Chp. 2: Economic Decision
Making
Objectives
p. 012
In the course of reading this chapter and participating in the classroom activity,
students will
a) explain how unlimited wants and scarce resources influence decision
making.
b) distinguish the goods and services, factors of production, and tradeoffs
visible in common places and everyday situations.
c) evaluate tradeoffs in and determine opportunity costs of various decisions.
d) analyze and interpret production possibilities frontiers.
e) apply the economic way of thinking to their own lives.
Preview
p. 002
It is Friday night. Your only chunk of free time all weekend is tonight from 6:00 to 11:00.
Before deciding how you will spend this time, consider these factors:
 You have $50 to spend.
 You have an economics test on Monday.
 This is the last football game of the season.
 It is your mother’s birthday.
 Someone you like has asked you out on a date.
 Your favorite band is in town tonight.
Fill in a table like the one below showing how you plan to spend your time. Create your
own activities or choose from the list of possible activities. If you choose an activity from
the list, use the given time and price.
Possible Activities
 Football game: 3 hours, $5
 Dinner: 2 hours, $20 per person
 Movie: 2 hours, $10 per person
 Concert: 4 hours, $40
 Study for test: variable time, $0
 Hang out at friend’s house: variable time, $0
 Work at job: variable time, earn $10 per hour
 Family time: variable time, $0
Preview
Time
Activity
p. 002-3
Price
Opportunity Cost
6:00pm
7:00pm
8:00pm
9:00pm
10:00pm
1. What decisions did you have to make in this exercise?
2. What constraints did you face when making these decisions?
3. For each decision you made about how to spend your time, what did you have to
give up?
Why is What We Want Scarce?
p. 003
1. Why can’t we have everything we want? 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.
Why is What We Want Scarce?
p. 003
2. What is the difference between a shortage and scarcity? 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.
Why is What We Want Scarce?
p. 003
3. What are some of the causes of shortages? Wars, prices, fads,
media craze, natural disasters, changes in productivity
Shortage or Scarcity?
p. 003
1. You buy a Babe Ruth rookie baseball card for $500,000.
2. You have to take the bus to school because your mom and
dad have the cars
3. You have to buy a Kiwi Strawberry smoothie on Friday
instead of Peach
4. You pay over $500 for an original Nintendo gaming system.
More Shortage v. Scarcity
5 Goods You Wish You Had
1.
2.
3.
4.
5.
What is keeping you from these goods?
p. 003
How Do We Satisfy Economic Wants?
1. What are factors of production? 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
p. 004
How Do We Satisfy Economic Wants?
p. 004
a. Land Resources “Gifts of Nature”
 Perpetual – sources that won’t run out EX – sunlight, wind
 Renewable – sources that can be replaced as they are used
EX - forests, fish,
 Nonrenewable – once these sources are used, they are
gone forever EX – fossil fuels, natural gas, coal
How Do We Satisfy Economic Wants?
p. 004
b. Labor Resources
 The time and effort people devote to producing goods (could
be physical(planting trees, building houses) or mental
(programming games, writing legal briefs)
How Do We Satisfy Economic Wants?
p. 004
c. Capital Resources
 physical capital (also known as real capital) – the manmade
goods, such as tools, which are used to produce other
goods (tools, machines, buildings, screwdrivers,
supercomputers, factories, roads, airports, etc.)
 Human capital – the skills and knowledge a person has
acquired through experience and/or education (take away
everything from a person and just leave them with)
How Do We Satisfy Economic Wants?
p. 004
2. 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.
Entrepreneurs + (land + labor + capital) = goods and services
Factors of Production
p. 004
What Do We Give Up When We Make a
Choice?
Can create a decision matrix to help you decide
p. 005
1. People often have to make tough decisions to maximize the
utility of their decisions
a. Utility – the satisfaction or gain made from a decision
b. Usually difficult because we don’t have enough information
and cannot predict the future
What Do We Give Up When We Make a
Choice?
Can create a decision matrix to help you decide
p. 005
2. Opportunity Cost – what it cost you to give up the next best
option Whether you have 2 alternatives or 200, the opportunity
cost is the next best option, this is really a personal thing
Go back to the Preview on page 2. Write in
the opportunity cost for each activity you
picked.
What Do We Give Up When We Make a
Choice?
Can create a decision matrix to help you decide
p. 005
3. Marginal Utility – the extra pleasure/satisfaction you get with
one more of something
4. Negative Utility – when one more of something actually does
not bring you happiness
5. Law of diminishing marginal utility – the more you do/have of
something, the marginal utility decreases until it becomes a
negative
How Can We Measure What We Gain and
Lose When Making Choices?
p. 005
1. A production possibilities frontier (PPF) is a graph that
shows how an economy might use its resources to produce two
goods.
How Can We Measure What We Gain and
Lose When Making Choices?
2. A PPF is used to calculate the opportunity cost of moving
production from one point to another.
p. 005
How Can We Measure What We Gain and
Lose When Making Choices?
p. 005
3. Every point on a PPF represents an efficient use of resources.
The area under the curve represents an attainable but
inefficient use of resources. The area above the curve
represents an unattainable goal based off current resources.
How Can We Measure What We Gain and
Lose When Making Choices?
4. Increases in productivity, a measure of the output of a
system, can shift the PPF outward.
p. 005
PPF Curve Practice
p. 006
PPF Curve Practice
p. 006
A
B
C
D
E
PPF Curve Practice
p. 006
1. What is the opportunity cost of increasing wheat production by 200 pounds by
moving production from Point B to Point C?
2. What is the opportunity cost of increasing wheat production by 200 points by moving
production from Point C to Point D?
3. How would the line change if they found a way to produce more wheat? Draw it on
the graph with a different color.
4. How would new computer technology affect the line? Draw it on the graph with a
different color.
PPF Curve Practice
3. How would the line
change if they
found a way to
produce more
wheat? Draw it on
the graph with a
different color.
4. How would new
computer
technology affect
the line? Draw it on
the graph with a
different color.
p. 006