ECONOMIC DECISION-MAKING

1. \ ECONOMIC DECISION-MAKING

2. Why are goods scarce? • Make a list of 5 things you wish you had right now – it can be anything. • What is stopping you from having the goods you listed? • People are never TRULY happy with goods • Due to people’s unlimited wants – want more • Even those who have it all want things better or faster or bigger

3. Scarcity • Unlimited Wants chasing limited resources • Different for everybody • Value placed on resources in one country may be different than value placed on same resource in another country. • “Basic needs” defined differently from one place to another.

4. Scarcity • Scarcity caused by limited resources used to create those goods and services • There is nothing that we have an unlimited supply of – NOTHING • Money and wealth in the end do not matter • There will always be something you cant have.

5. Scarcity vs. Shortage • Scarcity vs. shortage • Scarcity – limited resources/unlimited wants – there’s only so much. • Shortages – a short term deficit of a good • Always a temporary situation _____________________________________________________ • What do you think causes shortages? • Write your thoughts on your note sheet • Compare your answer with someone near you • What are some examples of shortages you can think of?

6. Scarcity vs. Shortage • Numerous causes for shortages • Wars, prices, fads, media craze, natural disasters, production problems, labor shortages, strikes, changes in productivity

7. Shortage or Scarcity • You have to take the bus to school because your mom and dad have the cars • You have to buy a Kiwi Strawberry smoothie on Friday instead of Peach • You pay over $500 for an original Nintendo gaming system

8. Choices • In economic terms, we refer to choices as trade-offs. • The process of making these choices involves a cost-benefit analysis • These can be complex equations or a simple question of “what do I give up in order to get this other thing I want”. • Costs – what must go into getting the product/outcome • Benefit – what is gained from the decision • Cost Benefit Analysis = Looking at what is spent versus what is earned from a potential decision

9. Resource Scarcity Game

10. What are the elements of an economy that constitute our wants? • Inputs and Outputs • Inputs: scarce resources that go into the process = the factors of production • Land • Labor • Capital • Outputs: goods & services produced using these resources

11. What are the elements of an economy that constitute our wants? • Production Equation: Land + Labor + Capital = goods & services • Some economists consider entrepreneurship – the willingness to take risks involved in starting up a business – a fourth factor of production • Can you name any famous entrepreneurs?

12. Inputs to an OutputPause & Process in Pairs • Think of a product – any product you want • Write it down – this is your OUTPUT (your good) • List ALL the materials you would need to create this good • Share with a partner your product and the inputs required. • See if they have any items that you may have forgotten • Add these to your list • Which inputs would be considered scarce? • What can you assume about the Production Equation from the information you have for this activity?

13. Types of Resources: Land • Land resources – known as “gifts of nature” • Includes natural resources – ore, lumber, metals • Includes actual real estate land • Can also include solar, geothermal or wind energy • Known as Perpetual Resources – those that wont run out • Renewable Resources – can be replaced • Forests, fresh water, animals/fish, some metals • Nonrenewable Resources – not replaceable • Fossil fuels, natural gas, coal, etc.

14. Types of Resources: Labor • Labor – time/effort of a person towards a good • Consists of two types of labor • Physical Labor – actually using your body to produce • Mental Activity – writing legal briefs, comp programs, etc. • Quantity of labor depends on population and their collective desire to work

15. Types of Resources: Labor • Human capital – the knowledge and skill/ability a person has • There is a value to the skills a person has • What skills do you have that are valuable? • Human capital is extremely important • Higher human capital = higher productivity and pay that can be earned • Strong correlation b/w human capital and standard of living • How could you INCREASE your “human capital?”

16. Types of Resources: Capital • Two types of capital resources • Financial capital – money to purchase inputs • Most commonly thought of when referring to capital • Physical capital – tools, machines and buildings • Also known as capital goods • Capital goods come in many forms • Computers, screwdrivers, cars, etc. • Capital replaces the use of labor • Changes human capital because people need to be trained in these new machines, gaining human capital

17. Types of ResourcesPause & Process Organize the following items into 3 categories: • Land (natural resources) • Labor • Capital Zinc Plumber Copper Engineer Coal Waitress Water Architect Oven Mechanic Sales Clerk Computer Sunlight Uranium Hammer Factory Calculator Scissors Sand Paper Diamonds Animals Telephone Trees Solar panel X-Ray machine Landscape Designer Teacher Assembly line worker • Let’s say you ordered a large cheese pizza from Dominos last night….list all the resources (natural, human and capital) that went into making and delivering the pizza to your home.

19. Improving Productivity • With all factors of production being scarce, people cannot produce everything they want • Must find a way to produce more with less • Productivity – Outputs/ inputs • Ex. 600 boards/ 10 trees = 60 boards/tree (productivity) • Two ways to increase production • Decrease inputs and get same output • 600 boards from 9 trees (from new cutting style) • Increase outputs from same input • 650 boards from 10 trees (from more efficient saws)

20. Maximizing Utility • People need to make tough decisions to benefit • People want to be as best off as possible • Utility – satisfaction or pleasure gained from using a product or service or from an action • Buying a cheeseburger for $1 = full but not best burger ever • Also includes benefit from non pleasurable actions • Vaccinations keep people healthy but are unpleasurable • Maximizing utility is difficult • Never enough information to make perfect decision • Also tough to predict the future

21. Tradeoffs & Opportunity Cost • Tradeoffs made by individuals and societies • Guns v. Butter Tradeoff – to pay for protection or food • One maximizes security, one maximizes goods • Opportunity Cost – what it costs to give up the next best option • Making only trucks v. cars – lose the car sales • People use matrices to help w/ decisions • Marginal Utility – extra benefit of one more • Usually depends on how much you already have • 1st one, great; 2nd okay; 3rd has no use – no utility • Negative Utility – one more actually hurts you • Law of Marginal Utility – as consumed good increases, marginal utility decreases

22. Measuring What We Gain/Lose • Production Possibilities Frontier – • Tells us the frontier of what an economy can produce • Shows the possibilities of making two goods • Also shows the potential tradeoffs • Production Possibilities Curve – • Shows the line of what is possibly produced • Curve also measures opportunity cost of decisions • Measuring Efficiency – • By marking what is produced we see efficiency • Measuring Economic Change – • Shows effects of increased technology or growth/ shrinkage in economy

23. PPCurve/PPFrontier • http://www.youtube.com/watch?v=JCEWQ_cafUs&list=PLF2A3693D8481F442

26. Exit Ticket – Day 3 • Think of a good or service in your life • In a short paragraph (3-5 sentences) summarize the inputs (land, labor and capital) that would have gone into producing that product. • Finally, answer the following question - IF YOU WERE TO BE AN ENTREPRENEUR, WHAT NEW PRODUCT WOULD YOU CREATE?