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– Understand the importance of

Entrepreneurs

Economic Decision Making

Chapter 2

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

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

Tides Gold Water Coal Trees Sand

Corn Sunshine Tuna Wind Oil

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 / InputsEx. 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 trees 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

Measuring What We Gain/Lose• Production Possibilities

Frontier (PPF)– – 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

NOT 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

NO

T POSSIBLE

Past the FrontierWASTED RESOURCESBelow 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

Increased

Production of

both ITEMS

• How would the line change if they found a way to produce more wheat?

• How would new computer technology affect the line?