Period _______ Name ____________________________
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What is Economics? Chapter 1
II. Trade–Offs and Opportunity Costs
A. Objectives:
1. Understand that trade-offs are present whenever choices are made. 2. Discover that trade-offs are costs in the form of opportunities given up when one course of action is chosen instead of another. 3. Evaluate the opportunity cost that an economy faces when resources are allocated to the production of one good instead of another.
B. Trade-Offs among Alternatives
1. Trade-Off – __________________________________
a. All the things on the Thanksgiving table
2. Decision-Making Grid – an effective way to analyze an economic problem. It forces you to evaluate each alternative based on the criteria.
a. List and then evaluate alternatives when a decision must be made.
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Concept Cards
• What do you need to know to become a good decision maker? • How are trade-offs present whenever choices are made? • How do the rows and columns in a decision-making grid relate to
trade-offs and opportunity costs? • What are the advantages of using a decision-making grid to evaluate
alternatives? • How is opportunity cost involved when resources are shifted from the
production of one good to another? • On a PPF, if a company makes only two products (A and Y), how do
you figure out how much A you can make if you know how much Y you will produce?
• On a PPF, how do you figure opportunity cost?
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C. Opportunity Cost
1. _________________________________________________________________________________________________________________________________________
a. Spending money on CD’s instead of gas for your car. Your opportunity cost would be the gas in the car.
b. Mashed potatoes vs. stuffing
c. What is the opportunity cost of going to school?
(Independent practice)
When we make decisions, there are many things we give up. Our second choice, or what we didn’t get because of our decision, is called opportunity cost. Opportunity cost can be different for everyone. Opportunity cost is not always assessed in monetary terms, but rather in a way that is valuable to the person or persons involved. Look at the examples below and determine the opportunity cost of each choice for you. Then, fold the paper to hide your answers and switch with a classmate to find out how similar or different opportunity cast can be for each of us. Examples Opportunity Cost (Yours) Opportunity Cost (your colleague’s) Keeping money in a dresser draw Loss of interest at a bank No cash available to buy stuff
Making a basketball team ___________________________ ___________________________
Going to college ___________________________ ___________________________
Working two jobs ___________________________ ___________________________
Watching TV after school ___________________________ ___________________________
Leasing a new car ___________________________ ___________________________
Selling a family heirloom ___________________________ ___________________________
Credit card debt ___________________________ ___________________________
Spending $250 on a game system ___________________________ ___________________________
Buying a $5,000 used car ___________________________ ___________________________
Come up with three examples or situations of your own. Then switch with two classmates and have them do it. ___________________________ ___________________________ ___________________________
___________________________ ___________________________ ___________________________
___________________________ ___________________________ ___________________________
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D. The Production Possibilities Frontier (PPF)
A curve depicting all maximum output possibilities of two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.
As indicated on the chart above, points A, B, and C represent the points at which production of Good A and Good B is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods, and point Y demonstrates an output that is not attainable with the given inputs.
Connections: Among others, factors such as labor, capital, and technology will effect where the production possibility frontier lies. The PPF is also known as the production possibility or transformation curve.
In economics, the production possibility frontier (the PPF, also called the production possibilities curve (PPC) or the “transformation curve”) is a graph that depicts the trade-off between any two items produced. It indicates the opportunity cost of increasing one item's production in terms of the units of the other forgone. An additional trade-off exists between the reward (i.e. sales) of the produced good and the opportunity cost of that good. A choice is non-improvable if the direct reward is higher than the opportunity cost. There is an equilibrium between these two. The rules can be changed by changing the rewards however, which can lead to a Nash equilibrium.
It shows the maximum obtainable amount of one commodity for any given amount of another commodity, given the availability of factors of production and the society's technology and management skills. The concept is used in macroeconomics to show the production possibilities available to a nation or economy (corresponding roughly to macroeconomic notions of potential output), and also in microeconomics to show the options open to an individual firm. All points on a production possibilities curve are points of maximum productive efficiency or minimum productive inefficiency: resources are allocated such that it is impossible to increase the output of one commodity without reducing the output of the other. That is, there must be a sacrifice -- an opportunity cost -- for increasing the production of any good. All resources are used as completely as possible (without the situation becoming unsustainable) and appropriately.
An economy may have productive efficiency, but not allocated efficiency: the market and other institutions of social decision-making (such as government, tradition, and community
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democracy) may lead to the wrong combination of goods being produced (and the wrong mix of resources allocated) compared to what individuals would prefer.
Production Possibilities Curve
Point A in the diagram for example, shows that FA of food and CA of computers can be produced when production is run efficiently. So can FB of food and CB of computers (point B).
All points to the right of (or above) the curve are technically impossible (or cannot be sustained for long). Most real-world economies and firms are operating well inside the curve (i.e., inefficiently). In a situation where more than two commodities are being produced this two sector model is not adequate. It would show firms and economies well to the left of the curve for statistical reasons.
A move from point A to point B indicates an increase in the number of computers produced. But it also implies a decrease in the amount of food produced. This decrease is the opportunity cost of producing more computers.
Continue with overhead notes:
1. PPF - __________________________________________________________
____________________________________________________________________
2. The PPF is a diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed. (See page 16 for example)
a. Both sides of the graph need to be the same length
b. The curve starts/ends at the highest portion of production for each item.
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A
Situation: If some country/company uses all of their resources to their fullest, they will be able to produce/manufacture either 200 A’s or 400 B’s
(title) PPF of ______________
200 100 200 300 400
B X-axis or horizontal axis
1. If country/company makes 100 A’s, how many B’s can it make? (Draw it on the graph) 2. If … manufactures 200 B’s, how many A’s can it make?
3. What is the opportunity cost of manufacturing 175 A’s?
a. Figure out how many B’s you can make b. The opportunity cost is the amount you give up when you produce something else.
4. What is the opportunity cost of producing 300 B’s?
Y-a
xis
or
ve
rtic
al axis
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When all resources are used, the country of Electronica can produce either 1,300 cameras or 650 radios. 1. How many cameras can be produced when 200 radios are produced? _____________ 2. How many radios can be produced when 500 cameras are produced? _________ 3. How many radios can be produced when 1,100 cameras are produced? ______________ 4. How many cameras can be manufactured when 400 radios are produced? ________________ 5. How many radios can be manufactured when 750 cameras are produced? ______________ 6. How many cameras can be made when 175 radios are manufactured? ______________ 7. How many radios can be made when 450 cameras are manufactured? _______________
8. What is the opportunity cost of producing 200 radios? ___________ 9. What is the opportunity cost of producing 500 cameras? _____________ 10. What is the opportunity cost of producing 1,100 cameras? ______________ 11. What is the opportunity cost of manufacturing 400 radios? ___________ 12. What is the opportunity cost of manufacturing 750 cameras? _______ 13. What is the opportunity cost of making 175 radios? _______________ 14. What is the opportunity cost of making 450 cameras? __________
PPF of Electronica 1300
Cameras
650 Radio s
(You have two identical graphs. Use the first graph for questions 1-7, and the second graph for questions 8-14.) PPF of Electronica 1300
Cameras
650 Radios
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Situation: When all resources are fully used, Andersenland can have a maximum production of either 1,200 Furbies or 84 X-boxes. Use the diagram to answers the questions.
Fu
rbie
s
Production Possibilities Frontier
For Andersenland
1200 900 600
400 300 100 21 42 63 84 X-Boxes What would happen to the PPF if new technology made the production of X-Boxes faster and more cost efficient? Draw and label it. What would happen to the PPF if in Andersenland they found a new resource that makes it cheaper for them to make Furbies? Draw and label it.
1. How many X-Boxes can be produced when 900 Furbies are manufactured? ____ 2. How many Furbies can be produced when 30X- Boxes are manufactured? ____ 3. What is the opportunity cost of producing 20 X-Boxes? __________ 4. What is the opportunity cost of producing 700 Furbies? ___________ 5. Is it possible to manufacture 50 X-Boxes and 300 Furbies?(put an X at that intersection) ________ Are they reaching their full output capacity?_____ 6. What about 90 X-Boxes and 1100 Furbies? (put a O on that intersection) ______ Why? ______________________ ______________________________________________________________________________
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Lat
tes
Situation: When all resources are fully used, Uptown Cafe can have a maximum production of either 1200 Cappuccinos or 600 Lattes. Use the diagram to answers the questions.
Production Possibilities Frontier For Uptown Cafe
600 400 100 100 200 300 400 500 600 700 800 900 1000 1100 1200 Cappuccinos 1. How many Lattes can be produced when 450 Cappuccinos are manufactured? ____ 2. How many Cappuccinos can be produced when 350 Lattes are manufactured? ____ 3. What is the opportunity cost of producing 500 Lattes? __________ 4. What is the opportunity cost of producing 800 Cappuccinos? ___________ 5. Is it possible to manufacture 800 Cappuccinos and 200 Lattes? ___ (put an X at that intersection) Are they reaching their full output capacity?_____ Solve the situations so they can manufacture to full capacity. __________________________ 6. They can now make 1200 Cappuccinos or 1200 Lattes. What has happened? _______________________ __________________________________________________________________________________________Draw the results.
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Situation: Techno Technologists have a maximum production of 6500 Ipods or 260 mainframe computers. Fill in the blanks, and then use the diagram to answer the questions.
1. How many mainframes can be produced when 4500 Ipods are manufactured? ____ 2. How many Ipods can be produced when 75 mainframes are manufactured? ____ 3. What is the opportunity cost of producing 130 mainframes? __________ 4. What is the opportunity cost of producing 5000 Ipods? ___________ 5. Is it possible to manufacture 4000 Ipods and 100 mainframes? ___ (Put an X at that intersection) Are they reaching their full output capacity?_____ Solve the situations so they manufacture to full capacity. __________________________ 6. They now can make 6000 Ipods and 150 mainframes. What has happened? ___________________________________________________________________________________
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Come up with your own PPF. Create a situation, fill in the diagram and write 6 questions (2 output, 2 opportunity cost, 1 underproduction, and 1 change in production). Have the answers, but do not write them on the sheet. Situation:
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III. Basic Economic Concepts
A. Objectives:
1. Understand the difference between needs, wants, goods and services. 2. Explain the relationship among value, utility, and wealth. 3. Describe the importance of productivity. 4. Understand the importance of economics to the American free enterprise system.
B. Needs and Wants
1. Need-
a. Food, shelter, clothing, etc.
2. Want –
a. Pizza, hamburger, etc.
Directions: Circle if it is a want or underline if it is a need and be able to explain why. 1. car 2. computer 3. bed 4. house 5. toothbrush 6. toilet paper 7. shoes 8. winter jacket 9. food 10. milk 11. shaving cream 12. cosmetics 13. telephone 14. concert tickets 15. water 16. shower 17. furniture 18. money 19. pet 20.designer clothing 21. music 22. glasses 23. pony 24. love
Concept Cards
• What conditions must be present for something to have value? • Provide two example of wealth and explain how this shows wealth. • Why are services excluded when the wealth of a nation is measured? • Why is productivity so important? • How does education relate to the productivity of human capital • What is the difference between a factor market and a product market? • How do individuals contribute to the circular flow of economic activity? • How do companies contribute to the circular flow of economic activity? • How is economics important to the American free enterprise system?
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C. Goods, Services, and Consumers
1.
a) Sunshine or air
2. Economic products – ____________________________________________
__________________________________________________________________
3. Goods – a tangible commodity like a book, car, or compact disk player.
a) Consumer good –_________________________________________.
(1) Car, sweater….
b) Capital good –_____________________________________________
____________________________________________________________
(1) Printing press
c) Durable good_____________________________________________
____________________________________________________________
(1) Car, house, washing machine…
d) Non-durable good _________________________________________
____________________________________________________________
(1) Sponge, towel, socks…
4. Service – _____________________________________________________
a) Doctor, waitress, hairdresser…
b) ________________________________________________________ ___________________________________________________________
5. Consumers –___________________________________________________
a) Consumption –the process of buying, acquiring, using, or consuming.
b) Conspicuous consumption – _________________________________
____________________________________________________________
(1) A person may wear expensive jewelry.
(a) Bling bling.
(b)
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D. Value, Utility, and Wealth
1. Paradox of Value –______________________________________________
__________________________________________________________________
a) Value____________________________________________________
_____________________________________________________
b) In order for something to have value, it has to be somewhat scarce. Scarcity by itself is not enough to create value.
2. Utility –__________________________________________________________
a) To have value, something must be scarce and have utility. This is the solution to the paradox of value.
3. Wealth – ______________________________________________________
__________________________________________________________________
a) A nation’s wealth includes all such items as natural resources, factories, stores, houses, motels, theaters, furniture, clothing, books, video games, and even football.
E. Productivity
1. Production – ____________________________________________________
2. Productivity – ____________________________________________________
3. Specialization of Labor
a) Specialization –productive inputs do whatever task they are able to do best.
b) Division of labor – takes place when workers perform fewer tasks more frequently.
4. Human Capital – __________________________________________________
F. Economic Interdependence
1. Economic interdependence –
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2. The Circular Flow of Economic Activity
a) Market – location or other mechanism that allows buyers and sellers to deal readily in a certain economic product.
b) Factor markets – the markets where productive resources are bought and sold.
c) Product markets – markets where producers offer goods and services for sale.
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Buys scarce resources
INDIVIDUALS
FACTOR MARKET Malls Land Stores Labor Internet Capital Entrepreneurs
BUSINESS ORAGANIZATION Microsoft Dow Chemicals
PRODUCT MARKET GOODs SERVICES Washing machine waitress car doctor
Provide goods and services
Buy goods
and services
Sell scarce resources like labor
Spend money
Receive money
Pays for use of
resources- wages
Earn income
Circle Flow
of Economic
Activity
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Economic Laboratory- The Circular Flow of Economic Activity
Every person living in the United States has several, if not many, roles in the circular flow of the nation’s
economic activity. Read the following description of a day in the life of Andy and Abby Average. Follow the
instructions at the end of each paragraph to fill in the economic activity flow chart provided.
Andy and Abby, the Average twins, live in Anycity, USA. Both are working high school students, trying to make extra dollars for personal needs and wants. Write their names in the appropriate box on the flow
chart. Today is Friday, their favorite weekday. It is payday. They sleep later than usual this Friday, too late to fix breakfast, and have to run for the bus. They get off the bus two stops before the high school and pick up a quick breakfast at Bob’s Breakfast. Andy and Abby have already purchased one good and used one service. Write
the name of the good and the service in the appropriate box on the flow chart. Andy and Abby jog the six blocks from Bob’s to Anycity High School. At the entrance to the school, they separate for the day and agree on a meeting spot after school to go to work. At lunchtime, Andy buys lunch at the school’s cafeteria, while Abby and some friends go to the mall for lunch. Add Andy’s and Abby’s lunch
purchases in the appropriate box on the flow chart.
After school, the twins use one of the high school’s rental cars provide for working students. Students pay a flat monthly fee for this service, which covers maintenance, gas, and insurance. List the service in the
appropriate box on the flow chart.
Abby and Andy punch into work at Pat’s Pizza Place at 3 PM. They work for three hours, and then collect their paychecks from Pat. Before leaving, they buy a pizza for supper and then return the rental car to the school. Finally they catch the 7:30 bus home. Add the food that Andy and Abby purchased in the appropriate box
on the flow chart. Then, list on the chart all of the business organizations that Abby and Andy made
contact with during the day. Finally, write in the name of Abby’s and Andy’s factor market. Now, put yourself in the circular flow of economic activity. Complete the lists below then transfer the information to the economic activity flow chart. I consumed the following four things:
Goods Services _____________________________________ __________________________________________ _____________________________________ __________________________________________ _____________________________________ __________________________________________ Companies and businesses (four of them)
I buy goods/services from Pay me wages _____________________________________ __________________________________________ _____________________________________ __________________________________________ _____________________________________ __________________________________________
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INDIVIDUALS
FACTOR MARKET
PRODUCT MARKET
Circle Flow
of Economic
Activity
BUSINESS ORAGANIZATION
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G. Investing in the Future
1. Standard of living – the quality of life based on the possession of necessities and luxuries that make life easier.
2. The Road Ahead
a) Free enterprise economy- one in which consumers and privately owned businesses, rather than the government, jointly make the majority of the WHAT, HOW, and FOR WHOM decisions.
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Name __________________________ Period_______
Chapter 1 Readings
Chapter 1, Section 1 (do not have to do this section, but I included it so if you want to look it over you can-
you WILL hand in the other packets that we have done instead of section 1) Answer the following questions as you read Section 1,” Scarcity and the Science of Economics,” in Chapter 1
of your textbook.
1. What does TINSTAAFL stand for? Give a real life example of it. (2pts) _____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 2. Explain the fundamental economic problem and give a real life example of it. (2 pts) ______________________________________________________________________________________________________________________________________________________________________________ _______________________________________________________________________________________ 3. Explain and give a real life example of the four factors of production. (4pts)
a. ____________________________________________________________________________ b. ____________________________________________________________________________ c. ____________________________________________________________________________ d. ____________________________________________________________________________
4. Explain the three basic questions of economics. How does the United States answer these questions?
(6pts) a. ______________________________________________________________________________
______________________________________________________________________________ b. ______________________________________________________________________________
______________________________________________________________________________ c. ______________________________________________________________________________
______________________________________________________________________________
5. Why must a society face choices about the three basic questions? (1 pt) ______________________________________________________________________________________________________________________________________________________________________________ 6. Why entrepreneurs are considered the “driving force” in the American economy? (1pt) _______________________________________________________________________________________ 7. Explain the four key elements that define the scope of economics and give a real life example of each.
(8 pts) a. ______________________________________________________________________________
______________________________________________________________________________
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b. ____________________________________________________________________________________________________________________________________________________________
c. ____________________________________________________________________________________________________________________________________________________________
d. ____________________________________________________________________________________________________________________________________________________________
Chapter 1, Section 2 (Yes… You must do!)
1. Explain what a trade-off is and give an example from your life. (2pts) ______________________________________________________________________________________________________________________________________________________________________________ 2. What do you need to know to become a good decision maker? (1pt) ______________________________________________________________________________________________________________________________________________________________________________ 3. What are opportunity costs? Give an example from your life. (2pt) ______________________________________________________________________________________________________________________________________________________________________________ 4. What does a production possibilities frontier show? How is it used by economists? (2ps) ______________________________________________________________________________________________________________________________________________________________________________ 5. Explain how opportunity cost is involved when resources are shifted from the production of one good to
another. (1 pt) ______________________________________________________________________________________________________________________________________________________________________________ 6. Explain the reasons that all resources are not fully used by a country? Where does the point on the
graph fall? (3pts) ______________________________________________________________________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________________________________________________________________
7. Explain the reasons that a PPF can shift to the right on the graph. (3pts) ______________________________________________________________________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________________________________________________________________
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8. Situation: In Possibility Frontierland, there are very few laborers and an abundance of capital and
resources. Because of the shortage of labor they are limited to producing two products: radios and
cars. They have the ability to produce a maximum of 10,000 radios or 5,000 cars.
Complete a PPF using the information given above (put the car on the x-axis). Then answer the following questions. (8pts)
a. What is the opportunity cost of producing 3,500 cars?
b. What is the opportunity cost of manufacturing 6,000 radios?
c. How many radios will be produced when 2,000 cars are manufactured?
d. How many cars will be produced when 4,000 radios are produced?
e. What would happen to the PPF if the country began an aggressive guest worker program?
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Chapter 1, Section 3 (yes, you must do!)
Do NOT use the examples from the text/notes- you need to come up with your own examples!
1. Using examples, explain the difference between a need and a want. (2pts) ______________________________________________________________________________________________________________________________________________________________________________
2. What are economic products? (1pt) _______________________________________________________________________________________ 3. Using examples, explain the difference between a good and a service. (2pts) ______________________________________________________________________________________________________________________________________________________________________________ 4. Using examples, explain the difference between a consumer good and a capital good. (2pts ) ______________________________________________________________________________________________________________________________________________________________________________ 5. Using examples, explain the difference between a durable good and a nondurable good. (2pts) ______________________________________________________________________________________________________________________________________________________________________________
6. To what does the phrase paradox of value refer? (1pt) _______________________________________________________________________________________ 7. Using examples, what gives something utility? (1pt) _______________________________________________________________________________________ 8. Using examples, what gives something value? (1pt) _______________________________________________________________________________________
9. Provide and explain two examples of items that could be considered as wealth. (1pt) ______________________________________________________________________________________________________________________________________________________________________________ 10. How does education relate to the productivity of human capital? (1pt) ______________________________________________________________________________________________________________________________________________________________________________ 11. What term refers to the efficient use of productive resources? (1pt) ______________________________ 12. What is the difference between a factor market and a product market? (2pts) ______________________________________________________________________________________________________________________________________________________________________________
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