Today’s Objectives

1. 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 • Be able to work with the Production Equation • Understand the importance of Entrepreneurs

2. Chapter 2 Economic Decision Making

3. 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

4. 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

5. 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

6. Shortage/Scarcity Activity • In a small group, look at the 8 questions posed to you and figure out if this is a situation of SCARCITY or if this is just a SHORTAGE. • Be sure to explain why your group thinks it is one or the other and be prepared to prove your decision.

7. 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?

8. 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?

9. 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

10. 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?

12. 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?

13. 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.

14. 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

15. 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

16. 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?”

17. 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

18. 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

19. 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 / Inputs Ex. 60 boards/tree = 600 boards/10 trees

20. Improving Productivity • Two ways to increase production • Find ways to decreasethe inputs and keep outputs the same • 600 boards from 9 trees • From new cutting style • Find ways to increaseoutputs from the same amount of input • 650 boards from 10 trees • From more efficient saws

21. 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 threes we cut down. How can we do that with the pattern we currently cut? Use visual given to help.

22. 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

23. 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.

24. 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

25. 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 • People use matrices to help w/ decisions

26. Decision Matrix

27. Measuring What We Gain/Lose NOT POSSIBLE • Production Possibilities Frontier (PPF)– • Tells us the frontierof 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

28. 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 NOT POSSIBLE Past the Frontier WASTED RESOURCES Below the Frontier

29. 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

30. Changes to the PPC/PPF Increased Production of both ITEMS • 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

32. How would the line change if they found a way to produce more wheat? • How would new computer technology affect the line?