Economic Decision Making Unit Two. Scarcity vs Shortages Goods- physical objects produced for sale Services-activities done for us by others The resources.

Economic Decision Making

Unit Two

Scarcity vs Shortages

• Goods- physical objects produced for sale• Services-activities done for us by others• The resources needed to produce these

things; land, labor, materials, and machines-are scarce

• Shortages- lack of something that is desired-due to fads, natural disasters, etc.

http://www.youtube.com/watch?v=OsQ_ROnNHIs

Scarcity vs Shortages

• Shortages are temporary; once the demand is met or the fad is over the shortage is over

• Scarcity will never go away; it is permanent. There will never be enough resources available to satisfy all of the wants of human beings

http://www.youtube.com/watch?v=OS_9A_EA30M

The Production Process• Inputs- the scarce resources that go into the production

process• Production equation is; Land + Labor + Capital= goods and services• Land, Labor, Capital are all considered factors of

production-resources used to create a good or service• Outputs- the goods and services which are produced • Entrepreneurship- the willingness to take the risks

associated with starting a business• Some economists believe entrepreneurship is the fourth

factor of production

Land• To economists land means all “the gifts of nature”- natural

resources• Perpetual resources- widely available and in no danger of being

used up; sunlight, wind.• Renewable resources- resources that with careful planning, can

be replaced as they are used; forests, fresh water, fish and game• Most metals can be recycled for use again and again• Nonrenewable resources- resources that once they are used,

are gone forever; oil, coal, natural gashttp://www.youtube.com/watch?v=woNnR4Ps0Iw&list=PLBEgyQ49zuIegSWCemPQWxYjP3GlFBfNe&index=9

Labor

• Labor- the time and effort people devote to producing goods in exchange for wages; includes both physical labor and mental activities

• Quantity of labor depends on a country’s population and people’s willingness to work

• Quality of labor depends on the skills of the people

Human Capital• Human capital-

knowledge and skill that people gain from education, on-the-job training, and other experiences

• Correlation between human capital and standard of living is strong but correlation between natural resources and standard of living is weak

• Japan has a higher standard of living than Nigeria because of Human Capital

Capital Resources

• Financial capital- money used to invest in stocks, bonds, real estate, or businesses to produce future wealth

• Physical capital- Tools, machines, and buildings used to produce goods and services

Entrepreneurship• Entrepreneurs are innovators, risk takers,

strategists, and sparkplugs. • They provide new ideas, energy, and

enthusiasm needed to turn ideas into realities

Productivity

• Productivity = output/input• Resources are scarce so in order to be productive

we must be efficient with the resources• You can increase productivity by increasing the

amount of output from the same inputs or you can increase the amount of inputs

• Improve the productivity of your current workforce, with technology or increased work ethic, or add to the numbers of workers at your business

Choices

• Everyone must make choices because of scarcity; individually and as a society

• Societies must choose to use their resources for guns (military goods) or butter (civilian goods)

• Opportunity cost- is the value of the next best alternative that you would have chosen instead of the choice you made

Decisions at the Margin• Marginal utility- the extra satisfaction or

pleasure you get from an increase of one additional unit of a good or service

• Law of diminishing marginal utility-marginal utility of something diminishes as we get more of it

• If you have so much that we start to not enjoy having an additional unit it can become negative utility

Production Possibilities Frontier

• PPF- is an economic model in the form of a line graph that shows how an economy might use its resources to produce two goods

• Economic efficiency- is the result of using resources in a way that produces the maximum amount of goods and services

• PPF “shift to the right”= economic growth• PPF “shift to the left”= economy shrinkingTurn to page 31 in your text book