Civics & Economics Goal 7 Economic Choices Contrary to popular belief, money does not grow on trees! Boosttwitter.com Goal 7: The learner will investigate how and why individuals and groups make economic choices. Objectives 7.01 Describe the basic factors of production such as land, labor, capital, and entrepreneurial skills and their impact on economic activities. 7.02 Explain how scarcity influences producers and consumers to make choices. 7.03 Compare examples of tradeoffs and opportunity costs of economic choices. 7.04 Analyze the impact on economic activities of specialization, division of labor, consumption and production increases. 7.05 Explain the impact of investment on human, capital, productive, and natural resources. 7.06 Compare and contrast how different economic systems address key economic factors. 7.01: Basic Factors of Production
Economics is the study of how people fulfill their wants and needs. Needs are things which are needed to live: food, shelter, clothes. Wants are things that a person would like to have. Things are pretty important. We have resources by which we get our wants and needs: renewable resources are things like water and timber which can be restored. Non-renewable resources, like oil, can not be restored. Once the oil is gone, it s gone! How can a renewable resource become non-renewable? At the heart of economics is the idea of productivity. This is the rate/measure of how fast a good can be produced. That makes sense, right? There are four basic economic questions that must be asked when considering productivity/needs and wants: WHAT to produce? HOW to produce it? HOW much to produce? For WHOM to produce it? These are essential questions for a big corporation, but also the vendor selling ice cream in the park. In our world, we have limited resources and this presents problems, so economics is often about making the right decisions-for both the producer (the one making the good/services) or the consumer (the one using the good/services). In our system, the goal is to get the highest profit per each item with the maximum amount sold! That s really what pricing is all about here in the United States! The North Carolina Department of Instruction wants us to know the four basic factors of production. These four factors are the things needed to make other things, but are not necessarily part of the product produced. Let s look at the four factors, right here, right now! C-capital- tools and equipment to make the thing. E-entrepreneurship-the one willing to RISK $ to coordinate the factors for the thing. L-Land-resources provided by nature that help create the thing. L-Labor-all human efforts that help produce the thing. The acronym CELL will help us remember the basic foundations of production, just like a cell is the basic foundation for life! 2
YUMMY! OR C E L L 3
7.02: Scarcity You can t always get what you want, but if you try sometimes you just might find you get what you need. Rolling Stones Another basic concept of economics is the idea of scarcity. Scarcity is the unavoidable condition in this world. We can never have all of our needs and wants satisfied. Oil has been used as an energy source for about 150 years, but there is only so much oil. It can t be reused in its crude form and once it is gone, it is gone! Oil is always scarce. Scarcity is a fact of life! There can also be shortages of oil. A shortage has to do with the link between the amounts the supplier supplies and the given price during a specific time period. A Real Example of Shortage: the OPEC Oil Embargo of 1973 7.03: Trade offs/opportunity Costs In October of 1973, OPEC (Oil Producing Exporting Countries), a mostly Middle Eastern oil cartel (group which sets prices and production highly illegal here in the United States.) ordered an embargo against the United States. An embargo is a refusal to sell goods. Now, look at the picture below. This is an overview picture of a gas station. What are all of the cars trying to do? The average retail price of gasoline rose from 38 cents to 55 cents a gallon! Because oil is already scarce and in short supply, people are willing to spend money in order to get what they want/need. How much is a regular gallon of gas today, 37 years after the embargo? $. As an item s scarcity shrinks, it becomes (more or less) costly. So, as we replace oil with other means of energy and the demand for oil diminishes, the price per gallon should go. The EOC will ask you questions about the differences between trade-offs and opportunity costs. Let s make sure we know the difference and then we will apply what we know: Go to pages 504-505 of Civics Today! TRADE-OFF OPPORTUNITY COST At the heart of this is the whole idea of individual choice. For each row, make an X on which you prefer: COKE PEPSI OTHER CHEVY FORD OTHER PAPER PLASTIC OTHER UNC NC STATE OTHER MTV VH1 OTHER 4
Choices are just that a choice made by me and each choice has a cost! Same is true of trade offs and opportunity costs... Opportunity cost is the next-best alternative, not all the possibilities Going to school, getting more sleep, working on an essay... First choice in the morning: Get up when the alarm clock goes off Alternative: Second choice in the morning: Get a shower Alternative: Third choice in the morning: Eat breakfast Alternative: O.K., so what are the trade-offs? What is the opportunity cost of your decision? OPPORTUNITY COSTS: What could you be doing instead of being here for this class? (List your alternatives here.) What is your opportunity cost for being here during this class session? Costs of Doing Business: Economists have created ways of measuring different costs and revenues. Costs are the total spent for goods or services including money and time and labor. Revenue is the money coming in! Turn to page 506 of Civics Today! Fill-in chart: Types of Costs Define it! Examples (at least two each) FIXED COST VARIABLE COST TOTAL COST MARGINAL COST Total Cost Total Cost xxxxxxxxx 5
7.04 Division of Labor and Production Back in the day, a tailor would raise sheep, sheer the sheep, spin the wool into thread, weave the cloth, make pants and then sell the pants to a customer. The tailor was responsible for all the parts of production. Today, it is rare that we see that kind of system. Production is easier, quicker, and cheaper now, more than ever before because of specialization and the division of labor. What is specialization? Who do you see if you have heart trouble? How about a leaky pipe?. What if you had roaches in your house? Who would you call? Specialization can refer to people, businesses, regions, or even countries that can make a product better than anyone else. It helps boost productivity! Division of labor The division of labor breaks down a job into small tasks performed by different workers. We see this everywhere, but the factory system uses division of labor as a way to boost productivity, too! Henry Ford... Super Genius! Henry Ford revolutionized the way people did business. He set up the modern assembly line where different workers specialized in different parts of the car. The Model T Ford was affordable to many Americans and it was because Ford kept costs low, production high and at the same time, increasing worker s wages! Remember, mass production is a way to keep costs low! A note about workers... Henry Ford invested in human capital, that is the sum total of a person s skills, abilities, and motivation. When workers make a quality product that the consumer wants, it benefits the business as well as the worker who gets higher pay. There are two types of worker, White collar and Blue collar. White collar workers use their brains for the most part and blue collars use their physical skills. There is a difference between skilled and unskilled workers, too. Skilled labor is the portion of workers in an economy that have specific, technical industry skills relating to business and the production of goods. Unskilled labor is the cheaper and less technical portion of the workforce that makes up a large part of an economy's labor market. Wage earners are paid by the hour. Salary workers work for a set amount of money. Create a T chart explaining the differences between a blue collar and white collar 6
7.05: Impact of Investment Question. How can businesses or workers increase productivity? Answer: through using and investing in resources wisely. These include the following: Human resources train workers on the latest gizmos! TRAINING is key! Capital resources make sure the things which produce things are in good repair. Natural resources don t take natural resources for granted. Use them wisely. Productive resources all of the elements mentioned above combined! To decide if the investment for a business is going to pay off, a company looks at the cost of investment versus the estimated future benefits. If Smart Boards are replaced with another technological tool, would Cumberland County Schools invest anymore time in training teachers? How about buying more Smart Boards? To estimate the costs of production, the U.S. government maintains the PPI, or the Producer Price Index. The PPI measures the changes in wholesale prices (what Faded Glory charges Wal-mart) for different goods. Here s a simple formula: Input and Output = maximizing profit Input: all the factors of production that go into the item/service Output: the amount of goods being made Is there ever a time when it is not worth producing just one more item? Law of Diminishing Returns is a law that says to continue after a certain level of performance has been reached will result in a decline in effectiveness. 7
In other words, making just one more of a good is going to cost more money than it is worth! The law is also good for us consumers. Let s say you love fresh strawberry ice cream. Your first strawberry cone tastes astonishing! Your second cone tastes good. The third ice cream cone makes you sick! The ice cream is variable as you can eat different amounts, but your stomach can only hold a certain amount! We call that a fixed amount. Let s Graph it! Is eating ice cream cone #3 worth it? Can you ever think of a time when we should ignore the law of diminishing returns? Why or why not? 8
7.06 Different Economic Systems: a Comparison The study of economics has not always been easy. In fact, different theories exist as to how to get the most out of a choice. In our system, we generally praise the free market. At the heart of this concept are the ideas of free enterprise and capitalism. The U.S. has elements of a market economy. This means that producers produce what they want and consumers consume what they want. But producers are mindful of the consumer because they want to make money on the goods they produce. This is called the profit motive. Free enterprise has many parts: 1. People are free to own property 2. People, not the government, own the means of production. 3. People are free to run any type of legal business 4. People have economic freedom of choice 5. People are free to compete 6. Under consumer sovereignty, the consumer is king of the market! 7. Businesses are allowed to make and keep profits 8. Voluntary exchange is the happy act of buyers and sellers wanting to transact business! Markets are where prices are set as the exchange takes place. Historically, these ideas started with Adam Smith, author of The Wealth of Nations, mentioned that a person, left on their own, would look out for their own self-interest. Because of this idea, a person would always seek the wisest economic choice. Smith mentions the invisible hand in which natural forces or an unseen force is at work. Some economists believe that government of a true market economy should have a policy of laissez-faire. This French term means that the government should not interfere with matters of business. The economy should be left to run itself. Laissez-Faire = HANDS OFF! Capitalism is an economic system in which the means of production and distribution are privately or corporately owned and development is based on profits gained. Our political system of democracy fits well with capitalism because both systems emphasize and value freedom. What is the most important element of capitalism? Should the U.S. government have a laissez-faire policy in American business? Why or why not? 9
The Keynesian Theory John Keynes was an economist who lived in the 20 th century, not that long ago. He believed that when times were economically hard, the central bank should expand the money supply. By putting more bills in people's hands, consumer confidence would return, people would spend, and the circular flow of money would be reestablished. Just that simple! To fight unemployment, the Fed traditionally expands the money supply. This creates more spending in the economy, which creates more jobs. (http://www.huppi.com/kangaroo/keynesianism.htm) Use the words increase or decrease in the following sentence: Keynes believed in public spending and taxes. This results in governments spending more than it has which is called deficit spending. There are other types of economies. Let s take a look: Traditional Economy: system in which decisions such as HOW, WHAT, and FOR WHOM are all made on the basis of customs, beliefs, religion, habits, etc. If Grandpa was a fisherman, then Dad is a fisherman, and you will be a fisherman. Because there is a lack of advanced goods, new technology or growth, the system keeps many in poverty and it discourages individual initiative. In the truest form of a command economy, the government makes all economic decisions. The government decides WHAT to produce, HOW to produce, and FOR WHOM to produce. Let s look: Government owns all/most property Government, not the people, own the means of production Government runs all businesses There is no economic choice There is no competition In command economy, the consumer takes what he can get! NO whining! Government takes any profit, if there is any to take! (low prices for consumers if there is anything to buy) No competition, no choice in products and goods are poorly made! Few nations have pure command economies; China, North Korea, and Cuba are examples of command economies. Political systems that work well with the command economy are communist and socialist nationstates. Karl Marx, author of the Communist Manifesto, connected the authoritarian-dictator style government to an equally oppressive economic system. Mixed economies blend both free market and command in the form of some government regulation or oversight. In a mixed economy, the means of production is usually owned by individuals, but the government guides and regulates the economy. Is the U.S. a command, mixed, or traditional economy? Using the information found in your textbook and the goal book fill-in the chart: Characteristics of a Free Market Economy Versus a Command Economy Free Market Economy Command Economy 10
Now, think!!! What is a major advantage a free market economy has over a command economy? Now think harder!! What is one advantage a command economy has over a free market economy? Questions Mr. Smith had planned to spend his Monday afternoon participating in a chicken wing eating contest, but he agreed to cover for the football coach s weightlifting class instead. What was Mr. Smith s opportunity cost for covering the football coach s class? Mrs. Murphy has the opportunity to do four things next Saturday night. She could go see the band; U2, go to a Hurricanes game, Watch a James Bond Marathon on SPIKE or write Growth tests for her Civics and Economics classes. She chose to go see U2. What were her trade-offs? Mr. Mach lost a bet to Mr. Britt. Because he lost the bet, Mr. Mach has to spend the weekend on a deserted island. He can only bring one item with him for the weekend. His choices were a gallon of water, a loaf of bread, a James Taylor CD, a Gameboy and the new Sarah Palin book. Although he needs water, he chose the loaf of bread. 1. What were Mr. Mach s trade-offs? 2. What was Mr. Mach s opportunity Cost? Label what type of factor of production each of the following is: a. Cotton: b. Weaver c. Robotic Weaver: d. Factory: e. Owner of the company: Label each of the following as white collar or blue collar: a. Auto Worker: b. Lawyer: c. Doctor: d. Computer technician: e. Landscape Artist/Architect: f. Groundskeeper: Which type of cost? (fixed or variable) Rent Electricity Refrigerator Hot dogs What are the four types of economic systems? 11