Economic Decision Making Ch. 2
Preview • Read Preview • Fill in the activity table • Answer these questions: • What decisions did you have to make in this exercise? • What constraints did you face when making these decisions? • For each decision you made about how to spend your time, what did you have to give up?
Share your responses with the class
You just experienced the problem of scarcity (having limited resources) to do and have everything you want. • Scarcity requires you to make decisions • In this chapter we will explore how scarcity requires individuals, businesses, and governments to make economic decisions that involve tradeoffs.
Notes • write this stuff down!
Scarcity • Wants exceed our resources • Resources are limited • Time • money • Goods and services are scarce b/c the resources needed to produce them, land, labor, materials, and machines- are scarce • Shortages- temporary • wars and natural disasters
How to Satisfy Economic Wants • Factors of production-land, labor, capital • Land resources- gift of nature • Labor resources- physical and mental activities • Capital- tools, machines, buildings, technologies used in production • Entrepreneurs
The Production Equation INPUTS=
The Production Equation • Outputs are the goods and services produced
Choices • People seek to maximize utility (benefit) when making decisions. • Need to make tradeoffs or alternatives • Opportunity cost is the value of the next best alternative. i.e.-Mick Jagger…music career or future utility of college degree • Marginal utility- one additional unit of a good or service • Diminishing marginal utility-as we get more of something the pleasure we derive from it tends to decrease
Measuring Gain and Loss • Production possibilities frontier • Used to calculate the opportunity cost of moving production from one point to another • Increases in productivity can shift the PPF outward
What makes a PPF shift? • Changes in Resource Availability • Changes in Stock of Capital Goods • Changes in Technology