Economic Factors

Opportunity Costs• Economic choices involve tradeoffs

o A.K.A. – opportunity costs

• Definition: those things that economic choices make us give up o Every economic choice has alternativeso When an economic choice is made the

opportunity to choose the alternatives is losto Example: Using part of your paycheck to eat

dinner at a restaurant means you cannot use that money for a down payment on a house.

The True Cost of an Economic Choice• What the person is willing to

give up to obtain something

• Cost includes not only the money spent in buying the item or performing the preferred action but also the economic benefits, or utility, that the person did without because of the decision

Production & Consumption• Prices are a common cost that is set by a balance

of production & consumption

• Prices are determined by costs of business and an estimate of what consumers are willing to pay

• However, the price must allow for a profit

• They act like traffic signals directing the flow of economic activity to their most efficient use for producers want to increase profits and consumers want to decrease the impact on their income.

• Production: the supply of goods & services

• Consumption: the demand of consumers

Production & Consumption• Supply: the amount of goods or

services available at a particular priceo Ultimately determined by what the

market price iso Market price depends on amount

demanded and what suppliers are willing to produce

• Demand: measures what people are able & willing to buy at a given price

Incentives• Forms of encouragement

• Used by businesses to influence the economic decisions of consumers

• Typical incentives include:o Added benefitso Lower costs

• Examples:o Toys offered in kid’s mealso Frequent flyer programso Sales

Wants vs. Needs• Wants: things desired

• Needs: necessities for survival

• Both should always be ranked in their order of importance when making economic choices

• Needs generally rank higher than wants:o Food is more important than a movie

• Wants should also be prioritizedo Going to school is more important than junk

food

Immediate Gratification• Economic choices should always be

based on long-term benefits & costs

• Immediate Gratification: when people only think about short-term satisfactiono Choices are self-defeatingo Future costs may outweigh present

benefitso Example: using credit cards

irresponsibly: cost of debt outweighs satisfaction of purchases

Types of Business Costs• Fixed costs: business costs that do not

depend on the level of productiono Example: Rent

• Variable costs: depend on a firm’s level of productiono Example: Overtime pay

• Total costs: combination of fixed & variable costs into the overall cost of operating at a particular rate of production

Types of Business Costs• Marginal Costs

o Measure the balance of costs & benefits from the decision to produce an additional unit of good or service

• Marginal Cost of the Additional Unito Cost of the additional factors of production needed

to produce the unito Example: Auto Manufacturer wants to make an

additional truck Marginal cost refers to: materials, labor, building costs

that went in to making it Company stops increasing production when marginal

costs lower profits

Revenue • Price: the producer must determine the willingness

of consumers, or the demand, the total and marginal costs of the product, and the desired profit in determining the price.

• Once a projected price is determine the producer can estimate revenue in order to determine the profit.

• Total Revenue is the amount of money a business takes in from selling a good or service; price*amount sold=total revenue

• Marginal revenue is the additional revenue from selling one more unit

• Profit is then determine by subtracting total revenue from total costs

Division of Labor & Specialization• Concept originated with the

economist Adam Smith in the 18th century

• Division of labor breaks down a job into a series of specific tasks for maximum productiono Each worker focuses on one or a

few taskso Allows workers to practice and

perfect a particular set of tasks

Division of Labor & Specialization• Specialization: the

specific task and skills that an individual contributes to the division of labor

• Concentration on single tasks increases labor productivity

Division of Labor & Specialization• Assembly Line

o Uses division of labor and specializationo Example: automobiles are made on an

assembly line in a factory

• Mass Productiono Made possibly by the division of labor &

specializationo Low skilled workers use machinery to

produce large numbers of standardized products

Division of Labor & Specialization• Automation

o Use of technology and machinery to do the work of human beings

o Robotics: Recent development in automation

• Benefits of Automation: Increases productivity & lowers business costs

• Drawbacks of Automation: Puts people out of work

Human Capital• Definition: a person’s skills & ability

to be economically productive

• Some comes from natural talents & abilities

• Most comes from education & training

• Education & training is especially important in our current economy which depends heavily on innovation

Innovation• Definition: creates new inventions &

technologies used in business success

• Come from the machines to technology

• Contribute to economic growth

• Recent inventions or technological innovations with large economic impacts:o Computerso Virtual realityo Wireless networks

Workers• Total number of workers makes up the

nation’s labor force

• Categorized according to the kinds of jobs they perform and their skill levels

• White-collar workers: named for the white dress shirts they used to wear – typically office workers

• Blue-collar workers: named for the blue work shirts factory workers used to wear – jobs that involve manual labor

Workers• Skilled workers: have jobs that require

special training, abilities, and knowledgeo Examples: surgeons, pilots, plumbers

• Un-skilled workers: perform jobs that do not require special trainingo Examples: picking crops, working on

an assembly lineo Usually less pay and offer fewer

benefits

Business Organizations• Allow people to combine capital and

enterprise to do business for profit

• Come in different forms:o Sole proprietorshipo General partnershipo Limited-Liability partnershipo Corporation

Business Organizations• Sole Proprietorship

o Single ownero Owner takes all risk and all profit

• General Partnershipo Form through an agreement among

the ownerso Each partner is fully liable for all

business debtso Partners decide together what to do

with profits

Business Organizations• Limited-liability partnership:

o Must file a certificate with the government

o Organization that is more formal than general partnership

o Nature of the business is still determined by the partners

o Limited partners have limited liability for business debts

Business Organizations• Corporations

o File charter/certificate with the government

o Formal organization prescribed by law

o Shareholders have a limited liability for the business’s debts and share in the profits through the value of stock or dividends

Agribusiness• Farming as mass production

• Also manufactures & distributes farm equipment & supplies

• Plays a role in financing agriculture

• Recently has taken the lead in developing genetically modified grains, fruits, and vegetables