Economic Choices Economics Unit One C E Unit

Economic Choices Economics Unit One (C & E Unit 7)

Objective 1. 02: Explain how scarcity influences producers and consumers to make choices Basic Principles of Economics is the study of how society manages its scarce resources. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

Objective 1. 03: Compare examples of tradeoffs and opportunity cost of economic choices Basic Principles of Economics Tradeoffs: individuals and society as whole are constantly making choices involving tradeoffs between alternatives. Rational Behavior: making decisions to achieve maximum fulfillment of goals. Different preferences and circumstances lead to different choices. Marginal changes: small, incremental adjustments to an existing plan of action.

Objective 1. 02: Explain how Scarcity influences producers and consumers to make choices Basic Principles of Economics Scarcity Decisions are based on resources Needs: things you need to survive Wants: things you would like to have Even the US does not have enough resources to produce everything or provide every service or

Objective 1. 02: Explain how scarcity influences producers and consumers to make choices Making Economic Decisions Trade-offs: (Choices) The alternative you face if you decided to do one thing rather than another Opportunity cost: The cost of an item is what you give up to obtain that item. “the opportunity cost is the opportunity lost” In other words, every economic decision involves giving up something. NOTHING IS FREE!!

Objective 1. 02: Explain how scarcity influences producers and consumers to make choices Making Economic Decisions Opportunity Cost Examples: The opportunity cost of watching TV on a weeknight is the benefit you could have gotten from studying economics. The opportunity cost of going to college is the income you could have earned by getting a job out of high school. The opportunity cost of starting your own business in the wages you give up by working for another company.

Practice with opportunity cost I am going to show you a series of pictures. For each picture, write down the opportunity cost portrayed in each image.

What is the opportunity cost? is the benefit greater than the cost?

Objective 1. 01: Describe the basic factors of production such as land, labor, capital, and entrepreneurial skills and their impact on economic activities. Producing Goods and Services Goods Tangible products like books and cars Services Work that is performed for someone else

Objective 1. 01: Describe the basic factors of production such as land, labor, capital, and entrepreneurial skills and their impact on economic activities. 4 Factors of Production (a. k. a. “Things needed to produce goods and services”) 1. Land or Natural Resources (“gifts of nature”) Fertile soil, coal mines, rainfall, land, trees, gas, agriculture, plants Renewable vs. Nonrenewable 2. Labor Human resources Physical and mental efforts that people contribute to the production of goods and services

Objective 1. 01: Describe the basic factors of production such as land, labor, capital, and entrepreneurial skills and their impact on economic activities. 3. Capital (capital goods) Money needed to start the business, tools, machinery, and buildings used to make other products 4. Entrepreneurship Individuals who start new businesses, introduce new products, and improve management techniques

Objective 1. 02: Explain how Scarcity influences producers and consumers to make choices All societies deal with SCARCITY BY MAKING CHOICES: What to produce is 1 st choice of society Goods for defense or health care? How to Produce is 2 nd choice Need more oil, do we drill in Alaska for it? How much pollution is acceptable? For Whom to produce is 3 rd choice How will it be distributed amongst society? Who will receive the new car, where do we build the new school?

Objective 1. 03: Compare examples of tradeoffs and opportunity cost of economic choices Costs and Revenues Types of Cost Fixed costs Costs or expenses that are the same no matter how many units of a good is produced Mortgage or property taxes Variable Costs Expense that change with the number of products produced Wages and raw materials Variable costs increase with more production and decrease with less production

Objective 1. 03: Compare examples of tradeoffs and opportunity costs of economic choices. Costs and Revenues Types of Cost (cont. ) Total Costs: Fixed costs + variable costs Many business focus on average total costs per unit Marginal Costs The extra, or additional, cost of producing one additional unit of output Bulk is cheaper than single output

Types of Revenue (pages 507 -508 in textbook) Total Revenue number of units sold multiplied by the average price per unit 100 DVDs sold at $10 each = 1, 000 Total Revenue Marginal Revenue (always in $ terms) The change in revenue for producing one extra unit 101 DVDs sold means a total revenue of $1, 010 = $10 Marginal Revenue Marginal Benefit The additional or extra benefit associated with an action

Objective 1. 03: Compare examples of tradeoffs and opportunity costs of economic choices. Costs and Revenues Cost-Benefit Analysis This analysis requires you to compare the marginal costs and marginal benefits of a decision Does the benefit outweigh the cost? 30 f Law o 25 n r u t e ng R hi s i n i Dim 20 15 10 15 20 25

Objective 1. 04: Analyze the impact on economic activities of specialization, division of labor, consumption, and production increases Economic Activity Circular flow of economic activity The consumer sector Buy, sell, and earn money in factor market The business sector Buy, sell goods, and buy services in the product markets The government Sector Receives most of its revenue from taxes, also buys and sells goods The foreign sector Purchasing and selling goods all over the world

Product Markets Factor Markets

Objective 1. 04: Analyze the impact on economic activities of specialization, division of labor, consumption, and production increases Promoting Economic Growth Productivity A measure of the amount of output produced by a given amount of inputs Examples: Do more with less is good, efficient use of resources Mass production at factory vs. micro scale in your house Specialization (1 st as far as importance) When a country, person or particular place focuses on one area of production

Objective 1. 04: Analyze the impact on economic activities of specialization, division of labor, consumption, and production increases Promoting Economic Growth Division of labor (2 nd as far as importance) The breaking down of a job into separate, smaller tasks which are performed by different workers Technologies, Robotics, Inventions, Innovation Draw a Sheep, Cow, Owl, Hippo, Walrus, Elephant

Objective 1. 04: Analyze the impact on economic activities of specialization, division of labor, consumption, and production increases Promoting Economic Growth Human Capital The sum of the skills, abilities, and motivation of people Google, SAS, Education & Training Economic Interdependence We rely on others and they rely on us for goods and services Katrina and gas prices

Objective 1. 06: Compare and contrast how different economic systems address key economic factors Economic Systems Market Economies Pure market economy Everything based on free trade (supply and Demand) Individual freedom: People choose what to buy and sell Market Economies are also referred as being Capitalist Economies

Objective 1. 06: Compare and contrast how different economic systems address key economic factors Economic Systems Market Economies What makes it work? Markets Circular flow with consumer sovereignty (consumer is king) Economic freedom We make our own economic decisions Type of job/occupation when and where we want to work Type of product we will buy or sell

Objective 1. 06: Compare and contrast how different economic systems address key economic factors Economic Systems Market Economies Capitalism: Where private citizens own and use the factors of production in order to seek profit Free Enterprise: Competition is allowed to flourish with a minimum of government interference What makes it work? Markets, economic freedom, private property rights, competition, profit motive, and voluntary exchange

Objective 1. 06: Compare and contrast how different economic systems address key economic factors Economic Systems Market Economies What makes it work? Private property rights Freedom to own and use, dispose of our own property Also give us incentives because we can keep what we gain Competition The struggle between buyers and sellers to get the best products for the best prices Rewards the most efficient and punishes the least efficient

Objective 1. 06: Compare and contrast how different economic systems address key economic factors Economic Systems Market Economies What makes it work? Profit Motive The driving force which encourages individuals and organizations to improve their material well being (big reason of growth in US) Voluntary Exchange Buyers and sellers freely and willingly engaging in market transactions

Objective 1. 03: Compare examples of tradeoffs and opportunity costs of economic choices. Incentives Should a government offer economic incentives to production of take a laissez-faire approach? Location Subsidies Price $242 Million

Objective 1. 06: Compare and contrast how different economic systems address key economic factors History of Capitalism Adam Smith and Capitalism Smith wrote a book describing the basic principles of economics Individuals seeking profit would benefit society as a whole in the end Vary laissez-faire economics (hands off approach) Governments role should be limited and to only to keep competition going, guiding it like an “invisible hand” When consumers needs and wants are met by producers the govt. need not be involved

Objective 1. 06: Compare and contrast how different economic systems address key economic factors Economic Systems Command Economies (Opposite of Market Economy) In a pure Command Economy the individual has little to no say in the economy Major Economic decisions are made by the government (controlled economy) Socialism: belief that the means of production should be owned and controlled by society directly or through government Karl Marx felt Socialism would turn into Communism (one class, all property held in common, and no need for government) Very inefficient, grow slower, and usually one central authority or planning agency Examples: N. Korea, China, and Cuba

Objective 1. 06: Compare and contrast how different economic systems address key economic factors Economic Systems Mixed Economies Individuals carry on their economic affairs freely, but are subject to government intervention Protects the consumer as well as the producer Traditional Economies Based on custom or habit Mainly developing countries