Chp. 2: Economic Decision Making

1
Chp. 2 Economic Decision Making
2
Objectives
p. 012

• In the course of reading this chapter and
  participating in the classroom activity, students
  will
• explain how unlimited wants and scarce resources
  influence decision making.
• distinguish the goods and services, factors of
  production, and tradeoffs visible in common
  places and everyday situations.
• evaluate tradeoffs in and determine opportunity
  costs of various decisions.
• analyze and interpret production possibilities
  frontiers.
• apply the economic way of thinking to their own
  lives.

3
Preview
p. 002

• It is Friday night. Your only chunk of free time
  all weekend is tonight from 600 to 1100. Before
  deciding how you will spend this time, consider
  these factors
• You have 50 to spend.
• You have an economics test on Monday.
• This is the last football game of the season.
• It is your mothers birthday.
• Someone you like has asked you out on a date.
• Your favorite band is in town tonight.
• Fill in a table like the one below showing how
  you plan to spend your time. Create your own
  activities or choose from the list of possible
  activities. If you choose an activity from the
  list, use the given time and price.
• Possible Activities
• Football game 3 hours, 5
• Dinner 2 hours, 20 per person
• Movie 2 hours, 10 per person
• Concert 4 hours, 40
• Study for test variable time, 0
• Hang out at friends house variable time, 0
• Work at job variable time, earn 10 per hour
• Family time variable time, 0

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Preview
p. 002-3
Time Activity Price Opportunity Cost
600pm      
700pm      
800pm      
900pm      
1000pm      

1. What decisions did you have to make in this
   exercise?
2. What constraints did you face when making these
   decisions?
3. For each decision you made about how to spend
   your time, what did you have to give up?

5
Why is What We Want Scarce?
p. 003

1. Why cant we have everything we want? We can't
   get everything we want because there is a limited
   amount of resources to fulfill our wants. All
   goods (physical objects) and services (activities
   provided by others) are scarce because the
   resources needed to produce them are scarce.

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Why is What We Want Scarce?
p. 003

1. What is the difference between a shortage and
   scarcity? A shortage is a temporary condition
   that occurs when there is less of a good or
   service available than people want at the current
   price.

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Why is What We Want Scarce?
p. 003

1. What are some of the causes of shortages? Wars,
   prices, fads, media craze, natural disasters,
   changes in productivity

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Shortage or Scarcity?
p. 003

1. You buy a Babe Ruth rookie baseball card for
   500,000.
2. You have to take the bus to school because your
   mom and dad have the cars
3. You have to buy a Kiwi Strawberry smoothie on
   Friday instead of Peach
4. You pay over 500 for an original Nintendo gaming
   system.

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More Shortage v. Scarcity
p. 003

• 5 Goods You Wish You Had What is keeping you from
  these goods?

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How Do We Satisfy Economic Wants?
p. 004

• What are factors of production? The productive
  resources that go into producing goods and
  services are called factors of production. These
  inputs make up the production equation
• land labor capital goods and services

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How Do We Satisfy Economic Wants?
p. 004

• Land Resources Gifts of Nature
• Perpetual sources that wont run out EX
  sunlight, wind
• Renewable sources that can be replaced as they
  are used EX - forests, fish,
• Nonrenewable once these sources are used, they
  are gone forever EX fossil fuels, natural gas,
  coal

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How Do We Satisfy Economic Wants?
p. 004

• Labor Resources
• The time and effort people devote to producing
  goods (could be physical(planting trees, building
  houses) or mental (programming games, writing
  legal briefs)

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How Do We Satisfy Economic Wants?
p. 004

• Capital Resources
• physical capital (also known as real capital)
  the manmade goods, such as tools, which are used
  to produce other goods (tools, machines,
  buildings, screwdrivers, supercomputers,
  factories, roads, airports, etc.)
• Human capital the skills and knowledge a person
  has acquired through experience and/or education
  (take away everything from a person and just
  leave them with)

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How Do We Satisfy Economic Wants?
p. 004

• Entrepreneurs combine land, labor, and capital to
  produce goods and services. They often supply
  vision, take risks, and provide the drive needed
  to turn ideas into realities.
• Entrepreneurs (land labor capital) goods
  and services

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Factors of Production
p. 004
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What Do We Give Up When We Make a Choice?
p. 005
Can create a decision matrix to help you decide

• People often have to make tough decisions to
  maximize the utility of their decisions
• Utility the satisfaction or gain made from a
  decision
• Usually difficult because we dont have enough
  information and cannot predict the future

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What Do We Give Up When We Make a Choice?
p. 005
Can create a decision matrix to help you decide

1. Opportunity Cost what it cost you to give up
   the next best option Whether you have 2
   alternatives or 200, the opportunity cost is the
   next best option, this is really a personal thing
   

Go back to the Preview on page 2. Write in the
opportunity cost for each activity you picked.
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What Do We Give Up When We Make a Choice?
p. 005
Can create a decision matrix to help you decide

1. Marginal Utility the extra pleasure/satisfaction
   you get with one more of something
2. Negative Utility when one more of something
   actually does not bring you happiness
3. Law of diminishing marginal utility the more
   you do/have of something, the marginal utility
   decreases until it becomes a negative

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How Can We Measure What We Gain and Lose When
Making Choices?
p. 005

• A production possibilities frontier (PPF) is a
  graph that shows how an economy might use its
  resources to produce two goods.

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How Can We Measure What We Gain and Lose When
Making Choices?
p. 005

1. A PPF is used to calculate the opportunity cost
   of moving production from one point to another.

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How Can We Measure What We Gain and Lose When
Making Choices?
p. 005

1. Every point on a PPF represents an efficient use
   of resources. The area under the curve represents
   an attainable but inefficient use of resources.
   The area above the curve represents an
   unattainable goal based off current resources.

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How Can We Measure What We Gain and Lose When
Making Choices?
p. 005

1. Increases in productivity, a measure of the
   output of a system, can shift the PPF outward.

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PPF Curve Practice
p. 006
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PPF Curve Practice
p. 006
A
B
C
D
E
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PPF Curve Practice
p. 006

1. What is the opportunity cost of increasing wheat
   production by 200 pounds by moving production
   from Point B to Point C?
2. What is the opportunity cost of increasing wheat
   production by 200 points by moving production
   from Point C to Point D?
3. How would the line change if they found a way to
   produce more wheat? Draw it on the graph with a
   different color.
4. How would new computer technology affect the
   line? Draw it on the graph with a different
   color.

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PPF Curve Practice
p. 006

1. How would the line change if they found a way to
   produce more wheat? Draw it on the graph with a
   different color.
2. How would new computer technology affect the
   line? Draw it on the graph with a different
   color.