 $50 $200 150 200 50 2 $100 300 3 $75 250 375 125 4 $65 440 140 5 $55 350 495 145 6 $48 400 543 143 7 $35 450 578 128

Minutes spent studying Another example Minutes spent studying Grade on Test 60 30 68 45 78 90 93 120 89 150 80 This student is deciding whether or not she should study more. Assuming she has been studying for 30 minutes and needs an A to pass the class, what would you tell her and why?

How many pieces do you eat? Consider the following chart: Example How many pieces do you eat? Consider the following chart: Slices of Pizza Costs Benefits 1 2 3 4 5 $8.00 10 utils $0 8 utils $0 3 utils $0 1 util $0 -1 util

What about at the mall? How does this change your thinking? $1.99 Slices of Pizza Costs Benefits 1 2 3 4 5 $1.99 10 utils $1.99 8 utils $1.99 3 utils $1.99 1 util $1.99 -1 util

What will be on the test? Factors of production Scarcity Define them Pick them from an example Productivity/Growth What causes it How do we measure it Rational Decision Making/Marginal Analysis What is marginal When do stop/start doing something Scarcity definition examples Opportunity cost Production Possibilities Curve What do they show? interpret points (below, above, moving from one point to another) DRAW ONE!!!!