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Presentation on theme: "ECONOMIC DECISION MAKING"— Presentation transcript:


2 Objectives: Explain how unlimited wants and scarce resources influence decision making. Distinguish the goods and services, factors of production, and tradeoffs visible in common places and everyday situations. Evaluate tradeoffs in and determine opportunity costs of various decisions. Analyze and interpret production possibilities frontiers. Apply the economic way of thinking to their own lives.

3 Why Is What We Want Scarce?

4 We can’t get everything we want because there is a limited amount of resources to fulfill our wants.
All goods (physical objects) and services (activities provided by others) are scarce because the resources needed to produce them are scarce. Scarcity and shortage are not the same! A shortage is a temporary condition that occurs when there is less of a good or service available than people want at the current price. Scarcity is the concept that all resources are ultimately limited (finite).

5 Click on Link Scarcity Explained

6 How Do We Satisfy Economic Wants?

7 The productive resources that go into producing goods and services are called factors of production. These inputs make up the production equation: Land + Labor + Capital = Goods and Services Land resources are gifts of nature such as air, soil, minerals, water, and plants. Labor resources include the physical and mental activities of human beings that go into producing goods and services. HUMAN RIGHTS! Capital resources include the tools, machines, buildings, and technologies that are used in the production of goods and services. ** ENTREPRENEURS combine land, labor, and capital to produce goods and services. They often supply vision, take risks, and provide the drive needed to turn ideas into realities. HUMAN SPIRIT!

8 Click on the Link: Factors of Production

9 What Do We Give Up When We Make a Choice?

10 People seek to maximize their utility (satisfaction or benefit) when making decisions. This requires them to consider tradeoffs, or alternatives among choices. Businesses and societies also face tradeoffs when making decisions. An opportunity cost of a decision is the value (in time, money, etc.) of the next best alternative. In other words, it is the cost of a decision. What you “lose when you chose.” People tend to make decisions based on their marginal utility, or the extra satisfaction they gain from one additional unit of a good or service. Most goods and services have diminishing marginal utility because as we get more of something, the pleasure we derive from it tends to decrease.

11 How Can We Measure What We Gain and Lose When Making Choices?

12 How Can We Measure What We Gain and Lose When Making Choices?
A production possibilities frontier (PPF) is a graph that shows how an economy might use its resources to produce two goods. A PPF is used to calculate the opportunity cost of moving production from one point to another. Every point on a PPF represents an efficient use of resources. The area under the curve represents an attainable but inefficient use of resources. Increases in productivity, a measure of the output of a system, can shift the PPF outward.

13 Click on the Link: Opportunities, trade-offs and PPF explained.

14 Key Terms Scarcity Tradeoffs Opportunity costs Shortage
production possibilities curve

HOW DO YOU KNOW WHEN THE PRICE IS “RIGHT”? Objectives: Analyze the relationship between quantity demanded and quantity supplied in determining prices in a market economy. Create a demand and supply schedule and graph a demand and supply curve to determine an equilibrium price. Explain the causes and effects of shortages, surpluses, and government enforced price controls. Analyze and graph the change in equilibrium quantity as events affect demand and supply.


17 In a perfectly competitive market, demand and supply work together to determine prices.
Direct and indirect communication between consumers and producers drives prices to a market equilibrium point at which the quantity demanded and quantity supplied are equal. On a graph, the equilibrium point is the point of intersection of the demand and supply curves. Equilibrium price can also be described as the market-clearing price, or the “right” price. At this, both consumers and producers are satisfied.


19 When prices are set above or below the equilibrium price, disequilibrium occurs: quantity demanded no longer equals quantity supplied. Equilibrium quantity, as determined by the market equilibrium point, is disrupted. When prices are too low, excess demand leads to shortages. When prices are too high, excess supply leads to surpluses. Adjusting prices can restore equilibrium.


21 To analyze how an event will affect market equilibrium, ask yourself these questions:
Does the event affect market demand, supply, or both? Think about the factors that shift demand and supply in Chapter 5. Does the event shift the demand or supply curve to the right (increase) or to the left (decrease)? What are the new equilibrium price and quantity? How have they changed as a result of the event?

22 Click on the Link Equilibrium Explained

23 Key Terms Supply Demand Equilibrium


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