Economic Choices

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Economic Choices

• Goal 7

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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

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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 wantsbut limited resources to obtain
  our wants

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Resources

• Things humans can put to productive use
• Money, people (labor), time, information,
  machines and natural resources

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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

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Resources (contd)

• 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

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So

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

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Basic Economic Questions

1. What to produce?
2. How will I produce it?
3. For whom will it be produced?

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4 Factors of Production

• Elements of any business
• allows resources to be properly processed in
  order to produce things that are needed/wanted
• Capital, Entrepreneurship, Land and Labor (CELL)

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Factors of Production

• CAPITAL
• Structures and equipment involved in the
  manufacturing process
• Ex nail guns, machinery, computer, grills,
  tools, lighting and assembly lines

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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

Ray Kroc and McDonalds
Bill Gates and Microsoft
www.tcocd.de/History/paulbill.jpg
http//www.businessweek.com/magazine/content/04_27
/art04_27/0427_18innova.jpg
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Factors of Production

• Land
• property on which production plant is built
• all natural resources involved
• more than the ground you stand on

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Factors of Production

• Labor
• contribution of human workers to the production
  process
• mental and physical efforts
• highly skilled and unskilled labor
• Ex open-heart surgery, assembly-line work,
  janitorial services, and writing a book

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Productivity

• rate at which goods/services can be produced
  (time)
• key factor in determining economic growth
• increased productivity more goods available to
  buyers and financial rewards for laborers

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Why factors of production?
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7.2 Scarcity and Decision-Making

• What is scarcity?
• Scarcity- lack of adequate resources to obtain
  all of ones 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

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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

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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

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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

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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

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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

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• Producers want to sell goods for highest price
• Consumers want to pay the smallest amount

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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

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Decision Making Model

• Define the problem
• List the alternatives
• State the Criteria
• Evaluate the alternatives
• trade-off and opportunity costs of each
• Make a decision

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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

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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

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7.3 Costs and Decisions facing Producers

• Blue Book page 153 (READ with a partner)
• Reggie and his lemonade stand
• Provides lemonade
• For some its a want
• For some its a need
• In all circumstances it provides immediate
  gratification (instant/short term satisfaction)

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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

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Total Costs
Variable Costs
Total Costs
Fixed Costs
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Motivating Producers

• Incentives- form of encouragement to influence
  economic decisions
• Marginal Cost- cost of producing one more unit

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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

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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

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Specialization cont

• 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

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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

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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

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Henry Fords Assembly Line
http//www.gpschools.org/ci/depts/eng/k5/ford/1913
_assembly_line.jpg
Ford made automobiles affordable to the average
man and revolutionized the production of
automobiles.
http//people.hofstra.edu/geotrans/eng/ch1en/conc1
en/assemblyft.html
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Increasing Productivity - technology

• Technology- the application of scientific
  breakthroughs to commerce and industry
• ex. Eli Whitneys cotton gin
• innovation- something that profoundly changes
  and improves the way things are done
• (ex. Henry Fords assembly line)
• invention- any new form of technology created to
  meet a need
• (ex. cotton gin)

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

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Blue vs. White collar workers

• Blue collar jobs- occupations that require manual
  labor
• ex electricians, plumbers, factor workers
• some are considered skilled
• White collar jobs- jobs that typically do not
  require manual labor
• most are considered skilled

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Workers for machines

• Many factories have turned from using human
  workers
• to 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

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• 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?

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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

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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)

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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

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Investments

• With investmentscome trade-offs and opportunity
  costs
• Investments are made when the likely return is
  thought to be more valuable than the otherwise
  immediate gratification.

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• 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

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• What conclusion might you make about output vs.
  input?
• The more you put in the more you get.
• BUTin 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

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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
• Theoreticallythe US is an example

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• Exchange- trade of one thing for another
• Producers have an incentive to produce what
  consumers want
• Profit motive
• Over 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

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Adam Smith and Wealth of Nations

• Adam Smith
• Scottish economist
• Published Wealth of Nations defense of free
  market economies
• Market is led by incentives
• Producers-make most money
• Consumers- buy goods/services for lowest price

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The Invisible Hand

• Invisible Hand- unseen force directing the
  market produced the most efficient output of
  goods and services
• Relies on Conditions
• Competition
• Private property
• Allow free enterprise (freedom to buy and sell)

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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)

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