Download Economic Decision Making

Today’s Objectives
• We will….
– Review Chapter 1 and the 7 economic principles
– Discuss goods and what goes into production
– Introduce the Production Equation
– How to increase productivity
• You will…
– Understand how land, labor and capital create
goods we purchase each day
– Be able to work with the Production Equation
– Understand the importance of Entrepreneurs
Chapter 2
Economic Decision
Making
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
Scarcity of Goods
• Goods (products) and Services are scarce
– May not seem that way, but they all are
• 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
Shortages vs. Scarcity
• What do you think is the difference
between a “shortage” and “scarcity?”
• Shortage – a short term deficit of a good
– Always a temporary situation
• Scarcity – the idea that all resources are
limited and can be used up
– Not a temporary problem
– More of a countdown to how much is left
Shortage/Scarcity Activity
• In a small group, look at the 8 questions
posed to you and figure out if this is a
situation of SCARCITY or if this is just a
SHORTAGE.
• Be sure to explain why your group thinks
it is one or the other and be prepared to
prove your decision.
What Causes a Shortage?
• What do you think causes shortages?
• Numerous causes for shortages
– Wars,
– prices,
– fads,
– media craze,
– natural disasters,
– changes in productivity
• What are some examples of shortages you
can think of?
What Causes a Shortage?
• What are some examples of shortages you
can think of?
• Is there an immediate way to fix your
shortage or is it a long term problem?
How We Satisfy Our Wants
• Wants are satisfied through products/goods
– We must PRODUCE those goods however
• The Production Equation
– 2 sides to every equation; always must equal
– Inputs = Outputs
• Inputs – those resources put into a product
– Referred to as the factors of production
• 3 groups – land, labor and capital
• Outputs – goods and services produced by inputs
Inputs to an Output
• Think about all the things that go into a
pencil
– What are the requirements to build one
(wooden)
• Materials?
• Labor?
• Resources?
• What can you assume about the Production
Equation from the information you have for this
activity?
The Production Equation
• Production Equation then looks like this
Land + Labor + Capital = Goods and Services
• These are the 3 MAIN factors of production
• Entrepreneurship – the 4th factor of production
– Entrepreneurs are those willing to take risk of funding
or starting a new business
• Can you think of any famous entrepreneurs?
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.
Resources: Renewable or Not?
Decide if each resource listed is
RENEWABLE, NONRENEWABLE or PERPETUAL
Corn
Sunshine
Tuna
Wind
Oil
Tides
Gold
Water
Coal
Trees
Sand
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
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?”
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
Today’s Objectives – Day 3
• We will….
– Review the Factors of Production
– Figure out how to calculate productivity
– Create decision matrices
– Graph the Production Possibilities Frontier.
• You will…
– Understand/be able to use the productivity
equation
– Be able to create a Decision Matrix
– Be able to understand and graph and
production possibilities frontier
What is Productivity?
• Productivity is how quickly we are able to
produce a given good or product
– People are always looking to produce more
from their scarce resources
• How do we calculate productivity?
Productivity = Outputs / Inputs
Ex. 60 boards/tree = 600 boards/10 trees
Improving Productivity
• Two ways to increase production
• Find ways to decrease the inputs and keep
outputs the same
– 600 boards from 9 trees
•From new cutting style
• Find ways to increase outputs from the
same amount of input
– 650 boards from 10 trees
•From more efficient saws
Improving Productivity
• Situational Practice – use a partner to find
a way to increase productivity by…
• Situation 1: We have been given enough wood,
lead and rubber to build 1000 full size pencils.
How could we DECREASE the inputs and still get
1000 pencils?
• Situation 2: We need to get more pieces of wood
from the threes we cut down. How can we do that
with the pattern we currently cut? Use visual
given to help.
What is Utility?
• People need to make tough decisions to
have it benefit their lives
– 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
How to Maximize Utility
• Maximizing utility is difficult
– Never enough information to make perfect
decision
– Also tough to predict the future
• How do you get the most out of what you
have?
– Dilemma – You have $40 for all your activities
for a week. List what you would do each day.
Marginal v. Negative Utility
• 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
– Law of Marginal Utility – as consumed good
increases, marginal utility decreases
• Negative Utility – one more actually hurts
you
Tradeoffs & Opportunity Cost
• Tradeoffs are made by individuals and
societies to get to maximum utility
– Guns v. Butter Tradeoff –
– Should you pay for protection or food for your
country
•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
Decision Matrix
Measuring What We Gain/Lose
• Production Possibilities
Frontier (PPF)–
NOT POSSIBLE
– Tells us the frontier of what
an economy can produce
– Shows the possibilities of
making two goods
– Also shows the potential
tradeoffs
• Frontier = the EDGE cannot
go past
– Production Possibilities
Frontier means we cannot
produce past this line
CURRENTLY
– Forces us to choose A or B
POSSIBLE
Measuring What We Gain/Lose
• Measuring Efficiency –
Show us where we
are at peak efficiency
– Nothing wasted
– Can show is we are
wasting
• Measuring Economic
Change –
– Now lines made all the
time
– Shows effects of
increased technology
or growth/ shrinkage
in economy
WASTED
RESOURCES
Below the
Frontier
Measuring What We Gain/Lose
• Production Possibilities Curve/Frontier (PPC/PPF)
– Shows the line of what could possibly be
produced AT A GIVEN TIME
– Curve also measures opportunity cost of decisions
• Shows what is GAINED and LOST
• Curve graphs both and looks to find the limit
of each and the best possible mix
– Multiple issues can cause a decision to be made
– Can also cause decisions to change
• Choose 2 products that can be produced
– Wheat vs. Computer Chips
– Resources can be used for either or both
Changes to the PPC/PPF
• Lines can change with
new information
– Lines can be affected
on 1 side or both
• Reasons for change
could be
– Increases in
production techniques
– Loss/Gain of
technology
– Loss/Gain of a
resource
Lost a
RESOURCE to
make as much
of ITEM A
• How would the
line change if they
found a way to
produce more
wheat?
• How would new
computer
technology affect
the line?