Economic Decision Making
Economic Decision Making
ECONOMIC DECISION MAKING
Why can’t you always get what you want?
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.
Why Is What We Want Scarce?
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).
How Do We Satisfy Economic Wants?
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!
What Do We Give Up When We Make a Choice?
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.
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.