1. Today’s Objectives We will…. You will…
Review Chapter 1 and the 7 economic principles
Discuss goods and what goes into production
Introduce the Production Equation
How to increase productivity
You will…
Understand how land, labor and capital create goods we purchase each day
Understand the importance of Entrepreneurs

2. Economic Decision Making
Chapter 2
Economic Decision Making

3. Why are goods scarce?
Make a list of 5 things you wish you had right now – it can be anything.
What is stopping you from having the goods you listed?
People are never TRULY happy with goods
Due to people’s unlimited wants – want more
Even those who have it all want things better or faster or bigger

4. Scarcity of Goods Goods (products) and Services are scarce
May not seem that way, but they all are
Scarcity caused by limited resources used to create those goods and services
There is nothing that we have an unlimited supply of - NOTHING
Money and wealth in the end do not matter
There will always be something you cant have

5. Shortages vs. Scarcity
What do you think is the difference between a “shortage” and “scarcity?”
Shortage – a short term deficit of a good
Always a temporary situation
Scarcity – the idea that all resources are limited and can be used up
Not a temporary problem
More of a countdown to how much is left

6. What Causes a Shortage? What do you think causes shortages?
Numerous causes for shortages
Wars,
prices,
fads,
media craze,
natural disasters,
changes in productivity
What are some examples of shortages you can think of?

7. What Causes a Shortage?
What are some examples of shortages you can think of?
Is there an immediate way to fix your shortage or is it a long term problem?

8. How We Satisfy Our Wants
Wants are satisfied through products/goods
We must PRODUCE those goods however
The Production Equation
2 sides to every equation; always must equal
Inputs = Outputs
Inputs – those resources put into a product
Referred to as the factors of production
3 groups – land, labor and capital
Outputs – goods and services produced by inputs

9. Inputs to an Output Think about all the things that go into a pencil
What are the requirements to build one (wooden)
Materials?
Labor?
Resources?
What can you assume about the Production Equation from the information you have for this activity?

11. The Production Equation
Production Equation then looks like this
Land + Labor + Capital = Goods and Services
These are the 3 MAIN factors of production
Entrepreneurship – the 4th factor of production
Entrepreneurs are those willing to take risk of funding or starting a new business
Can you think of any famous entrepreneurs?

12. Types of Resources: Land
Land resources – known as “gifts of nature”
Includes natural resources – ore, lumber, metals
Includes actual real estate land
Can also include solar, geothermal or wind energy
Known as Perpetual Resources – those that wont run out
Renewable Resources – can be replaced
Forests, fresh water, animals/fish, some metals
Nonrenewable Resources – not replaceable
Fossil fuels, natural gas, coal, etc.

13. Resources: Renewable or Not?
Decide if each resource listed is
RENEWABLE, NONRENEWABLE or PERPETUAL
Tides
Gold
Water
Coal
Trees
Sand
Corn
Sunshine
Tuna
Wind
Oil

14. Types of Resources: Labor
Labor – time/effort of a person towards a good
Consists of two types of labor
Physical Labor – actually using your body to produce
Mental Activity – writing legal briefs, comp programs, etc.
Quantity of labor depends on population and their collective desire to work

15. Types of Resources: Labor
Human capital – the knowledge and skill/ability a person has
There is a value to the skills a person has
What skills do you have that are valuable?
Human capital is extremely important
Higher human capital = higher productivity and pay that can be earned
Strong correlation b/w human capital and standard of living
How could you INCREASE your “human capital?”

16. Types of Resources: Capital
Two types of capital resources
Financial capital – money to purchase inputs
Most commonly thought of when referring to capital
Physical capital – tools, machines and buildings
Also known as capital goods
Capital goods come in many forms
Computers, screwdrivers, cars, etc.
Capital replaces the use of labor
Changes human capital because people need to be trained in these new machines, gaining human capital

17. Today’s Objectives – Day 3
We will….
Review the Factors of Production
Figure out how to calculate productivity
Create decision matrices
Graph the Production Possibilities Frontier.
You will…
Understand/be able to use the productivity equation
Be able to create a Decision Matrix
Be able to understand and graph and production possibilities frontier

18. What is Productivity?
Productivity is how quickly we are able to produce a given good or product
People are always looking to produce more from their scarce resources
How do we calculate productivity?
Productivity = Outputs / Inputs
Ex. 60 boards/tree = 600 boards/10 trees

19. Improving Productivity
Two ways to increase production
Find ways to decrease the inputs and keep outputs the same
600 boards from 9 trees
From new cutting style
Find ways to increase outputs from the same amount of input
650 boards from 10 trees
From more efficient saws

20. Improving Productivity
Situational Practice – use a partner to find a way to increase productivity by…
Situation 1: We have been given enough wood, lead and rubber to build 1000 full size pencils. How could we DECREASE the inputs and still get 1000 pencils?
Situation 2: We need to get more pieces of wood from the trees we cut down. How can we do that with the pattern we currently cut? Use visual given to help.

21. What is Utility?
People need to make tough decisions to have it benefit their lives
People want to be as best off as possible
Utility – satisfaction or pleasure gained from using a product or service or from an action
Buying a cheeseburger for $1 = full but not best burger ever
Also includes benefit from non pleasurable actions
Vaccinations keep people healthy but are unpleasurable

22. How to Maximize Utility
Maximizing utility is difficult
Never enough information to make perfect decision
Also tough to predict the future
How do you get the most out of what you have?
Dilemma – You have $40 for all your activities for a week. List what you would do each day.

23. Marginal v. Negative Utility
Marginal Utility – extra benefit of one more
Usually depends on how much you already have
1st one, great; 2nd okay; 3rd has no use – no utility
Law of Marginal Utility – as consumed good increases, marginal utility decreases
Negative Utility – one more actually hurts you

24. Tradeoffs & Opportunity Cost
Tradeoffs are made by individuals and societies to get to maximum utility
Guns v. Butter Tradeoff –
Should you pay for protection or food for your country
One maximizes security, one maximizes goods
Opportunity Cost – what it costs to give up the next best option
Making only trucks v. cars – lose the car sales

25. Measuring What We Gain/Lose
NOT POSSIBLE
Production Possibilities Frontier (PPF)–
Tells us the frontier of what an economy can produce
Shows the possibilities of making two goods
Also shows the potential tradeoffs
Frontier = the EDGE cannot go past
Production Possibilities Frontier means we cannot produce past this line CURRENTLY
Forces us to choose A or B
POSSIBLE

26. Measuring What We Gain/Lose
Measuring Efficiency – Show us where we are at peak efficiency
Nothing wasted
Can show is we are wasting
Measuring Economic Change –
Now lines made all the time
Shows effects of increased technology or growth/ shrinkage in economy
NOT POSSIBLE
Past the Frontier
WASTED RESOURCES
Below the
Frontier

27. Measuring What We Gain/Lose
Production Possibilities Curve/Frontier (PPC/PPF)
Shows the line of what could possibly be produced AT A GIVEN TIME
Curve also measures opportunity cost of decisions
Shows what is GAINED and LOST
Curve graphs both and looks to find the limit of each and the best possible mix
Multiple issues can cause a decision to be made
Can also cause decisions to change
Choose 2 products that can be produced
Wheat vs. Computer Chips
Resources can be used for either or both

28. Changes to the PPC/PPF Lines can change with new information
Lines can be affected on 1 side or both
Reasons for change could be
Increases in production techniques
Loss/Gain of technology
Loss/Gain of a resource
Increased Production of both ITEMS
Lost a RESOURCE to make as much of ITEM A

30. How would the line change if they found a way to produce more wheat?
How would new computer technology affect the line?