LESSON 2 . ; Our Economic Choices e with the In what ways do people cop’ problem of scarcity? You and your brother need new laptops for school, which starts next week. You both researched the models of new laptops and both decide to buy the same model. You go to an electronics warehouse store to buy the laptops. The store advertised a closeout sale on the brand and model of the laptops you and your brother want to buy. When you get to the store, the clerk tells you the specific model of laptop that was on sale has sold out. He shows you and your brother a new model that has more features than the model you wanted, and it is $75 more in price. What options do you and your brother have? Decide what you would do in these circumstances and explain your choice. . Buy the new model at $75 more in price b. Ask to see another model of laptop that is nearer in price to the model that was on sale Decide not to buy a laptop at a store and check into buying a laptop online d. Decide to go to another electronics store e. Ask to see the most inexpensive laptop the store sellsUNDERSTANDING CRAFT AND STRUCTURE 1. ANALYZING TEXT STRUCTURE Why does the author organize this section into four smaller sections? 2. DETERMINING MEANING The text about entrepreneurs states that they are “the driving force” inn economy. Using context Clues, explain the meaning of this expression, DETERMINING MEANING ‘As you learned in the previous lesson, in economics the word produce usually refers tothe action ‘of creating goods or services that can be sold or transferred to someone else. Using this information, restate the definition of the term: in your own words, DETERMINING MEANING Review the information about ‘What are some other examples of capital goods? ANALYZING KEY IDEAS AND DETAILS Read closely to learn about the choices producers must make, about production Possibilities and opportunity cost, and about the choices consumers make. Identify ‘ways choices can be made to cope withthe problem of scarcity List those ways ina chart ike this one THE CHOICES PRODUCERS MAKE GUIDING QUESTION Wy must producers make production choices? |thelps to think of our economy as being made up of two broad groups— Producers and consumers. Of course we also have government, but more on that later; let's turn our attention to producers first. Producers include all kinds of businesses, from individual artists who sell their creations at art shows to giant corporations whose annual revenue Is in {he billions of dollars. All of these producers have one thing in common: they all use what economists call “factors of production.” The factors of production, or resources required to produce the things we would like to have, are land, Capital, labor, and entrepreneurs, As shown in Figure 4.2, all four are required to produce goods and services. LAND 'n economics, land refers to the “gifts of nature,” or natural resources not Created by people. Land includes deserts, fertile fields, forests, mineral deposits, livestock, sunshine, ‘and the climate necessary to grow crops. Because a finite amount of natural resources are available at any given time, economists tend to think of land as being fixed, on limited supply. Changing world events and market speculation can easily affect the prices of limited natural resources such as oil and metals, Sometimes newer methods of production can be used to extract more resources out of the ground. For example, relatively new “fracking* techniques are used to recover natural gas locked in underground shale deposits, but the Natural gas was already there before the new mining methods were developed. CAPITAL ‘second factor of production is alta, sometimes called capital goods—the tools, equipment, machinery, and factories used in the production of goods ‘and services. Capital is unique because itis the result of production. A bulldozer, for example, is a capital good used in in a factory, it was the result of production invoh computers in your school that are used to also are capital goods, construction. When it was built Wving other capital goods. The Produce the service of education |In order to create a product, four factors of production are needed. INTEGRATING INFORMATION What four factors of production are necessary to bring clothing to consumers? Entrepreneur LABOR {A third factor of production is labor—people with all their efforts, abilities, and skills. This category includes all people except a unique group of individuals called entrepreneurs, whom we single out because of their special role in the economy. Historically, factors such as birthrates, immigration, famine, war, and. disease have had a dramatic impact on the quantity and quality of labor. ENTREPRENEURS A fourth factor of production isthe people responsible for much ofthe change and progress in our economy. These individuals are entrepreneur, sk takers in search of profits who do something new with existing resources, Entrepreneurs ae often thought of as being the driving force In an economy because they are the people who start new businesses or bring new products to market. Hemry Ford is one example of an entrepreneur His introduction of the moving assembly line in 1913 revolutionized the way cars were produced Steve Jobs was another entrepreneur who @AsGHREA, or dramatically changed the nature of, the personal computer, cell phone, and music distribution industries. What is Economics? 23sales Reseeeneer remnant) | ers roqes ae tat come fom nature, such as BOM h pane uses ptrshes and easels (cpa spends many hous creating tne (str nd motesthe efit to promote shed Os oneprercag, Giant corporations doth same ony ona much ger sale Even the serie calle eduction uses al our facors of production, The desks and ab equipment ved in schools are capital goods Teaches ana other employees prove the bor. Landincudesthe propery where tne, schools locate as well as the on ore and ber used to meke the buling Final, educational publsher ere envepreneus They ees the meters that eb teachers present the subject mater ANALYZING KEY IDEAS AND DETAILS FA CHECKING FOR UNDERSTANDING 1.SUMMARIZING Summarzethis 4, coy must producers luction choices? ee NSTRUCTING HYPOTHESES Why must producers make production choices Be sure to inclue information 2. INFERRING What would happen f one of he factors of production, suchas land, were ‘bout how opportunity cst missing? relates tothe production possBilies cone. 3. UNDERSTANDING CHANGE Wich factors of production are mos affected by advances in +2. CITING TEXT EVIDENCE technology? Review the section “Fully Employed Resources." What evidence inthis section best PRODUCTION POSSIBILITIES Supports the claim that point d cannot be reached? GUIDING QUESTION How does a production pessibilties cure iistrate the decisions ‘mode in an economy? Economists use the production possibilities curve, sometimes also called the frontier, to illustrate all Brot ee) possible combinations of output. A production Possibilities curve is a diagram that represents various combinations of goods and services an ‘economy can produce when all its resources are efficiently used. In the example in Figure 13, a mythical country called Alpha produces two ‘goods—cars and clothing, IDENTIFYING POSSIBLE ALTERNATIVES Even though Alpha produces only two goods, the country has a number of alternatives available to it, which is why the figure Is called a production possibilities frontier. For example, it could choose to comes Use all ofits resources to produce 70 units of cars ‘and 300 units of clothing, which is shown as point a Tina prudickon posses cone’ or Worsiec thors te In Figure 13. Or itcould shift some of its resources ferent combinations of two product that canbe produced ut of car production and into clothing, thereby if all resources ae fully employed. ‘moving output to point b. Alpha could even choose INTERPRETING GRAPHS Why can production only iakeplaceon to produce at point e, which represents all clothing or inside te trontier? ‘and no cars, or at point e, which is inside the frontier. Choosing an option inside the frontier «results in less than maximum production and Carsdoesn't fully use resources. Although Alpha has many alternatives, eventually it will have to settle on a single combination such as point a, point b, or any other Point on or inside the curve, because its resources are limited. FULLY EMPLOYED RESOURCES Al points that lie on the curve, such as a, b, and ¢, represent maximum ‘combinations of output that are possible if all resources are fully employed. To ilustrate, suppose that Alpha is producing at point a, and the people would like to move to point d, which represents the same amount of cars (70), but more Clothing (400). As long as all resources are fully employed at point a, there are ‘no extra resources available to produce the extra clothing. Therefore, point d cannot be reached, nor can any other point outside the curve. This is why the figure is called a production possibilities frontier—to indicate the maximum combinations of goods and services that can be produced. ot OPPORTUNITY COST People often think of cost in terms of dollars and cents. To an economist, however, cost means more than the price tag on a good or service. Instead, economists think broadly in terms of apportunity cost, the value of the next best alternative given up. For example, suppose that Alpha was producing at Point a and that it wanted to move to point b. This is clearly possible as long as Point b is not outside the production possibilities frontier. However, Alpha will have to give something up in return. As shown in Figure 1.4, the opportunity cost of producing the 100 additional units of clothing is the 30 units of cars given up. ‘As you can see, opportunity cost applies to ‘almost all activities, and it is not always measured in terms of dollars and cents. For example, you need to balance the time you spend doing homework and the time you spend with your friends. If you decide to spend extra hours on your homework, the opportunity cost of this action is the time that you cannot spend with your friends. You normally have a number of trade-offs available whenever you make a decision, and the opportunity cost of the choice you make is the value of the next best alternative that you give up. THE OPPORTUNITY COST OF IDLE RESOURCES If some resources were not fully employed, then it would be impossible for Alpha to reach its maximum potential production. Suppose that Alpha was producing at point b when workers in the clothing Industry went on strike. Clothing production would fall, causing total output to change to point e, The ‘opportunity cost of the unemployed resources, would be the 100 units of lost clothing production. DETERMINING MEANING To better understand the concept consider ‘each word separately. Opportunity refers to the existence of many separate choices. Cost refers to the money, effort, time, and other resources related to each of those ‘options. You can view the ‘opportunity cost of any decision as the resource you give up when you ‘choose one option instead of ‘another. Why do you think ‘economists use the word cost to describe this idea? Clothing When the production for one tem increases, the production of other tems decreases. INTERPRETING GRAPHS I Alpha is producing 300 units of clothing represented by Point a, and iti then decides to produce the amount of clothing at point, what would be the opportunity cost in cars? What is Economics? —-25.UNDERSTANDING CRAFT AND STRUCTURE 1. DETERMINING MEANING How does the meaning of the term trade-off elate to that of the term opportunity cost? 2. ANALYZING POINT OF VIEW According to the text, what point of view does the author hold on the relationship between consumer rights and responsibilities? What adjective does the author use to characterize appropriate ‘consumer behavior in regard to responsibilities? 5 Ws All Online! Production at pointe could also be the result of other idle resources, suey ! as factories or land that are available but not being used. As long as some resources are dle, the county cannot produce on its frontie-—which is anothe, way of saying that it cannot reach its full production potential. 4 CHECKING FOR UNDERSTANDING 1. DETERMINING CENTRAL IDEAS How does a production possibilities cure illustrate the different choices an economy can make? frontier be used to illustrate 2. INTERPRETING GRAPHS How can a production possi economic growth? 3. PREDICTING Suppose an entrepreneur developed a way to extract more valuable natural Fesources from a country’s land. How would this event affect that country’s production Possibilities frontier? THE CHOICES CONSUMERS MAKE GUIDING QUESTION Why is it important to evaluate trade-offs ond opportunity costs when making choices? {na world where “there is no such thing as a free lunch,” there are alternatives and costs to everything we do. Choices can be made by society as a whole, or by individuals in the society. Either way, the alternatives and thelr opportunity Costs are important, so it pays to examine these concepts closely. TRADE-OFFS Making the right decision, or at least the best decision from a limited group of alternatives, is not always easy. Every decision we make has its trad@-offs, or alternative choices that are given up in favor of the choice we select. To make the best decision, it helps to have a consistent strategy, or plan. For example, Suppose you have decided to spend some of the money you earned last ‘summer, but you have not decided how or on what to spend it. One way to help make a decision is to construct a model such as the decision-making grid in Figure 1.5, with the alternatives (choices) listed in the first column and the criteria (measures or conditions for judging) in the first row. 'fall of the alternatives have the same dollar cost, then all that remains to be done is to evaluate each one with a “plus” ifit satisfies the criterion, or with a “minus” if it does not. These evaluations may differ from one person to the. Next, but in the case of Figure 1.5, probably the best alternative is to buy a new computer because it satisfies more criteria than any other alternative. The decision-making grid is a good way to analyze an economic problem because it forces you to consider a number of alternatives and the criteria you will use to evaluate the alternatives. Finally, it makes you evaluate each alternative on the basis of the criteria you selected, OPPORTUNITY COST FOR CONSUMERS Producers are not the only ones who face opportunity costs; these costs apply to consumers as well, Recall that the opportunity cost of doing something is1 A A A \ ey TC) eee Tee Ped Can be used mee cy one met ec Ae expenditure oo pees Po ey cer) Pao oe eo Ceo Sa Use the Decision-Making Grid to evaluate which choice you would ING mew gien ea eave ed @ covcmc eason ECONOMIC DECISION MAKING What are ‘some of the benefits of using this method to make choices? not measured in terms of dollars and cents. Instead, economists think of ‘opportunity cost as the next best alternative given up. The decision-making grid shows the opportunity cost of making a decision like buying a computer. The next best alternative use of time or money would be to buy a used motorcycle. Why? The purchase of a motorcycle is the second-best choice in terms of meeting all of the criteria given in the decision-making grid above. In contrast to the opportunity cost, which is the next best choice given up, the trade-offs are all of the other alternatives that could have been chosen, including going to the prom or taking a trip to Washington, D.C., with friends. Even time has an opportunity cost, and you cannot necessarily put a monetary value on it. The opportunity cost of reading this economics book, for example, is the history paper or math homework that you could not do at the same time. CONSUMER RIGHTS Ina world of giant corporations, it may seem as if the individual consumer is the “little guy” who often gets overlooked, Collectively, of course, consumers, as a group help decide WHAT producers should make, and therefore where country will be on its production possibilities frontier. For example, if consumers decide that they want more clothing and fewer cars, they will help move the economy from point a on the production possibilities curve in Figure 1.3 to point b. What is Economics? 27In 1962, President John F. Kennedy called on Congress to Give consumers | ANALYZING PRIMARY SOURCES some protection, He argued that all Americans were consumers, and that the 1. DETERMINING MEANING |_federal government had a responsibility to look out for consumers’ interests Given the context clues in this, Kennedy explained: excerpt, what do you think the | ‘meaning ofthe word exorbitant is a used by President Kennedy? 6CFortunate as we are, we nevertheless cannot afford waste in consumption any more than we can afford inefficiency in business or Government. If consumers are offereq inferior products, if prices are exorbitant, if drugs are unsafe or worthless, ifthe consumer is unable to choose on an informed basis, then his dollar is wasted, his health and safety 2. EVALUATING EVIDENCE Which reason given by Kennedy inthis excerpt best supports his ‘may be threatened, and the national interest sufers.Onthe other hand, increased efforts sauce leds to make the best possible use oftheir incomes can contribute mare to the wellbeing of ‘government must protect fA consumers? Why did you select most families than equivalent efforts to raise theirincomes, that reason? Jon F Kennedy, “Special Message to Congress on Protecting the Consumer Interest,” March 15,1962 Kennedy went on to request legislation by outlining the first four consumer DETERMINING MEANING rights listed below. President Richard Nixon later added the fifth consumer right: ‘The suffix -ism is used to form + The right to safety—protection against goods that are dangerous to life nouns that show the principles or and health ideas surrounding something, Use this sutfic to write a definition for + The right to be informed—to receive information that can be used for the word Feasoned choices and protection against fraud + The right to choose—the right to be Protected in markets where competition may not always exist + The right to be heard—the guarantee that consumer interests will be considered when laws are being written + The right to redress—the ability of Consumers to receive adequate payment ‘Include important details ond copies of receipts, quarantees, and Contracts to support your case. from producers if they are harmed by ‘Report the problem immediately. Do not try to fix a product yourself, thelr products because doing so may cancel the warranty. | These consumer rights were part of a movement called €6mSUR@HER that began in {the 1960s. The movement was an attempt to educate buyers about purchases they make and to demand better and safer Products from: | producers, ‘you need to contact the manufacturer in writing, type your letter or send an e-mail directly. Keep a copy. ‘Keep cool. The person who will help you solve your problem is probably not responsible for causing the problem, ‘Keep an accurate record of your efforts to get the problem solved. it CONSUMER ‘Include the names of people you have spoken to or written to ond ‘the dates on which you communicated. RESPONSIBILITIES The consumer rights listed above were Fesponsible for a number of laws that worked. INTEGRATING INFORMATION « toprotect consumers. At the same time, it In what ways do the actions of 4 Was recognized that consumers have the consumer relate to business 4 Fesponsibilities as well as rights, activities? These responsibilities are listed in || Figure 1.6 and basically require consumers to 28 Its All Ontine!behave ethically when dealing with producers and other merchants. For example, an ethical consumer is expected to do his or her homework when searching for @ product. This includes searching for the store with the lowest price and reading the full information about the product, including the operating instructions and other disclosure requirements, before making a purchase. The availability of online shopping makes many of these steps easier. For example, Is possible to search for the seller with the lowest price, and many sites even list comments by consumers who have already purchased the product. In addition, there are a number of sites that do comparison tests, and some even recommend preferred sellers to make purchasing something easier. CHECKING FOR UNDERSTANDING LINFERRING Why is it important to evaluate trade-offs and opportunity costs wien making choices? 2. PREDICTING How do you think our society would be diferent if cizens id not study economics? 3. IDENTIFYING EFFECTS What was an effec ofthe consumerism movement? LESSON 2 REVIEW Economic Reasoning 1. DETERMINING MEANING Explain what the term labor means Building History-Social Science Analysis Skills 2, IDENTIFYING CONNECTIONS During the Second Industria, Revolution, American entrepreneurs began to use new resources ‘and technology such as ol, steel, and heavy machinery to have ‘workers produce goods and services on a large scale. Which {actor of production did the Second Industral Revolution most affect? Explain your reasoning, 3. ANALYZING PERSPECTIVES Techniques such as mining and “fracking” use technology to extract valuable natural resources from the land, What trade-offs may encourage some Americans 10 oppose using these techniques? 4, ANALYZING ISSUES Consumers deal with the scarcity of items frequently, especially when a new electronics gadget fist comes on the market. Long lines at electronics stores occur, and people even camp out overnight infront ofthe stores to make sure they wil get one of those gadgets when the stores open, Do you agree that this is a good way to deal with the scarcity of ‘an electronics item? Explain your answer. Writing About Economics 5. EXPLANATORY WRITING Think about how scarcity affects Your school community. Wt a short report in which you formulate some ideas about how the school administration could deal with that scarcity. Collaborating 16. MAKING DECISIONS Work with a partner. You are entrepreneurs who have made a huge profit selling Product A. However, even though Product As stil selling well, you have an Idea to produce Product B. Product Ais selling 300 units, requires very ite in the way of resources, and is garnering a rice profit. Product 8 seems lke it would do well, but your ‘market research shows you probably would be able to sell only 100 units, To help you decide whether it's worth putting your resources toward Product B, work together to create a hypothetical production possibilities curve, and write a one-page report explaining why it would or would not be a good decision to produce only Product A orto produce both, What is Economics? 29