Economic Choices Competency Goal #7: Investigate how and why individuals and groups make economic choices Objective 7.01 = Describe the basic factors of

Economic ChoicesCompetency Goal #7: Investigate how and why individuals and groups make economic choices

Objective 7.01 = Describe the basic factors of production such as land, labor, capital, and entrepreneurial skills and their impact on economic activities.

Objective 7.02 = Explain how scarcity influences producers and consumers to make choices

Objective 7.03 = Compare example of tradeoffs and opportunity costs of economic choices

Objective 7.04 = Analyze the impact on economic activities of specialization, division of labor, consumption and production increases

Objective 7.05 = Explain the impact of investment oh human capital, productive and natural resources

Objective 7.06 = Compare and contrast low different economic systems address key economic factors.

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Economic Choices

• Economics is the study of how individuals and societies make choices about ways to use limited resources to fulfill their wants and needs.– We as individuals have many needs (food, shelter,

clothes) which are required for survival– We also have many wants (vacations,

entertainment) which are items that make life more enjoyable and comfortable


Economic Choices

• Machines, workers, money, land, raw materials, and other thing that a country can use to produce goods and services and to make its economy grow are called resources.– Natural resources are natural occurring substance that are

considered valuable in their unmodified state.• Natural Resources are classified as renewable and nonrenewable.


Natural Resources

• Renewable Resources – Are generally living

organisms that can be restock or renew themselves if they are not over-harvested.

• Fish, timber, coffee

– Water, soil, trees, plants and animals are all renewable resources if they are conserved

• Nonrenewable Resources

– Are resources that cannot be replenished

• Coal, oil, natural gas

– Nonrenewable resources take millions of years to from, cannot be replaced as fast as they are used and will eventually be used up


Production – 4 Factors

• Productivity is a measure of the amount of output (good and services) that can be created in a specific period of time

• Economic production uses four factors;– Land– Labor– Capital– Entrepreneurship


#1– LAND

• Land adds natural resources to production– It is also property

• Property can be an economic resource by providing a sit for a plan, cropland for growing food or through the leasing, renting, or selling of it


#2 – LABOR

• Labor is the productive work (especially physical work) done for economic productivity.– Labor can involve mental work.

• Labor can be divided into two categories: – Skilled Labor

• Workers with a high level of education and pay

– Unskilled Labor• Workers with a low level of education and pay


#2 – LABOR

• Laborers include fast food workers, teachers, doctors, carpenters, corporation CEO’s and many other occupations.– Note: Labor is not just someone with a

shovel: it includes all levels and talents in the workforce from computer programmers to plumbers.


#3 – Capital (Capital Goods)

• Capital (Capital Goods) consists of the equipment, buildings, and structures used to produce anything.

• Without these items, nothing would be made. In the construction business, hammers, nails, ladders, tacks, cemene, etc. are all capital goods used by the workers.


#4 -- Entrepreneurship

• Entrepreneurship is the bringing together of land , labor, and capital to start new businesses.

• It involves combining these factors in a cost-effective way, uncovering new opportunities to earn profit and assessing the risks associated with a business venture.– Entrepreneurship is often a difficult undertaking

and a majority of new businesses fail


#4 -- Entrepreneurship

• Henry Ford and his Ford Motor Company was a 20th Century American example.

• More recent ventures are generally cyber-related.– Think of Google and YouTube


4 Factors of Production

• When all of these factors come together productivity take place.

• Economic growth is determined by the amount of productivity.

• When more productivity takes place more goods are available to buyers.

• This is a key factor in economic growth


Essential Questions

• Answer the following Essential Questions for Objective 7.01

1. How do the basic factors of production influence the choices made by producers and consumers?

2. What effects do limited natural resources have on the choices made by producers and consumers

3. How are the four factors of production used in satisfying wants and needs?


Competency Goal #7: Investigate how and why individuals and groups make economic choices


• Major Concepts– Scarcity

– Decision Making Process



• Terms– Limited Resources– Decision Making Model/Cost-Benefit Analysis– Service – Goods– Wages– Salary– Consumer– Producer


Objective 7.03 = Compare example of tradeoffs and opportunity costs of economic choices

• Major Concepts

• Wants Vs. Needs

• Tradeoffs

• Opportunity Costs

• Terms

• Incentives

• Fixed Costs

• Variable Costs

• Total Costs

• Marginal Costs


Scarcity

• One interesting economic problem is the concept of Scarcity.– When we do not have enough resources to

produce all of the things we would like to have, scarcity occurs.• If items are scarce, like generators after a

hurricane has struck, people will be willing to pay more for them.


Scarcity

• We, as a country, do not have enough productive resources to produce all of the goods that our people need.– B/c of this, we import many important items.

• Consumers are people who will purchase goods and services, are always comparing prices (the cost of goods and services) and making choices of what to buy on the basis of their monetary resources


Scarcity

• Monetary resources are the salaries and wages that they make for labor at their jobs.– How much they make determines what they can

afford to spend.

• Producers (the market of the goods or services) must determine what price can be set for their goods. – Since the goods will satisfy both needs and wants,

they want to set a fair price.


Scarcity

• The same applies to services. • Services are activities that meet our wants and needs.

– Services are dental and medical care, auto repair, education, etc…

• All producers of goods and services want to make as much money as possible, but the consumer wants to pay to lowest price possible.– Therefore, producers must come up with a price that will

“sell” as well as fit the consumer’s needs.


Scarcity

• Sometimes the costs are more than consumers can or are willing to pay. – For Example: Mr. Tomlin want a top-of-the-line,

side-by-side refrigerator, but cannot find one that he can afford, he will have to realize that he has limited resources (small amount of money).

• His limited resources now called for a decision-making process. (Cost-Benefit Analysis)


Scarcity

• In this decision-making process, Mr. Tomlin has realized that there is a problem.– He does not have enough money to buy to

refrigerator he wants.– Now he must decide what he alternatives are.

• He could choose another less expensive model

• He could borrow some money from the bank or she could wait a few months when he has more money saved.


Scarcity

• Mr. Tomlin realizes he would really like to have the top-of-the-line refrigerator but wonders if this is selfish on his part.

• What if another need arises in the next few months?

• So he decides on a trade-off.


Scarcity

• A trade-off means that you give up one thing of value to gain another thing of value.

• He decided to buy a cheaper version of the side-by-side refrigerator he wants so badly.

• By making this decision, he has money left over in case there are other items that need to be bought in the next few months.

• In buying the cheaper version, there is an opportunity cost.


Scarcity

• The opportunity costs is the possible discomfort and inconvenience linked to the choice made.

• The opportunity costs for Mr. Tomlin’s choice is no ice maker.

• By choosing the cheaper refrigerator, he will have to fill and refill ice trays.


Essential Questions (7.02)

• Why is scarcity the biggest problem faced by all economies?

• How does scarcity affect price and the production and consumption of goods?

• How can scarcity affect economic interdependence?


How a Business Figures Costs and Profitability

• The Couch family owns a family bakery in Hamptonville, N.C.

• They sell giant cookies and pies to local grocery stores and to the local population.

• Since everyone wants fresh cookies and pies, there is always the question of how many pies and giant cookies to make each day.



• They want to make enough for the day – not too many and not too few.– Remember that most consumers want immediate

gratification (short-term satisfaction)

• So by being careful, the Couch’s can make just enough cookies every day to make Hamptonville residents happy without making too many which will get stale and can’t be sold as fresh.



• Naturally, the Couch’s want to make a profit and therefore have to consider what their expenses (costs) are.

• Expenses are divided into 2 categories– Fixed costs are the same every month no matter

how many giant cookies and pies are made.– Variable costs are those expenses that change

according to how many pies and cookies are made.

• If they make more pies and cookies, they will need more flour, sugar, and electricity.



• During the holidays, Hamptonville residents eat more of the Couch’s delicious pies and cookies, so sales go up.– For simplicity’s sake

• Giant cookies and pies = Units

• In Nov. the Couch’s sold 1,000 units at $10 a piece, but in Dec. that doubled to 2,000 units



• Nov. Sales:

1,000 units @ $10.00

$ 10,000

• Dec. Sales:

2,000 units @ $10.00

$20,000



• Now, the Couch’s have to consider their expenses (fixed and variable).

• Their variable costs are $3.00 per unit.

• This unit cost does not change either, but the more pies and cookies they make, the more their total variable costs go up.

• Remember they sold 1,000 units in Nov. and jumped to 2,000 units for Dec. holiday sales



• November• Fixed Costs

– $2,000 / 1000 = 2 per unit

– Rent, bank loan, etc.

• Variable Costs – $3 per unit– 1,000 X $3.00 = 3,000

• Total Unit Costs =$5.00 per unit.

• December• Fixed Costs

– $2,000 / 2000 = 1 per unit

– Rent, bank loan, etc.

• Variable Costs – $3 per unit– 2,000 X $3.00 = 6,000

• Total Unit Costs =$4.00 per unit



• So, how did the Couch’s do?– You can see that their overall unit costs go

down as they make more cookies.

– This is because their fixed costs are spread over more units


Nov.

- Total Sales = 1,000 units @ $10 = $10,000

- Expenses Fixed = -$2,000

Variable = -$3,000

(1,000 units @ $3) = $5,000 PROFIT

Dec.

- Total Sales = 2,000 units @ $10 = $20,000

- Expenses Fixed = -$2,000

Variable = -$6,000

(2,000 units @ $3 ) = $12,000 PROFIT



• The Couch’s did very well in December. – Fixed costs remained the same – unit cost went down – sales doubled

• they were able to make more money.

• In this example the Couch’s additional December business did not require any more employees so they kept their fixed expenses the same.



• This model is an uncomplicated, basic version that many businesses use.

• Another cost is called marginal cost.– Marginal costs is the cost for one extra unit and

can vary greatly depending upon the situation and circumstances.

– At some point, the marginal costs of the next unit of production lowers profit.

– At that point, the company should stop increasing production.



• The incentive to make more money is an important one.

• Some business use specials or giveaways to attract customers.

• If the Couch’s decided to give away free samples of their cookies at the mall, it would increase their costs and reduce profit.

• This is a possible way to bring in more income, but businesses have to carefully consider the benefits of these expenses.



• In big companies, many inputs come from a lot of people, but in the Couch’s case, they probably guessed that their free cookies would entice people to buy in the future.

• Hopefully these incentives will make consumers buy other products that are making a profit.

• Increased business can lead to increased profit.



• Another concern with running a business is the wages and salaries of the employees.

• Employers may chose to pay an hourly wage (a certain amount paid for each hour worked), a salary (a yearly amount) or may pay by product (a certain amount paid for each item sold).

• This decision is usually made between the employee and employer, and is usually made in the best interest of the employer.

Productivity And Economic Growth

• Productivity goes up when more products can be produced with the same amount of input in the same amount of time or when the same product can be produced with less input– Productivity is usually discussed in terms of

labor.



• Going back to the Couch’s cookies, specialization of labor is when people or businesses concentrate on goods, or services that they can produce better than anyone else.– Plumbers, electricians and heating and air

contractors have a specialization in their particular area.



• A division of labor is also important in productivity.

• This means breaking down a job into smaller tasks that are preformed by different workers.– An example of division of labor is in a factory.

– A factory is a facility that makes or assembles a particular

good.



• A factory that make automobiles has a division of labor that has many workers assembling the cars.– Each worker is involved with a certain stage

of the assembly process.• The process moves down an assembly line and

the workers assemble the product one part at a time.

• The product is completed at the end of the line.



• By using the assembly line process, a car is made more cheaply than if one person assembled one car at a time.

• Assembly lines are used in many manufacturing facilities.

• The factory is designed for mass production (making huge quantities of a certain product).



• Many care are manufactured because this factory allows for all the materials to be provided for a complete assembly of the product.– Henry Ford started all this in the early

1900s



• Increases in productivity are sometimes evident when businesses invest in human capital.– Human capital refers to the skills,

abilities, and motivation of people.• Investments in training, health care, and

employee motivation by businesses and governments will increase the amount of production that will take place.



• Employees benefit from higher wages, better jobs and more satisfaction with their work, and employers benefit from higher quality products and increased profits.– Happy content employees are much more

productive



• The work force (human capital) is made up of skilled and unskilled workers.– Skilled workers (doctors, teachers, and

nurses) have jobs that require training or education.

– Unskilled workers (garbage collectors, fast food workers, and laborers) have jobs that require few skills or only a small amount of training



• Skilled workers are also called white collar because they do no manual labor.

• Unskilled workers are called blue collar because their jobs require manual labor.– The salaries of white collar workers are

typically higher than blue collar because of the training and education that is needed for their jobs.



• Productivity is also helped greatly by innovation.

• Innovation is the making or inventing of something new.– It is an important topic in the study of

economics, businesses technology and engineering since it contributes to economic growth



• Innovations such as the development of electricity, steam engines, and motor vehicles have greatly contributed to the productivity of our nation.– Hi-tech innovation has recently caused large

changes as well.• Think of technology like iPod, MP3 players,

Apple’s new iPhone and Internet search engines such as Google and Yahoo.



• As innovation and technology improve productivity, sometimes it comes at a cost to the workers.– Many unskilled workers have been replaced

by robots• Robots are machines that have been

programmed to do certain jobs and the human worker is no longer needed.



• This replacement of human workers is known as automation.– Automation is faster and more efficient so

there is less cost and better production.• Small are now being replace.• These company-owned farms are run by

managers who use technology, large machines and highly efficient equipment and therefore few farm laborers.



• Theses huge farms are now know as agribusiness.

• There purpose is to produce crops with less labor.


Objective 7.05= Explain the impact of investment on human capital, productive

and natural resources• Major Concepts• Productivity• Investment

• Terms• Capital Goods

• Consumer Goods

• Producer Price Index (PPI)

• Output Vs. Input

• Law of Diminishing Returns

• Recycling

• Education and training


Investments

• Investments involve putting money to work to make more money.

• There are many types of investments.– One type of investment is a capital

investment.• This means a business will purchase equipment

or inventory (capital goods) in the hopes of improving business.


Investments

• By purchasing the equipment, or inventory, the worker will have more inputs in order to make more outputs (the consumer good products)

• Hopefully productivity will increase and the investment will mean more profits


Investments

• Another type of investment is done by workers investing in themselves.– If they invest in more education and training

at colleges, they make themselves more efficient and profitable to prospective employees.


Investments

• Sometimes investments have draw backs.– The purchasing of new equipment, adding

more inventory and the hiring of a skilled laborer will cost more in the beginning.• The amount of profit will be less initially, but if

the investment was a good one, it will add business and profits in the future


Investments

• Recycling is another way to invest.– By recycling, you invest in protection of the

environment, and also reuse materials that were discarded in the creation process.• If discarded scraps are put back into the

production line to help make a new product, this saves money and helps with profit.


Investments

• In the Couch’s cookie business, the excess chocolate that is poured over the finished product is caught and reused over and over.– This is both efficient and a form of

recycling.


Producer Price Index (PPI)

• The Producer Price Index (PPI) measures the average change over time in the selling price received by domestic producers for their output

• This index is published monthly by the U.S. Dept. of Labor– Bureau of Labor Statistics


Producer Price Index (PPI)

• The PPI can show in figures and graphs the price of lumber for construction companies or the price of aircraft and aircraft equipment for airlines.


Law of Diminishing Returns

• The output mentioned in the PPI and the output for any business is called consumer goods.

• Businesses are very concerned about the cost of investment (how much money they have put into wages or equipment/inventory) and their estimated future benefits (profits).



• These future benefits are only determined by using the ratio output Vs input.– Inputs are the costs to the producers

– Outputs are potential profits.

– All businesses want to increase their profits by investing their outputs and reducing their inputs.



• Let’s go back to the Couch’s cookie and pie business in Hamptonville.

• Recall their fixed expenses were $2,000 a month and each unit costs them $3.00 a piece (variable expenses).– They decided that an automated cookie

machine would allow them to lay off their baker who was being paid $1,200 a month.



• Payments on the cookie machine would be $200.00 a month so they would be reducing their input by $1,000 a month.

• This would be a fixed cost reduction and now that amount would be $1,000 a month instead of 2,000 a month.



• Have the Couch’s made a good decision?– The answer is yes.

– By saving on their fixed expenses, they have a higher ratio and will be more profitable.



• Eventually producers will become aware of the law of diminishing returns.– This means that as some point in a production

system with fixed input (never changes), each additional unit of variable input yields less and less additional output.

– The Couchs’ could keep adding more equipment to save expenses but at some point the cost of the new equipment would be greater than their savings.



• This is the law of diminishing returns.

• Another good example is commonly found in agriculture.– A farmer has to weigh his costs (inputs)

against how he feels his crops will do (outputs)



• Every year Farmer Smith uses one kilogram of wheat seeds per acre and get one and a half tons of wheat from that acre.– One year she decides to use twice as many seeds in

hopes of getting three tones of wheat.– At harvest time she finds she only got 2 ½ tons of

wheat.– The additional seeds did not result in as much as

what she projected. What happened?



• Assuming all the factors were unchanged, the laws of diminishing returns has come into play.– This law shows that if one factor of

production increases and the other factor remains the same, thee overall return will fall at a certain point.


Objective 7.06 = Compare and contrast low different economic systems address key

economic factors.


Economic Factors and Systems

• The U.S. has a market economy = one in which the basic economic questions of what, how and for whom are answered by individual households and businesses through a system of free markets.

• In market economies, natural resources and capital goods are usually privately owned.

• Buyers and Sellers have a good deal of freedom as they interact through supply and demand.



• Buyers who increase orders send messages to seller to increase production.

• When buyers decrease orders, suppliers will decrease production.

• Consumer sovereignty controls what is produced.

• If consumers demand certain products, producers will produce those products.



• Producers try not to provide products that are not in demand because no one would buy them.

• Sometimes consumers are “convinced” through advertisements that a certain product is the “one to buy”

• This persuasion is used by producers to get consumers to buy.

• We see all sorts of ads everyday.– They are a part of our

lives.



• Adam Smith, 1776, wrote the Wealth of Nations.

• He was an economist and philosopher who provided a philosophy for the capitalist system.

• He wrote that individuals, left on their own, would work for their own self-interest

• They would be guided by an “invisible hand” to use resources efficiently for the good of society.



• This means that there would be sellers competing to make the most profits (competition).

• Producers and consumers must have private property (their own goods and services) and they must have the freedom to sell and buy what they want (free enterprise).



• Producers would have the incentive to produce what consumers want because this would make them money.– This is the Profit Motive

• Smith believed that the government should stay out of the market.

• Prices should be set by producers/consumers.



• This method is similar to the French laissez-faire (let do, let pass)

• In 1848, the Communists Manifesto, by Karl Marx and Friedrich Engles was published.

• Marx believed that the capitalists (businessmen who own the means of production) and workers (producers of goods) were in a class struggle.



• Eventually, the workers would revolt and overthrow the capitalists.

• By doing this, socialism would be established.

• Socialism established that government will control all capital and will own all property.

• Socialism would eventually lead to communism.



• Under communism, one class would evolve, there would be no government and all property would be held in common.

• Marx believed that people would produce by cooperating because all people would profit equally under communism.



• History has show that socialism and communism have not worked and the nations that are considered “communist” today do not abide by the “rules” laid down by Marx.



• The Communist nations today are command economies.– In a command economy the productive

resources (land and capital) are owned by the government.• There is nothing in the individuals’ hands.• The government decides what to produce, how

it is produced and form whom it is produced.



• It fixes all wages and prices.

• Command economies are very inefficient and former command economies such as the Soviet Union and China are now converting to market economies.


Economic Factor and Systems

• John Maynard Keynes, a British economists, developed a theory known as Keynesian Theory.

• This theory promotes a mixed economy where both the state and private sector play an important role.



• The theory says that fiscal policy (government spending and taxing) and its deficit spending (government spending more than they have) can balance the economy.– Keynes believed that if the economy was sluggish,

the government increasing spending and decreasing taxes would stimulate economic growth.


Documents

Economic Choices Competency Goal #7: Investigate how and why individuals and groups make economic choices Objective 7.01 = Describe the basic factors of