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Opportunity Costs• Economic choices involve tradeoffs
o A.K.A. – opportunity costs
• Definition: those things that economic choices make us give up o Every economic choice has alternativeso When an economic choice is made the
opportunity to choose the alternatives is losto Example: Using part of your paycheck to eat
dinner at a restaurant means you cannot use that money for a down payment on a house.
The True Cost of an Economic Choice• What the person is willing to
give up to obtain something
• Cost includes not only the money spent in buying the item or performing the preferred action but also the economic benefits, or utility, that the person did without because of the decision
Production & Consumption• Prices are a common cost that is set by a balance
of production & consumption
• Prices are determined by costs of business and an estimate of what consumers are willing to pay
• However, the price must allow for a profit
• They act like traffic signals directing the flow of economic activity to their most efficient use for producers want to increase profits and consumers want to decrease the impact on their income.
• Production: the supply of goods & services
• Consumption: the demand of consumers
Production & Consumption• Supply: the amount of goods or
services available at a particular priceo Ultimately determined by what the
market price iso Market price depends on amount
demanded and what suppliers are willing to produce
• Demand: measures what people are able & willing to buy at a given price
Incentives• Forms of encouragement
• Used by businesses to influence the economic decisions of consumers
• Typical incentives include:o Added benefitso Lower costs
• Examples:o Toys offered in kid’s mealso Frequent flyer programso Sales
Wants vs. Needs• Wants: things desired
• Needs: necessities for survival
• Both should always be ranked in their order of importance when making economic choices
• Needs generally rank higher than wants:o Food is more important than a movie
• Wants should also be prioritizedo Going to school is more important than junk
food
Immediate Gratification• Economic choices should always be
based on long-term benefits & costs
• Immediate Gratification: when people only think about short-term satisfactiono Choices are self-defeatingo Future costs may outweigh present
benefitso Example: using credit cards
irresponsibly: cost of debt outweighs satisfaction of purchases
Types of Business Costs• Fixed costs: business costs that do not
depend on the level of productiono Example: Rent
• Variable costs: depend on a firm’s level of productiono Example: Overtime pay
• Total costs: combination of fixed & variable costs into the overall cost of operating at a particular rate of production
Types of Business Costs• Marginal Costs
o Measure the balance of costs & benefits from the decision to produce an additional unit of good or service
• Marginal Cost of the Additional Unito Cost of the additional factors of production needed
to produce the unito Example: Auto Manufacturer wants to make an
additional truck Marginal cost refers to: materials, labor, building costs
that went in to making it Company stops increasing production when marginal
costs lower profits
Revenue • Price: the producer must determine the willingness
of consumers, or the demand, the total and marginal costs of the product, and the desired profit in determining the price.
• Once a projected price is determine the producer can estimate revenue in order to determine the profit.
• Total Revenue is the amount of money a business takes in from selling a good or service; price*amount sold=total revenue
• Marginal revenue is the additional revenue from selling one more unit
• Profit is then determine by subtracting total revenue from total costs
Division of Labor & Specialization• Concept originated with the
economist Adam Smith in the 18th century
• Division of labor breaks down a job into a series of specific tasks for maximum productiono Each worker focuses on one or a
few taskso Allows workers to practice and
perfect a particular set of tasks
Division of Labor & Specialization• Specialization: the
specific task and skills that an individual contributes to the division of labor
• Concentration on single tasks increases labor productivity
Division of Labor & Specialization• Assembly Line
o Uses division of labor and specializationo Example: automobiles are made on an
assembly line in a factory
• Mass Productiono Made possibly by the division of labor &
specializationo Low skilled workers use machinery to
produce large numbers of standardized products
Division of Labor & Specialization• Automation
o Use of technology and machinery to do the work of human beings
o Robotics: Recent development in automation
• Benefits of Automation: Increases productivity & lowers business costs
• Drawbacks of Automation: Puts people out of work
Human Capital• Definition: a person’s skills & ability
to be economically productive
• Some comes from natural talents & abilities
• Most comes from education & training
• Education & training is especially important in our current economy which depends heavily on innovation
Innovation• Definition: creates new inventions &
technologies used in business success
• Come from the machines to technology
• Contribute to economic growth
• Recent inventions or technological innovations with large economic impacts:o Computerso Virtual realityo Wireless networks
Workers• Total number of workers makes up the
nation’s labor force
• Categorized according to the kinds of jobs they perform and their skill levels
• White-collar workers: named for the white dress shirts they used to wear – typically office workers
• Blue-collar workers: named for the blue work shirts factory workers used to wear – jobs that involve manual labor
Workers• Skilled workers: have jobs that require
special training, abilities, and knowledgeo Examples: surgeons, pilots, plumbers
• Un-skilled workers: perform jobs that do not require special trainingo Examples: picking crops, working on
an assembly lineo Usually less pay and offer fewer
benefits
Business Organizations• Allow people to combine capital and
enterprise to do business for profit
• Come in different forms:o Sole proprietorshipo General partnershipo Limited-Liability partnershipo Corporation
Business Organizations• Sole Proprietorship
o Single ownero Owner takes all risk and all profit
• General Partnershipo Form through an agreement among
the ownerso Each partner is fully liable for all
business debtso Partners decide together what to do
with profits
Business Organizations• Limited-liability partnership:
o Must file a certificate with the government
o Organization that is more formal than general partnership
o Nature of the business is still determined by the partners
o Limited partners have limited liability for business debts
Business Organizations• Corporations
o File charter/certificate with the government
o Formal organization prescribed by law
o Shareholders have a limited liability for the business’s debts and share in the profits through the value of stock or dividends