1. Economic Decision Making
Chapter 2
Essential Question:
Why can’t you always get what you want?

2. Wants and resources
Wants are unlimited, resources are limited. Scarcity results.
Goods – physical items (like shoes, bread, phone) are scarce
Services – activities done for us (like a mechanic fixing your car, someone mowing your lawn) are scarce
They are scarce because the resources to produce them are scarce (think leather-shoes, wheat-bread, plastic/glass/metal-phone, or labor for services)
Shortages – less of a good or service is available than people want at a set price.
Can be sudden (a fad or disaster).
But, shortages are temporary.
Scarcity, however, lasts forever.

3. Factors of production
4 factors of production – productive resources/things used to make or do something
Land – “gifts of nature”
Labor – work, skill, knowledge
Capital – tools, machines, buildings, $?
Entrepreneurship – person who has idea, invests, takes risk, reaps reward or suffers loss
Together, these make goods and services
Productivity = output / input
Output is goods or service; input is a factor of prod.

4. 2 ½ key terms
Opportunity cost – what we give up when we make a decision
Guns or butter?
Marginal utility – what’s gained by adding one more unit
Law of diminishing marginal utility – by adding one more unit, our gain gets smaller each time
Think eating slices of pizza
Graph is a hump
Optimum is the top of the hump

5. PPF
Production Possibilities Frontier – graph showing how an economy might produce 2 goods
We operate along the curve, ideally
Outside the curve is impossible
Inside the curve is inefficient (we can do better)
It’s used to measure opportunity cost