Imagine that it is Friday night. Your only chunk of free time all weekend is tonight from 6:00 to 11:00. Before deciding how you will spend this time, consider these factors: You have $40 to spend. You have a math test on Monday. This is the last football game of the season. It is you mothers birthday. Someone you like has asked you out on a date. Your favorite band is in town tonight. Economic Decision Making Some of our wants are necessary for survival Beyond the necessities, what we desire to own or experience in our lives is limited only by our imaginations. Our ability to satisfy our wants is limited Time Money Goods Physical objects made for sale Services Activities done for us by others Goods and services are scarce because the resources needed to produce themland, labor, materials, and machinesare scarce. Scarcity would exist even if everyone in the world was a millionaire. Shortage Lack of something that is desired Occurs when there is less of a good or service available than people want at the current price. Why do shortages occur? Fads/trends War Natural disasters Shortages are usually a temporary condition End once production is resumed or new sources of supply are found Scarcity is forever No matter how well we use our limited resources, there will never be enough of everything to satisfy all of our wants. Round 1: Goods and Services Inputs The scarce resources that go into the process The factors of production Land Labor Capital Outputs The goods and services produced using these resources. Production Equation Land + Labor + Capital = Goods and Services Some economists consider entrepreneurship to be a fourth factor of production. Gifts of Nature Air, soil, minerals, water, forests, plants, animals, fish, birds, solar energy, wind, geothermal energy, etc. Perpetual resources Resources that are widely available, and in no danger of being used up, i.e. sunlight and wind. Renewable resources Resources that can, with careful planning, be replaced as they are used, i.e. forests, fresh water, and fish. Nonrenewable resources Resources that once gone, are gone forever, i.e. oil, coal, and natural gas. Labor The time and effort people devote to producing goods and services in exchange for wages Can be physical or mental Human Capital The knowledge and skill that people gain from education, on-the-job training, and other resources. It is what you would be left with if someone stripped away all of your assets and left you on the street corner with only the clothes on your back. Charles Wheelen, The Naked Economist There is a strong correlation between a countrys level of human capital and its standard of living. The correlation between a countrys natural resources and living standards is weak 75% of the wealth of a modern economy consists of the education, training, and skills of its people. Nobel Prize winning economist Gary Becker Different types of capital Financial capital The money people invest in stocks, bonds, real estate, or businesses to produce future wealth. Physical capital, or capital goods The tools, machines, and factories that actually produce other goods and services. Capital can take several forms Tools- can be a screwdriver or a supercomputer Factories, office towers, warehouses, bakeries, airports, power plants, roads, electrical grids, sewer systems, and the Internet Since the beginning of the Industrial Revolution, capital has replaced labor in several ways. Each advance in physical capital, although replacing labor, has also created new needs for labor this is why investing in your human capital is so important! Entrepreneurship is a specialized form of human capital, and is highly valued because of the innovation they bring into producing goods and services. Steve Jobs Entrepreneurs perform the following roles in the production process: 1.Innovation Entrepreneurs think of new inventions, ways to use technology and techniques into goods and services people will want. 2.Strategies Entrepreneurs supply the vision to make the key decisions that create new businesses. 3.Risk taker Starting a business is a big risk. Entrepreneur invest their time, energy, and abilities along with money both their own money and other peoples money. 4.Spark Entrepreneurs provide the energy, drive, and enthusiasm that it takes to turn ideas into reality. Productivity The measure of the output of an economy per unit of input. It is determined by dividing total output by one of the three inputs involved in production: land, labor, or capital. Productivity = output/input Get more output from the same inputs May be accomplished by organizing the production process in a more efficient manner The same number of hours of labor (input) could produce more board feet of lumber (output) a week Get the same output from fewer inputs Maybe accomplished by finding a way to get more lumber out of each tree harvested Would allow the mill to produce the same amount of lumber (output) using fewer trees (input) and fewer workers (another input). Round 2: Factors of Production Utility The satisfaction or pleasure one gains from consuming a product or service or from taking an action. We gain utility from making choices that are likely to improve our lives Getting a vaccination Studying for a test Maximizing utility isnt always easy We dont always have enough information to know if we made the best choice Scarcity forces tradeoffs Every decision we make involves giving up one thing for another Businesses face tradeoffs as they try to maximize the utility of their land, labor, and capital. If an automaker decides to stop making cars and only produce pickup trucks, what is the tradeoff? A society must choose between using its resources to produce guns (military goods) or butter (civilian goods). What are the pros and cons of each? When you choose one course of action, you lose the utility, or benefits, of the alternatives you did not choose. Opportunity Cost The value of the next best alternative you could have chosen instead. Marginal utility The extra satisfaction or pleasure you will get from an increase of one additional unit of a good or service Negative utility A lack of pleasure of satisfaction from consuming a product or service or taking an action Round 3: Opportunity Cost and Tradeoffs Production Possibilities Frontier (PPF) An economic model, in the form of a line graph, that shows how an economy might use its resources to combine two goods. The graph shows all possible combinations of those goods that can be produced using the available resources and technology fully. It helps us see the tradeoffs involved in devoting more resources to the production of one good or another. Alexander Selkirk One man economy In the 4 hours a day he has to gather food, he can choose to either harvest 10 turnips or 10 clams an hour. Two goods economy Bananas Cell phones Bowed shape of the curve Tradeoffs in this economy are not the same at every point in the curve. The opportunity cost-what the country gives up-when choosing to produce more of either good changes as you move along the curve. Economic efficiency The result of using resources in a way that produces the maximum amount of goods and services. Every point on the PPF represents an efficient use of resources to produce that combination of outputs. Every point in the shaded area represents a less efficient, but still obtainable, production possibility. Every point outside the PPF represents an unattainable production possibility. PPFs represent a snapshot of an economys production possibilities at a moment in time. Things may change the PPF of an economy, such as Improvements in production Economy may expand or shrink Growth- PPF shifts to the right Shrinks- PPF shifts to the left