Chapter 1 : Lesson 2 Our Economic Choices

Essential Question Why is it important to evaluate trade offs and opportunity costs when making choices?

SCARCITY CHOICE How Do You Know When Something Is Scarce? Scarcity Forces You to CHOOSE SCARCITY CHOICE

Why Choices? We make choices about how we spend our money, time, and energy so we can fulfill our NEEDS and WANTS. What are NEEDS and WANTS?

Wants and Needs, Needs and Wants NEEDS – “stuff” we must have to survive, generally: food, shelter, clothing WANTS – “stuff” we would really like to have (Fancy food, big screen TVs, jewelry, conveniences . . . Also known as LUXURIES

VS.

TRADE-OFFS You can’t have it all (SCARCITY – remember?) so you have to choose how to spend your money, time, and energy. These decisions involve picking one thing over all the other possibilities – a TRADE-OFF!

Trade-Offs, cont. What COULD you have done instead of come to school today? These are all Trade-Offs!

The Value of the Next Best Choice A special kind of Trade-Off is an OPPORTUNITY COST = The Value of the Next Best Choice (Ex: Sleeping is the opportunity cost of studying for a test)

Q: What is the opportunity cost of buying pizza? Opportunity Costs This is really IMPORTANT – when you choose to do ONE thing, its value (how much it is worth) is measured by the value of the NEXT BEST CHOICE. This can be in time, energy, or even MONEY Then I can’t afford the movies… If I buy a pizza… Q: What is the opportunity cost of buying pizza?

Opportunity Cost =the value of the Next-Best Alternative What are the considered alternatives? What does the decision-maker perceive to be the benefits of each alternative?

Opportunity Cost Analysis What was the 1st decision you made this morning?

Opportunity Cost Analysis Decision Maker: Mr. Parks Alternatives: Get Up Now 5:15 AM Don’t Get Up Now Perceived Benefits Choice Opp. Cost

Opportunity Cost Analysis Decision Maker: Mr. Parks Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice Opp. Cost More sleep

Opportunity Cost Analysis Decision Maker: Mr. Parks Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice X Opp. Cost Mr. Parks will be more cranky in Class because lack of sleep More sleep

Opportunity Cost Analysis Decision Maker: Mr. Parks Alternatives: Get Up Now Don’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice Opp. Cost Ms. Denney Writes me up for being late and wont see Mr. Parks greeting you outside More sleep X

Choosing is Refusing Every time we choose we pay a cost.

People’s Choices are always RATIONAL Rational choice = choosing the alternative that has the greatest excess of benefits over costs. If ALL choices are rational, then the challenge is to understand the decision-maker’s perception of costs and benefits.

Do Gov’t actions have opportunity costs? Government Debt Economic Stimulus Package War in Iraq Limiting Carbon Emissions Universal Healthcare All alternatives have cost and benefits Individuals perceive the value of costs and benefits differently

Methods of Rationing Scarce Goods and Services prices command (someone decides) majority rule contests by force voting first-come-first-served sharing equally lottery personal characteristics need or merit

Prices: POWERFUL Incentives When prices change, opportunity costs change –that’s an incentive! Both consumers and producers react to prices in ways that help us to deal with scarcity.

Production So how do we get all this “stuff” that we have to decide about? Decisions, decisions …

PRODUCTION Production is how much stuff an individual, business, country, even the WORLD makes. But what is “STUFF”? STUFF – Goods and Services. Goods – tangible (you can touch it) products we can buy Services – work that is performed for others

Factors of Production So, what do we need to make all of this Stuff?

4 Factors of Production LAND – Natural Resources Water, natural gas, oil, trees (all the stuff we find on, in, and under the land)

4 Factors of Production LABOR – Physical and Intellectual Labor is manpower

4 Factors of Production CAPITAL - Tools, Machinery, Factories The things we use to make things Human capital is brainpower, ideas, innovation

4 Factors of Production ENTREPRENEURSHIP – Investment $$$ Investing time, natural resources, labor and capital are all risks associated with production

Production/Manufacturing Land Production/Manufacturing “Factory” Goods Labor Consumers Capital Services Entrepreneurship

CHANGES IN PRODUCTION If we INCREASE land, labor, capital we INCREASE production Many entrepreneurs invest profit back into production If we DECREASE land, labor, capital we DECREASE production

Review Question: Chapter 1 : Lesson 2 Read pages 14-20 and answer Review Questions on page 20. Hand in Google Class Room.