Economic Decision Making Chapter 2 Essential Question: Why can’t you always get what you want?

Wants and resources Wants are unlimited, resources are limited. Scarcity results. Goods – physical items (like shoes, bread, phone) are scarce Services – activities done for us (like a mechanic fixing your car, someone mowing your lawn) are scarce They are scarce because the resources to produce them are scarce (think leather-shoes, wheat-bread, plastic/glass/metal-phone, or labor for services) Shortages – less of a good or service is available than people want at a set price. Can be sudden (a fad or disaster). But, shortages are temporary. Scarcity, however, lasts forever.

Factors of production 4 factors of production – productive resources/things used to make or do something Land – “gifts of nature” Labor – work, skill, knowledge Capital – tools, machines, buildings, $? Entrepreneurship – person who has idea, invests, takes risk, reaps reward or suffers loss Together, these make goods and services Productivity = output / input Output is goods or service; input is a factor of prod.

2 ½ key terms Opportunity cost – what we give up when we make a decision Guns or butter? Marginal utility – what’s gained by adding one more unit Law of diminishing marginal utility – by adding one more unit, our gain gets smaller each time Think eating slices of pizza Graph is a hump Optimum is the top of the hump

PPF Production Possibilities Frontier – graph showing how an economy might produce 2 goods We operate along the curve, ideally Outside the curve is impossible Inside the curve is inefficient (we can do better) It’s used to measure opportunity cost