UNIT 2: The Choice is Yours!

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

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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.

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Factors of Production(Productive Resources)
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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).

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Factors of Production

• What went into making this?

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

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Opportunity Costs
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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

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Opportunity Costs Examples

• Mr. Cannon really wants BOTH goods

3,500
1,000
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Opportunity Costs Examples

• He decides to spend his money on

3,500
What was the price he paid? What was his
opportunity cost?
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Opportunity Costs

• 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)

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Production Possibilities Curve (PPC)
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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.

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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

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PPC an example

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

500
300
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PPC an example
The country/business can produce anywhere on the
line when they use ALL of their resources
500
Pencils
Pens
300
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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
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PPC an example
At point X, the country or business is producing
below its possibilities and is INEFFICIENT
Y
500
Pencils
X
At point Y, the country or business is producing
beyond its possibilities and is NON-SUSTAINABLE.
200
Pens
75
300
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Journal 5 Graph this countrys 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
  countrys economy?

GOOD A GOOD B
200 0
180 25
150 50
100 75
25 100
0 110
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Productivity and Investment
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GPS

• Define productivity as the relationship of inputs
  to outputs.

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Productivity

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

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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

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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?

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Economic Growth
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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.

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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?

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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

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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

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Historic examples

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

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Historic Examples

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

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

• Country C Nigeria
• 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

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Economic Growth

• Not 1 magical thing, combination of several
  factors
• Increasing overall productivity is key

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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

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

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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.

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RATIONAL DECISION MAKING
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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 dont matter
• this affects PRODUCERS AND CONSUMERS
• A rational decision is made when the marginal
  benefit is equal to or greater than the marginal
  cost

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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

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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.

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RDM Example (contd)
COST BENEFIT
STAY Lost opportunity to do next best thing See end of movie Can discuss movie with others
LEAVE Cant discuss with others Wont see ending Can do next best thing which may bring more satisfaction
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Another example

• A person opens a business making sandwiches.
  Hes 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

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1 Month
Rent/Food/Entrepreneurship 750
Worker Cost Production Price/Sand
1 750 250 sandwiches 5
2 750 250 sandwiches 5
Total Costs 75015002250
Total Output 500 x 5 2500
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1 Month
Rent, Food, Entrepreneurship - 750
Worker Cost Production Price/Sand
1 750 250 5
2 750 250 5
3 750 200 5
4 750 100 5
Should he hire worker 3? Why? What about 4?
Why?
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What will be on the test?

• Factors of production
• 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
• definition
• examples
• Production Possibilities Curve
• What do they show?
• interpret points (below, above, moving from one
  point to another)
• DRAW ONE!!!!

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Scarcity
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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.

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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

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MORE SCARCE - Small quantity, many
uses, high demand
LESS SCARCE - Large quantity, few
uses, low demand
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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. Cannons tests
• VHS Tapes to a 10 year old
• Knowledge of Economics

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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. Makayas tests

• VHS Tapes to a 10 year old

• Knowledge of Economics

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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

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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.

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2 Use this graph to answer thequestion.
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What BEST explains the shift of theproduction
possibilities curve fromB1 to B2?

• A improvements in agricultural technology
• B inflationary increases in process
• C higher costs of producing corn
• D higher costs of producing wheat

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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.

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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 Dylans lawn while Dylan trims
  Alexs lawn
• D Alex and Dylan reduce the number of lawns they
  mow and trim

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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.