Economics Unit 1 Lesson 3 Part 1

entrepreneur

someone who organizes productive resources to make goods and services

trade-off

values of all alternatives given up

employee

worker

EXPECTATIONS AND UNINTENDED CONSEQUENCES

Choices are trade-offs. The expected value of one opportunity is compared to the expected value of other options. Companies try to do their best to set reasonable expectations, or things that they think will most likely happen. For example, imagine you run a T-shirt company. Would making the company larger result in earning more money? What if your T-shirts stop being popular? The amount required to make more shirts and expand your factory would result in more expenses. What about the employees, who have a new maternity-leave plan? Do you know for certain that a new maternity plan will make employees stay in your company? No; some people may still choose to leave for other reasons, such as to find a job closer to home, or even to go to a company that provides a better maternity-leave plan and day care. So, the most that your company can do is to look at the expected values of the costs and benefits of each option.

DECISION MAKERS FACE TRADE-OFFS BASED ON EXPECTED OUTCOMES

Congratulations! You are an entrepreneur, or someone who organizes productive resources to make goods and services. As an entrepreneur, you have opened a new clothing company called Doing it Your Way. The company produces graphic T-shirts that are very popular with teens. The shirts come in four different designs, and each design features a scene from various parts of the country (think West Coast, East Coast, Midwest, and South). Your company's revenues are growing each month, giving you the incentive to work harder and make your company more efficient and productive. Having a good idea and product and a happy and motivated workforce are key reasons entrepreneurs go into business. Another motivation is that the good idea can turn into profits, for you and your workforce. Money doesn't always buy happiness, but it can be a strong incentive in working hard and persevering through tough times. What can be better than running such a successful company? As you can see, there are many decisions that you need to make as an entrepreneur. And, just as with the decisions that individuals make, companies face trade-offs. For example, when a company decides to use some of its money to pay for materials, there is a trade-off. This trade-off is the value given up from not choosing to spend the money on other things, such as more commercials to advertise the T-shirts. Companies, just like individuals, must weigh the costs and benefits of their decisions so that they can maximize their satisfaction. Then, there is the concern that any expenditures can cut into profits.

ALLOCATING PRODUCTIVE RESOURCES

Consider your company's problem of not selling the T-shirts. Your company chooses to deal with this by cutting costs. This might help your company's short-term cash problems, but, what about the long run? What is your company going to do? Is it going to continue making T-shirts that teens no longer want to buy? What are your options? The answer to this problem is in resource allocation. Just as individuals need to allocate scarce resources, like water, companies need to allocate their scarce resources. In this case, your company's goal is to produce a product that people will buy, because it hopes to earn money from the sales. So, your company needs to allocate its scarce resources to the goal of making money. In order to make a T-shirt, the following resources are needed: ink, sewing needles, people, machines, and fabric. How can a company allocate resources to make a different product? After all, these resources make other products that might sell better than the T-shirts. The company can sell these products, earn money, and Doing it Your Way will be back in business! Performing research could result in uncovering a big demand for graphic-design towels, especially as summer is approaching quickly. The company can transition into the towel business! Putting It Together: Just as people use resources in different ways to satisfy wants, productive resources can be used in different ways to produce different goods and services. Consumers rely on expected costs and benefits. For example, purchasing food or going to the movies are two options available. When looking at these two alternatives, consideration of the satisfaction achieved from each option is reviewed. The expectation is that both activities will be enjoyable. A possibility remains that the food could cause food poisoning and the movie could be uninteresting. Decisions are made based on expectations of what consumers think will happen in the future.

GOVERNMENT SERVICES, ALLOCATIONS, AND TRADE-OFFS

Governments The federal government in the U.S. provides public goods, such as education, mail delivery, and public libraries to society. A government cannot produce an unlimited number of goods and services, because resources are limited. Also, governments experience scarcity, because human wants are greater than what can be made with all these resources. People may desire for the government to pay for their wants, but limited resources make this impossible. Magnify It: How the government allocates its resources affects millions of people, because it provides goods and services to society as a whole. Government Allocation So, how does the U.S. government decide how to allocate its resources? For example, how does it decide to allocate people and trucks for mail delivery, instead of for something else, such as delivering bottled water? People in the government work together to decide how much money will be allocated for different goods and services. These decisions are part of the budget process. America is also a democracy, so citizens play a part in these decisions. They do this by electing representatives they believe will allocate resources in ways that they would want. For example, suppose that you believe the government should provide health care for people living in America. First, you would vote for a representative who supported this position. Then, the representative would vote in Congress for resources to be allocated for health care. Government Trade-Offs Just as individuals and companies face trade-offs for their decisions, governments do, too. If a government allocates resources to provide one service, it is taking these resources away from making other goods and services. And, any value given up from these other options are trade-offs. Also like individuals and companies, the way a government chooses to allocate its resources depends on its goals. In your T-shirt business, you allocated your resources away from making T-shirts and toward making towels because your goal was to make money. Revenue is important to governments. Any money brought in by governments is spent on things like salaries, pensions, roads, and buildings. Real Life: During the recession that began at the end of 2007, many state governments had financial problems. They ran out of money and had to decide how to cut costs and only allocate the resources that they could afford. These governments had to make very difficult decisions about which goods and services to offer. In many cases, the goal was to spend less money. State governments tried to achieve this goal in different ways, including firing workers who were employed by state governments. This happened in 28 states in 2009 (fiscal year).

Unintended Consequences

Sometimes, choices made by individuals, companies, and even governments have long-term unintended consequences, or effects, that can partially or entirely offset the initial effects of a decision. For example, suppose your company decides to use its money resources to expand its factory. One benefit that you hoped for was providing more jobs for people out of work. But unfortunately, things do not go as planned. You spend the money to expand your factory. Your company makes more shirts but is unable to sell them. As a result, you have higher expenses but less money to pay the bills. Eventually, your company needs to cut costs. So, you end up firing workers in the new factory. You even end up letting more workers go than you hired. You could not have foreseen that your sales would drop or that you would cut costs by firing employees. But, these things did happen. And, your initial effect of giving people jobs was offset by your company's later decision to cut costs and fire these new workers.

Alice decided to throw her new shirt in the dryer. It shrank and no longer fit Alice. Shrinking her shirt was a of Alice's decision to use the dryer.

consequences

consequence

effect

A person who organizes productive resources to make goods and services is a(n)

entrepreneur

public good

item that is provided to society

salary

payment for work

Governments cannot produce enough goods and services to satisfy everyone's wants, because

resources are scarce

A person who owned a bakery figured out that cookies were selling better than brownies. So, she took the resources that she was using to make the brownies and allocated them to making more cookies. This could happen because

resources can be used to make different goods and services

expectations

things that are anticipated will happen

A company bought a piece of land. It can use this resource to build a factory or to plant crops. The company can also hold onto the land and try to resell it later for more money. The company decides to build a factory on the land. Any value given up from not choosing the other options is the

trade-off