Economic Productivity, Choices and Decision Making

Circular-Flow Model 4 elements Households Product markets Firms Stores, where you purchase goods Firms Companies that make products Resource markets Suppliers of resources

Productivity & Economic Growth Productivity (measure of output produced by input over times) #1 factor for econ growth Applies to all FoP Div of labor aims to make workers more proficient When FoP do job more efficiently then others they specialize Gov’t and businesses benefit when they invest in human capital

Tradeoff and Opportunity Cost There are alternative choices (trade-offs) in every econ choice. Using a decision making grid helps analyze econ trade-offs & options The cost of next best alternative choice is the opportunity cost Can be measured in time, resources or $$$ Helps us to recognize & evaluate cost of alts & making choices from alts

Opportunity cost Two types of costs can be factored into opportunity cost: Explicit costs- require a money system (measured in $) Implicit costs- does not require a money system (time, relationships)

Practice Bobby is going to buy a new car? He has been looking at two in particular. The first is a $9000 2002 Ford Mustang. It is a fast car with “cool” styling. It gets about 18 miles to the gallon and the wheels are rather expensive to replace. The second car is an $8000 2000 Toyota Prius. It has odd styling and is not as fast as the mustang. It does however get 60 miles to the gallon and its tires are affordable. 1. What would the opportunity cost be if Bobby chooses to buy the Mustang?

Production Possibility Frontier Graph showing an econ production capabilities Illustrates how much an economy can produce with avail resources Only looks at two goods or services over a given window of time Represents max. output w/ resources fully used It only looks at a given window of time

PPF Visual https://www.youtube.com/watch?v=knwrcbUZSAw

The Production Possibilities for a Single Country Option Food Computers A 11 5 B 8 9 C 10 D 12

When is the PPF not a straight line? The PPF shows the possible combinations of goods that can be produced when resources are used efficiently When is the PPF not a straight line? Law of Increasing Opportunity Cost Each additional increment of one good requires the economy to give up successively larger increments of another good

Thinking Like an Economist Econ models used to give simplified theories & pictures Models based on assumptions, quality only as good as assumptions Models can be changed based on data

The Road Ahead In a free enterprise economy consumers & private business determine WHAT, HOW, WHY Economic topics have a baring on standard of living (inflation, unemployment….)