Economic Choices

Goal 7

What is Economics?

Study of …how individuals, businesses and nations can best use their limited resources

How people can get the most of wants and needs from the limited amount available and at the lowest cost

Needs and Wants

NEEDS• must haves to survive• food, clothing, shelter, water, etc.

WANTS• all goods and services a person desires

and would have if they could• unlimited wants…but limited resources to

obtain our wants

Resources

Things humans can put to productive use

• Money, people (labor), time, information, machines and natural resources

Natural Resources

Raw materials in nature used to produce what humans need or want

• Timber, water, iron ore, crude oil, natural gas, coal, fish, uranium, and arable (farmable) land

Resources (cont’d) renewable

replenished/replaced over time ex: timber

**Can be expended if not given a chance to renew**

nonrenewable cannot be replenished over time ex: petroleum takes millions of years to

form

So…

people are forced to make decisions/choices about how to spend their limited resources.

Basic Economic Questions

1. What to produce?

2. How will I produce it?

3. For whom will it be produced?

4 Factors of Production

Elements of any businessallows resources to be properly

processed in order to produce things that are needed/wanted

Capital, Entrepreneurship, Land and Labor (CELL)

Factors of Production

CAPITAL• Structures and equipment involved in the

manufacturing process• Ex: nail guns, machinery, computer, grills,

tools, lighting and assembly lines

Factors of Production

Entrepreneurship• creative, managerial, and risk-taking

capabilities involved in starting up and running a business

• Ex: organizing the business, developing the business model, raising funds to open for business

• human activity

**May be labor, but not all labor is entrepreneurship**

www.tcocd.de/History/paulbill.jpg http://www.businessweek.com/magazine/content/04_27/art04_27/0427_18innova.jpg

Bill Gates and Microsoft

Ray Kroc and McDonald’s

Factors of Production

Landproperty on which production plant is

built all natural resources involved“more than the ground you stand on”

Factors of Production

Laborcontribution of human workers to the

production processmental and physical effortshighly skilled and unskilled labor

• Ex: open-heart surgery, assembly-line work, janitorial services, and writing a book

Productivity

rate at which goods/services can be produced (time)key factor in determining economic

growthincreased productivity = more goods

available to buyers and financial rewards for laborers

Why factors of production?

7.2 Scarcity and Decision-Making What is scarcity?

Scarcity- lack of adequate resources to obtain all of one’s wants and needs

• Different from rare (happens from time to time, but not desired)

• Ex. Hurricanes are rare not scarce even though only a few occur every year

Examples of Scarcity

Gold is scarce.-people are willing to pay a lot

-Scarcity helps to establish pricing. -more scarce an item the greater the

item cost

Pricing

Pricing- sets monetary value on producers’ output by establishing the amount of money they will be willing to exchange their goods and services with consumers

scarcity increases (by becoming rare or by people wanting more than is available) = price increases

Producers and Consumers

Consumer- economic actor purchasing or receiving goods/services

Producers- economic actor who makes or provides the goods/services

*must consider various factors when setting prices

Salaries vs. Wages

Money paid to people in exchange for their labor to produce output:

Salaries- paid a set amount, not tied to hours or amount produced

Wages-paid by the hour, tied to amount of hours worked or amount produced

Goods and Services Goods- material products made to

satisfy wants and needs

ex: hot dogs, frisbees, automobiles, medicines, textbooks

Services- activities performed to satisfy wants and needs

ex: medical care, education, trash pick up, massages

Producers want to sell goods for highest price

Consumers want to pay the smallest amount

Result of Scarcity Economic actors (households,

businesses, governments) must often make choices between two or more options that offer less than they would like

Due to limited resources… we must make decisions between options…consumers follow the decision-making model

Decision Making Model

1. Define the problem

2. List the alternatives

3. State the Criteria

4. Evaluate the alternativestrade-off and opportunity costs of each

5. Make a decision

Evaluating Alternatives

Open book to page 6

trade-offs- the act of giving up one thing to have another

opportunity costs- the alternative option that is lost when one makes the decision

7.3 Evaluating Alternatives

Open Blue Book to page 152-153

trade-offs- the act of giving up one thing to have another

opportunity costs- the alternative option that is lost when one makes the decision

7.3 Costs and Decisions facing Producers

Blue Book page 153 (READ with a partner)

Reggie and his lemonade stand

Provides lemonade: For some it’s a wantFor some it’s a need In all circumstances it provides immediate

gratification (instant/short term satisfaction)

Costs to Producers

Variable costs- costs that go up or down when the amount of products produced changes

Fixed costs- costs that never change depending on the amount produced

Total Costs

Variable Costs

Fixed Costs

Total Costs

Motivating Producers

Incentives- form of encouragement to influence economic decisions

Marginal Cost- cost of producing “one more unit”

7.4 Increasing Productivity

Productivity- ability to turn input into output in a certain amount of time

How can we increase productivity??? specialization business organization technology

Specialization of Labor

Specialization – devoting certain resources to a specific task

Division of labor- splitting up work into smaller and more specialized tasks

• Increases efficiency, quality of output and amount produced

Specialization con’t

Industrialization began in America in the early 1900s…

Factory- facility designed and used for producing particular goods and services

Mass production- production of large quantities of a particular good

• Production is cheaper and faster

Business Organization

Before, individual merchants would produce and sell their own products…

business organization allows owners to gain profits from production and pay their laborers a monetary wage/salary

Business Organization Entrepreneurs- owners or chief executives Management- workers who specialize in

managing and directing laborers Laborers- individuals whose labor produces

goods or services

Assembly line – putting together a product piece by piece

• Every laborer has a specific task• Increases production• Decreases the price of the good

http://www.gpschools.org/ci/depts/eng/k5/ford/1913_assembly_line.jpg

http://people.hofstra.edu/geotrans/eng/ch1en/conc1en/assemblyft.html

Henry Ford’s Assembly Line

Ford made automobiles affordable to the “average man” and revolutionized the production of automobiles.

Increasing Productivity - technology

Technology- the application of scientific breakthroughs to commerce and industryex. Eli Whitney’s cotton gin

innovation- something that profoundly changes and improves the way things are done

(ex. Henry Ford’s assembly line)

invention- any new form of technology created to meet a need

(ex. cotton gin)

http://www.eliwhitney.org/cotton.htm

Other reasons for economic growth

Investments in human capital (that which makes laborers more productive)

• Improved health care, education, training unskilled workers- workers whose jobs

require minimal amounts of training and few specific skills

(ex. waiters, construction workers, garbage collectors, fast food workers)

skilled workers- workers whose jobs require greater training or education and more skills (ex. doctors, engineers, teachers and executives)

Blue vs. White collar workers

Blue collar jobs- occupations that require manual laborex: electricians, plumbers, factor workerssome are considered skilled

White collar jobs- jobs that typically do not require manual labormost are considered skilled

Workers for machinesMany factories have turned from using human workersto using robotics…

…because it completes the same task for less cost.

automation- process of replacing human labor with machines

robotics – machines that can be programmed to produce

goods without the need for constant human interaction

An industry greatly impacted by automation is

agriculture.

agribusiness- replacing small, labor-intensive family-owned farms with larger, capital-intensive company-owned farms

What are the trade-offs of innovation and invention?

7.5 Impact of Investment

What is investment? Have you ever invested?

Investments increase productivity Investments- use resources that could bring

immediate benefits for gaining greater benefits at a later time

• Buy stocks or put money into 401K at work

Investments by firms/businesses

Capital investment- investing in capital goods and human capital

Capital goods- products used to make other goods or provide services

• Bolts, metal, plastic, wiring, van• Allow workers to do more in a given timeframe

Consumer goods- items purchased for final use by individuals, households, and firms

• Skis, toaster, bottle of soda

• RECYCLING- (capital or consumer goods)

Laborers’ investments

How can laborers increase productivity??

Physical condition Education and Training

-increase knowledge, skills and value as workers-employers are willing to pay more-you invest now to help yourself in the future

• May take place in a classroom, using a book or on the job through real-world experiences

Investments

With investments…come trade-offs and opportunity costs

Investments are made when the likely return is thought to be more valuable than the otherwise immediate gratification.

To decide how to spend money (investments v. production/ consumption), businesses compare cost of investment versus the estimated future benefits.

Producer Price Index-• Maintained by US government• Used to estimate costs of goods• Measures average changes in prices for different goods

Output v. Input- determines the opportunity cost of lost production Input- factors of production used to make a good or service Output- amount of the good or service made

What conclusion might you make about output vs. input? The more you put in the more you get. BUT…in the short-run, the law of diminishing returns

occurs.• Law of Diminishing Returns- as more and more of a

variable input (input whose amount/frequency changes) is combined with a fixed input (unchanging input), the amount per input decreases.

• EX: chefs in the kitchen; bubble gum

7.6 Economic Systems

Market Economy- Producers are free to produce what they

want and consumers may choose what they consume

Producers and consumers make these choices in a market

• organized exchange of goods, services and resources within a given region and time

Theoretically…the US is an example

Exchange- trade of one thing for another Producers have an incentive to produce

what consumers want…$$$Profit motiveOver the long-run, consumers control what

products are produced via consumer sovereignty (producers base production on how much consumers demand the product)

May use advertising

Adam Smith and Wealth of Nations

Adam SmithScottish economistPublished Wealth of Nations –

defense of free market economiesMarket is led by incentives:

• Producers-make most money• Consumers- buy goods/services for

lowest price

The “Invisible Hand”

“Invisible Hand”- unseen force directing the market produced the most efficient output of goods and services

Relies on Conditions:1. Competition 2. Private property 3. Allow free enterprise (freedom to buy

and sell)

Capitalism

Capitalism is a social system based on the recognition of individual rights (from Capitalism.org)

most of the means of production are privately owned and production is guided and income distributed largely through the operation of markets

(from Britannica Encyclopedia)