Transcript Scarcity and opportunity cost

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)
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.
a)
Define and give examples of productive resources
(e.g., land (natural), labor (human), capital (capital
goods), entrepreneurship).
Factors of Production

What went into making this?
What went into this?
Rubber (from
Malaysia)
machines
metal
Someone who
put all of this
together.
wood
graphite
4 Categories of Productive Resources
(Factors of Production)
LAND
LABOR
- Natural, renewable resources
- Human resources, people
-wood, rubber, graphite, land,
animals
-MENTAL and PHYSICAL
CAPITAL
- A produced good used in the
production of another good
-Machines, computers, buildings,
etc
ENTREPRENUERSHIP
-The person or group responsible
for putting the other 3 together to
produce something
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

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



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
PPC – an example
500
Pencils
The country/business can
produce anywhere on the line
when they use ALL of their
resources
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
125
200
Pens
300
PPC – an example
500
At point X, the country or
business is producing
below its possibilities and
is INEFFICIENT
Y
Pencils
200
At point Y, the country or
business is producing
beyond its possibilities and
is NON-SUSTAINABLE.
X
75
Pens
300
Journal #5: Graph this country’s PPC
GOOD
A
GOOD
B
200
0
180
25
150
50
100
75
25
100
0
110
After graphing, answer these questions:
1. 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?
2. If the country was producing 150
of Good A and 30 of Good B,
what could you conclude about
the country’s economy?
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

–
Improve technology

–
Faster machines, multi-tasking devices, machines with larger
capacity
Train/educate workers

–
More factories, tools, machines, etc
Specialization, new techniques, ability to USE technology
Improve entrepreneurship

Better organization of resources, motivational tools,
leadership, worker morale
Headlines

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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)
Historic Examples

Wheat Harvesting (Bushels in 1 hour)
1800
1900
2000
.26
.96
25
Literacy Rates
Country
GDP per
capita
Bahamas
Literacy
Rate
95.6%
Australia
99%
$36,300
Bolivia
86%
$4,000
US
99%
$48,500
Sudan
61%
$2,200
$25,000
Rank these countries
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•
•
•
Country A: Argentina
Population: 37,384,816
PerCapita GDP: $12,900
Literacy Rate: 96.2%
•
•
•
•
Country C: Nigeria
Population: 126,635,626
PerCapita GDP: $950
Literacy Rate: 57.1%
•
•
•
•
Country B: Japan
Population: 126,771,662
PerCapita GDP: $24,900
Literacy Rate: 99%
•
•
•
•
Country D: Russia
Population: 145,470,196
PerCapita GDP: $7,700
Literacy Rate: 98%
•
•
•
•
Country E: Singapore
Population: 4,300,419
PerCapita GDP: $26,500
Literacy Rate: 93.5%
Economic Growth
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)
STAY
LEAVE
COST
Lost opportunity
to do next best
thing
Can’t
BENEFIT
See end of movie
Can discuss
movie with others
discuss
Can do next best
with others
thing which may
Won’t see ending 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:
1 Month
Rent/Food/Entrepreneurship = $750
Worker #
Cost
Production
Price/Sand
1
$750
5
2
$750
250
sandwiches
250
sandwiches
Total Costs: 750+1500=2250
Total Output: 500 x 5 = 2500
5
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?
What will be on the test?

Scarcity
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What do they show?
interpret points (below,
above, moving from one
point to another)
DRAW ONE!!!!
–

Define them
Pick them from an example
Productivity/Growth
–
definition
examples
Production Possibilities
Curve
Factors of production
–
definition
examples
Opportunity cost
–

What causes it
How do we measure it
Rational Decision
Making/Marginal Analysis
–
–
What is marginal
When do stop/start doing
something
Scarcity
Georgia Performance Standard

a)
d)
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.
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
LESS SCARCE
- Large quantity,
few uses, low
demand
MORE SCARCE
- Small quantity,
many uses, high
demand
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
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
An
bill to a millionaire
MVP basketball player
A copy
of Mr. Makaya’s tests
VHS
Tapes to a 10 year old
Knowledge
of Economics
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.