The Fundamental Economic Problem

What is Economics? Economics is the study of how we make decisions in a world where resources are limited. It is sometimes called the science of decision making.

Needs vs. Wants Needs are things we need for survival, such as food, clothing, and shelter. Wants are things we would like to have. vs.

What is the Fundamental Economic Problem? 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. Choose to Camp Out for an XBox 360, or Do Something Else

Three Basic Economic Questions that Society Must Answer Who? What? How?

What to Produce? MP3 Players Boombox OR Society must decide what to produce with its limited resources. For example, society may have to choose whether to produce goods for defense or services for poor people. MP3 Players Boombox OR

How to Produce? Assembly Line Model T Ford Society must decide how to produce. For example, should we accept more pollution from factories in exchange for greater output of products? Assembly Line Model T Ford

Are Electronics Produced For Whom to Produce? Society must decide for whom to produce. Who will receive the goods and services? In the United States, most goods and services are distributed through the price system. Are Electronics Produced for All Ages to Enjoy?

Economic 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.

Circular Flow Model

Economic Resources and Economic Decisions

Producing Goods and Services Economic output includes goods, or tangible products, and services—work performed for someone else.

Four Factors of Production Four factors of production are needed to produce goods and services: Natural Resources Labor Capital Entrepreneurs

Natural Resources Natural resources are all the gifts of nature that make production possible, such as land, rain, forests, and minerals.

Labor Labor is the nation’s workforce or human resources. It includes the physical and mental talents of the people who help produce goods and services. Factors such as population growth, education, and war affect the quantity and quality of labor.

Capital Capital, or capital goods, includes the tools, machinery, and buildings used to make other products. Capital goods are unique because they are themselves produced. Consumer goods satisfy wants directly; capital goods do so indirectly by aiding production of consumer goods.

Entrepreneurs Entrepreneurs are individuals who start new businesses, introduce new products, and improve management techniques. They are innovative and willing to take risks. They drive the economy because they use factors of production to produce new products.

Economic Decisions Influenced by costs

Trade-Offs Example: Exchange Money for Stuff Economic decision making requires that we take into account all the costs and all the benefits of an action. Economic choices involve trade-offs, or exchanging one thing for the use of another. Example: Exchange Money for Stuff

Go to work now or go to college?? 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. Go to work now or go to college??

Fixed, Variable and Total Cost Fixed costs are expenses that are the same no matter how many units of a good are produced. Variable costs are expenses that change with the number of products produced. If a business produces more, variable costs like raw material and wages will increase. Fixed costs plus variable costs equal total costs. FC + VC=TC

Marginal Cost =$50 One Extra Marginal cost is the extra cost of producing one additional unit of output. If it costs an extra $50 to produce one more bicycle helmet, the marginal cost is $50. =$50 One Extra

Marginal Benefit We usually do something because we expect to achieve some benefit. Marginal benefit is the additional benefit associated with an action.

Cost-Benefit Analysis Cost-benefit analysis is an economic model used to compare marginal costs and marginal benefits of a decision. You should choose an action when the benefits are greater than the costs. If costs outweigh benefits, you should reject the option.

Supply and Demand When you hear the terms supply and demand what do you think of? What does it mean? Have a class discussion.

Law of Supply What is the goal of the Nike Corporation? $$$ The goal is to make profit. How do they make profit? Hyperlink the Jordan or use the media file in the corner. Go to the Nike Pure J video. Why was this shoe released in September 2010? Why not February or March? (possible reason-back to school, more buyers) Why are there so many Jordans? (profit- able to keep the price high so more profit) As the price of a their shoes increase, the quantity of shoes made increases.

Profit….Profit…Profit How does Nike maximize their profits? 2010, $130.00 Make more shoes & increase the price!! 1985, $64.99 You can have a discussion on the other Jordan Brand Shoes and how the price for some special release Jordan’s are upwards to $300.00. Discuss why Nike charges these prices and how the law of supply drives the prices. As the price of the shoe increases the quantity made by Nike increases. = Law of Supply

As the price of a good increases the consumers demand decreases. Law of Demand As the price of a good increases the consumers demand decreases. Yikes, we can’t afford these shoes. We’ll have to buy something else. $130 $110.00 Talk to students about new products that come out, but they are unable to afford. Revisit the concept of tradeoffs in your discussion.

Equilibrium Price When the supply equals the quantity demanded. “I can’t afford this” Supply $ $ $ Profit, profit, profit The supply equals the quantity demanded! “Finally, I can buy it!” Point out the different parts of the supply and demand graph.

Examples With a partner determine the equilibrium price for each graph and define what equilibrium price is. #1 $3 #2 $1.50

Activity Create a cost-benefit analysis with a upcoming decision you must make. For example: deciding b/w two colleges, or a project for school, etc…