7.2 Scarcity & Opportunity Cost

Economic Choices The fundamental economic problem is scarcity—we do not have enough resources to produce all the things we would like to have. Because of scarcity, we must make choices among alternatives.

Wages vs. Salaries Wages – hourly pay Minimum wage is the lowest wage one can receive. Right now, minimum wage in NC is $7.25. Salary – yearly pay

Economics Models To study a part of the economy, economists use economic models. These are simplified representations of the real world, based on economic theories. Business and government often base decisions on solutions that emerge from testing economic models.

Economic Models (Cont.) Models are based on assumptions. The quality of the model’s results can be no better than the assumptions on which it is based. Economists use models to better understand the past or present and to predict the future. If predictions based on a model turn out to be wrong, economists revise the model.

Consumer vs. Producer Consumers are the people that buy stuff. Producers are the people that make the stuff people buy. Price for items is influenced by Supply and Demand (we will discuss this later).

What is opportunity cost? . Sara had enough money for either the rabbit or the bike. She decided to buy the bike because then she could ride bikes with her friends after school.

Opportunity Costs Purchases Opportunity cost is the process of choosing one good or service over another. The item that you don’t pick is the opportunity cost. The rabbit is Sara’s opportunity cost.

Opportunity Cost Opportunity cost is what you cannot buy or do when you choose to do or buy one thing rather than another. It is the next best alternative that you had to give up for the choice you made. Opportunity cost includes more than just money. It also includes the discomforts and inconveniences linked to the choice made. For example, the opportunity cost of cleaning the house includes not only the price of cleaning products, but also the time you spent cleaning instead of doing something else, like listening to music.

Tradeoffs and Opportunity Costs Economic choices involve tradeoffs, or what economists call opportunity costs. Opportunity costs are those things that economic choices make us give up, as a nation or individuals. Every economic choice has alternatives. When an economic choice is made, the opportunity to choose the alternatives is lost.

Incentives Incentives are rewards offered to try to persuade people to take certain economic actions. Price is one incentive. Others are bonuses for salespeople and low credit rates for consumers. Knowing how incentives work will help you make wise choices.

Incentives There is a 1st time home buyer incentive of $8,000 if you buy a house in 2009.

Fixed costs Fixed costs are business costs that do not depend on the level of production. For example, a business that pays rent on its factory building pays that rent pays that rent whether the factory is operating or not.

Variable costs Variable costs depend on a firm’s level of production. Imagine that an aircraft company suddenly receives a large order for jumbo jets. It must increase production. The workers put in overtime. Overtime pay is a variable cost. The increase production increases the company’s labor costs.

Total costs A firm’s total costs combine its fixed and variable costs into the overall cost of operating at a particular rate of production.

Marginal Costs Marginal costs to a business measure the balance of costs and benefits from the decision to produce an additional unit of a good or service. For example, an automobile manufacturer wants to make an additional truck. The marginal cost of that truck refers to the materials, labor, and building costs of making it. At some point, the marginal cost of the next unit of production lowers profit. At some point the company should stop increasing production.

Cost-Benefit Analysis Cost-Benefit Analysis refers to whether it is worth the extra effort to produce more of something. Is it worth paying more employees, paying for more supplies, and just increasing the overall cost of something. Is the PROFIT going to be great enough? Is your benefit worth the extra cost?

Specialization Specialization takes place when people, businesses, regions, and countries concentrate on goods and services that they produce better than anyone else. Specialization improves Productivity. We specialize because we can make more money and it is more efficient.

Adam Smith Scottish philosopher and economist He helped develop the idea of the free market economy (we’ll talk about this next goal). He felt specialization would improve production and productivity.

Adam Smith

Division of Labor The division of labor is the breaking down of a job into separate, smaller tasks, which are performed by different workers. Division of labor is a form of specialization that improves productivity. Division of labor can make a worker more productive by repetition of the same job.

Division of Labor improves Productivity

The Assembly Line Assembly Line – it is a manufacturing process with interchangeable parts increase productivity. Technologies – technologies help the assembly line be more efficient. Robotics – robotics would be an example of new technologies. It is a process where robots put together a product on an assembly line. Many car companies use this. Automation – the process where machines replace human labor. Robotics would be an example of automation.

Robotics Creating a Car on the Assembly Line

Henry Ford’s Assembly Line

Modern-day Assembly Line

Henry Ford He was the founder of Ford Motor Company and the father of the modern assembly line. His Model T revolutionized transportation in the United States. Ford used Mass Production and created a cheaper car for Americans. Mass Production is the production of large amounts of products produced on the assembly line.

Henry Ford and the Model T The price of the Model T fell $950 to as low as $280, selling 15.5 million.

The 1908 Model T. Two forward gears, a 20 horsepower engine and no driver doors. They sold like hot cakes

Production Invention – any new product or idea created by someone. Innovation – any improvement upon someone else’s invention. Mass Production - the production of large amounts of products produced on the assembly line. Factory – industrial building where workers manufacture goods on a large scale.

Agribusiness Agribusiness is the generic term that refers to the various businesses involved in food production, including farming, seed supply, agrichemicals, farm machinery, sale of goods, etc.