UNIT 2: The Choice is Yours! Basic economic concepts, choices, rational decision making, investment in education/training, etc

Unit 2 standards SSEF1 The student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments. a. Define scarcity as a basic condition that exists when unlimited wants exceed limited productive resources. b. Define and give examples of productive resources (e.g., land (natural), labor (human), capital (capital goods), entrepreneurship). c. List a variety of strategies for allocating scarce resources. d. Define opportunity cost as the next best alternative given up when individuals, businesses, and governments confront scarcity by making choices. SSEF2 The student will give examples of how rational decision-making entails comparing the marginal benefits and the marginal costs of an action. a. Illustrate, by means of a production possibilities curve, the tradeoffs between two options. b. Explain that rational decisions occur when the marginal benefits of an action equal or exceed the marginal costs.

Unit 2 standards (continued) SSEF6 The student will explain how productivity, economic growth, and future standards of living are influenced by investment in factories, machinery, new technology, and the health, education, and training of people. a. Define productivity as the relationship of inputs to outputs. b. Give illustrations of investment in equipment and technology and explain their relationship to economic growth. c. Give examples of how investment in education can lead to a higher standard of living. SSEPF1 The student will apply rational decision making to personal spending and saving choices. a. Explain that people respond to positive and negative incentives in predictable ways. b. Use a rational decision making model to select one option over another. c. Create a savings or financial investment plan for a future goal.

Factors of Production (Productive Resources) 4

GPS SSEF1 The student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments. Define and give examples of productive resources (e.g., land (natural), labor (human), capital (capital goods), entrepreneurship). 5

Factors of Production What went into making this? 6

What went into this? Rubber (from Malaysia) machines metal Someone who put all of this together. wood graphite 7

4 Categories of Productive Resources (Factors of Production) LAND LABOR CAPITAL ENTREPRENUERSHIP Natural, renewable resources wood, rubber, graphite, land, animals Human resources, people MENTAL and PHYSICAL A produced good used in the production of another good Machines, computers, buildings, etc The person or group responsible for putting the other 3 together to produce something 8

Opportunity Costs

Opportunity Costs OPPORTUNITY COSTS: the value of the NEXT BEST alternative given up when a choice is made NEXT BEST is key, the cost is not everything you give up Opportunity cost is not always money

Opportunity Costs Examples Mr. Cannon really wants BOTH goods: $3,500 $1,000

Opportunity Costs Examples He decides to spend his money on: $3,500 What was the price he paid? What was his opportunity cost?

Opportunity Costs DVD set of a TV Show($60) New outfit ($85) You have $100 to spend at the mall, rank the following in the order (1, 2, 3) you would purchase them. DVD set of a TV Show($60) New outfit ($85) New pair of shoes ($65)

Production Possibilities Curve (PPC)

GPS SSEF2 The student will give examples of how rational decision making entails comparing the marginal benefits and the marginal costs of an action. Illustrate by means of a production possibilities curve the trade offs between two options.

PPC a graph that shows the trade-off between two production options A visual representation of OPPORTUNITY COSTS 2 Assumptions: The company/country is ONLY producing the two goods on the graph The company/country desires to use ALL of their resources

PPC – an example 500 300 Suppose a country makes Pencils and Pens. If they devoted ALL of their resources to pencils, they could make 500 a day 500 300 …..to pens, they could make 300 a day

PPC – an example The country/business can produce anywhere on the line when they use ALL of their resources 500 Pencils Pens 300

PPC – an example If the country is producing ONLY pencils, and they want pens, they have to give up pencils. 500 450 Pencils The more pens they want….. 200 Pens 125 200 300

PPC – an example Y At point X, the country or business is producing below its possibilities and is INEFFICIENT 500 Pencils X At point Y, the country or business is producing beyond its possibilities and is NON-SUSTAINABLE. 200 Pens 75 300

Journal #5: Graph this country’s PPC After graphing, answer these questions: Assume the country is currently producing 180 of good A and 25 of Good B. If the country wants to make 75 of Good B, how many of good A must they give up? If the country was producing 150 of Good A and 30 of Good B, what could you conclude about the country’s economy? GOOD A GOOD B 200 180 25 150 50 100 75 110

Productivity and Investment

GPS Define productivity as the relationship of inputs to outputs.

Productivity We measure productivity as the relationship of inputs to outputs For a business it’s the cost of all their resources compared to their revenue For a country it’s the cost of all of their resources as compared to their GROSS DOMESTIC PRODUCT (GDP)

Improving Productivity Increased Capital More factories, tools, machines, etc Improve technology Faster machines, multi-tasking devices, machines with larger capacity Train/educate workers Specialization, new techniques, ability to USE technology Improve entrepreneurship Better organization of resources, motivational tools, leadership, worker morale 25

Headlines HEADLINE 1: WHIRLPOOL FACTORY INCREASES PRODUCTIVITY What are some steps the Whirlpool Factory could have taken to increase productivity? How could this increase in productivity benefit the workers? HEADLINE 2: U.S. PRODUCTIVITY RISES RAPIDLY FOR 6TH CONSECUTIVE QUARTER How can rising productivity benefit workers? Producers? The nation? Could there be some disadvantages of increasing productivity, at least to some people? HEADLINE 3: PRODUCTIVITY LAGS FIRST THREE QUARTERS OF 93 Why is lagging productivity a problem for the nation, businesses, and individual workers and consumers?

Economic Growth

GPS Give illustrations of investment in equipment and technology and explain their relationship to economic growth. Give examples of how investment in education can lead to a higher standard of living.

Economic Growth For countries, we look at economic growth in terms of GROSS DOMESTIC PRODUCT (GDP) and GDP PER CAPITA GDP = dollar amount of all goods and services produced in an economy GDP Per Capita = GDP divided by the population What makes an economy grow?

Factors Affecting Economic Growth High Investment in physical and human capital Greater economic freedom lower taxes, fewer regulations, protecting property rights Strong Incentives to Save Competitive Markets Political Stability Free Trade

Historic examples Cotton Gin in America Before Cotton Gin: 1 man = 1 pound of clean cotton After Cotton Gin: 1 man = 50 pounds of clean cotton

Historic examples Assembly Line Before AL: .08 car frame in an hour (1913) After AL: .67 car frame in an hour (1914)

Wheat Harvesting (Bushels in 1 hour) Historic Examples Wheat Harvesting (Bushels in 1 hour) 1800 1900 2000 .26 .96 25

Literacy Rates Country Literacy Rate Bahamas 95.6% Australia 99% Bolivia 86% US Sudan 61% GDP per capita $25,000 $36,300 $4,000 $48,500 $2,200

Rank these countries Country C: Nigeria Country A: Argentina Population: 126,635,626 PerCapita GDP: $950 Literacy Rate: 57.1% Country A: Argentina Population: 37,384,816 PerCapita GDP: $12,900 Literacy Rate: 96.2% Country D: Russia Population: 145,470,196 PerCapita GDP: $7,700 Literacy Rate: 98% Country B: Japan Population: 126,771,662 PerCapita GDP: $24,900 Literacy Rate: 99% Country E: Singapore Population: 4,300,419 PerCapita GDP: $26,500 Literacy Rate: 93.5%

Economic Growth Not 1 magical thing, combination of several factors Capital Goods Consumer Goods Not 1 magical thing, combination of several factors Increasing overall productivity is key

Factors Affecting Economic Growth High Investment in physical and human capital Greater economic freedom lower taxes, fewer regulations, protecting property rights Strong Incentives to Save Competitive Markets Political Stability Free Trade

Different PPC graphs can show how different variables affect an economy.

Different PPC graphs can show how different variables affect an economy (continued). A natural disaster such as a hurricane has the effect of Case 1 on a local economy. Here, both capital (buildings and equipment) and labor are lost due to the calamity. Since the region’s production inputs are reduced, so too is its PPC, moving from A1 to A2. The region may recover over time, but the immediate effect of the disaster is to move the entire PPC inward. Conversely, consider a local area with a booming economy; people are moving there in droves (providing labor), and businesses are investing in the area to take advantage of the increased number of consumers and potential employees. This would lead to a condition illustrated in Case 2, where the entire PPC shifts outward.

Different PPC graphs can show how different variables affect an economy (continued). Now imagine a small town has just received a large economic development grant from the federal government. The amount of capital available to this economy has greatly increased while its labor pool remains unchanged, so a movement like that shown in Case 3 occurs. The new PPC, C2, shows how the investment will create an enhanced ability to produce capital goods. Lastly, increases in labor inputs (such as a higher number of college graduates) will lead to Case 4. Here, the boost to the labor force allows the PPC to shift from D1 to D2.

RATIONAL DECISION MAKING

Rational Decision Making Analyzing costs and benefits before making a decision MARGINAL thinking is key What is the cost/benefit of my NEXT decision Past decisions don’t matter this affects PRODUCERS AND CONSUMERS A rational decision is made when the marginal benefit is equal to or greater than the marginal cost

Costs and Benefits For producers, this is simply measured in dollars Marginal costs of the inputs vs. marginal revenue For consumers, it is trickier We measure benefits in terms of UTILITY How “useful” is the item or service We use “utils” as the measure for this

Another Example You purchased a ticket to see 10 minutes into the movie, you realize it is going to be horrible. DO YOU STAY OR LEAVE? Write down your answer and reason WHY.

RDM Example (cont’d) COST BENEFIT STAY Lost opportunity to do next best thing See end of movie Can discuss movie with others LEAVE Can’t discuss with others Won’t see ending Can do next best thing which may bring more satisfaction

Another example A person opens a business making sandwiches. He’s purchased a store and all of the food products, now he wants to hire some people. He decides to hire two people to start with and pay them $50 a day. His costs/benefits sheet for a month looks like this:

Rent/Food/Entrepreneurship = $750 1 Month Rent/Food/Entrepreneurship = $750 Worker # Cost Production Price/Sand 1 $750 250 sandwiches 5 2 Total Costs: 750+1500=2250 Total Output: 500 x 5 = 2500

Should he hire worker #3? Why? 1 Month Rent, Food, Entrepreneurship - $750 Worker # Cost Production Price/Sand 1 $750 250 5 2 3 200 4 100 Should he hire worker #3? Why? What about #4? Why?

What will be on the test? Factors of production Scarcity Define them Pick them from an example Productivity/Growth What causes it How do we measure it Rational Decision Making/Marginal Analysis What is marginal When do stop/start doing something Scarcity definition examples Opportunity cost Production Possibilities Curve What do they show? interpret points (below, above, moving from one point to another) DRAW ONE!!!!

Scarcity 51

Georgia Performance Standard SSEF1 The student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments. Define scarcity as a basic condition that exists when unlimited wants exceed limited productive resources. Define opportunity cost as the next best alternative given up when individuals, businesses, and governments confront scarcity by making choices. 52

Scarcity SCARCITY: a condition that exists when UNLIMITED needs/wants exceed the LIMITED available resources The central problem in economics, all things revolve around scarcity Must be a want/need for the item and a limited amount There are DEGREES of scarcity If there is a lot of something that no one wants, it is less scarce than something MANY people want 53

MORE SCARCE - Small quantity, many uses, high demand LESS SCARCE - Large quantity, few uses, low demand 54

Scarcity Situations Old books that, for 2 years, have sat on a shelf that reads “Free! Take One.” Oil in Saudi Arabia One book, 5 students needing to study the book for a quiz Diamonds Oil in England A $10 bill to a millionaire An MVP basketball player A copy of Mr. Cannon’s tests VHS Tapes to a 10 year old Knowledge of Economics 55

MORE SCARCE - Small quantity, many uses, high demand LESS SCARCE - Large quantity, few uses, low demand Old books that, for 2 years, have sat on a shelf that reads “Free! Take One.” Oil in Saudi Arabia One book, 5 students needing to study the book for a quiz Diamonds Oil in England A $10 bill to a millionaire An MVP basketball player A copy of Mr. Makaya’s tests VHS Tapes to a 10 year old Knowledge of Economics 56

Sample Questions for Unit 2 1 Opportunity cost is BEST described as the A most expensive resource used in production B sum of all production costs C value of the next best alternative forgone when a choice is made D monetary value of all alternatives forgone when a choice is made

Answer to 1 1. Answer: C Standard: Scarcity and opportunity cost Opportunity cost is the value of the next best economic choice you did NOT make. Choice D is the sum of all possible opportunity costs, but opportunity costs are not added up. Only the best alternative forgone, choice C, counts as the opportunity cost.

2 Use this graph to answer the question.

What BEST explains the shift of the production possibilities curve from B1 to B2? A improvements in agricultural technology B inflationary increases in process C higher costs of producing corn D higher costs of producing wheat

Answer to 2 2. Answer: A Standard: Investment and economic growth An outward expansion of a production possibilities frontier means greater productivity. One way greater productivity can be achieved is by improving technology.

Question 3 3 Alex and Dylan mow and trim lawns. Currently, each man mows and trims a lawn by himself, but the process takes a long time. They would MOST likely improve their efficiency if A Alex and Dylan mow a lawn and then trim it together B Alex mows a lawn while Dylan trims the same lawn C Alex trims Dylan’s lawn while Dylan trims Alex’s lawn D Alex and Dylan reduce the number of lawns they mow and trim

Answer 3 3. Answer: B Standard: Benefits of specialization One of the best ways to improve efficiency is to specialize, which means each person in a production process concentrates on a specific task. Choice A would still require each man to mow and trim, while choice C simply changes the lawn each man is trimming. Choice D, on the other hand, reduces the total number of lawns they mow but does not improve the efficiency with which they complete their task. Only choice B would be a specialization of labor. In this case, Dylan now does one task in the production process (trims) while Alex does another task (mows). According to economic theory, this specialization will make each man better at his respective task and reduce the time it takes to change from one task to another, thereby increasing their overall efficiency.