Focus Question: How important is it for people in business to understand economics?
http://schools.nyc.gov/ve/eco/lesson20072.pdf
Definitions of economic terms appear at: www.bized.ac.uk/stafsup/options/notes/econ201.htm
Objectives
Students will be able to:
• Explain how the problem of scarcity is related to the study of economics.
• Discuss the concepts of opportunity cost and trade-offs.
• Examine the relationship between economics and business.
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I. Introduction
• Write the following headlines on the chalkboard:
— RATE OF INFLATION UP AGAIN!!
— INTEREST RATES ON LOANS CUT!!
— BUDGET DEFICIT MAY LEAD TO TAX HIKE!!
• Have the students explain their answers to the following questions:
— Why would people in business be interested in these headlines?
— To what extent does each of these headlines represent good or bad news for people who are
running a business?
— How important is it that people who are running a business understand economic concepts
like inflation, interest rates, and taxation?
— What questions do these headlines raise for our class discussion?
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II. Scarcity
• Distribute Worksheet 2A, “Scarcity—The Basic Problem in Economics.” Have students complete
the exercise on the worksheet. As part of the whole-class discussion, have students explain their
answers to the following:
Worksheet 2A
Scarcity – The Basic Problem in Economics
— What do you see in this diagram?
— Why is side “A” of the scale weighing down side “B”?
— Using this diagram, how would you describe the problem of scarcity?
— Give some examples to show that people’s wants are unlimited.
— Give some examples to show that resources like property, labor, time, and capital are limited.
— How does the fact that people’s wants are unlimited and resources are limited affect
business?
Exercise. After studying the cartoon, answer the following questions:
1. What is “A,” the left side of the scale measuring? _______________________2. What is “B,” the right side of the scale measuring? ______________________
3. What is the cartoonist saying about how people’s wants and needs compare to the availability of the
things needed to produce the goods and services that people want and need?
4. Using the cartoon how would you describe the problem of scarcity?
Worksheet 2B
Coping with Scarcity
Exercise: Write responses to the three memos below in the spaces provided.
To: Dept. of Procurement
From: VE CEO
Subject: Hiring IT Professionals
As you know, the firm has had a great many problems hiring Information Technology professionals to fill positions for technical support, billing, and web page design needs.
In the space below, please suggest two or three solutions to this problem.
- Raise Salaries
- Hire Abroad - H1-B Visas (China, India)
- Tele-Commute
- Outsource
_______________________________________________________________________
To: Dept. of Procurement
From: VE CEO
Subject: Obtaining Xenon
As you know, the firm has had a great deal of trouble in securing Xenon, the key ingredient in our
product. The only place Xenon is found is in Kashmir where it comes from the bark of a special tree. A
civil war in Kashmir has all but stopped the export of Xenon. In the space below, please suggest two or
three solutions to this problem.
- Get the U.S. Government to invade - Hawaii & Sugar crops - late 1800's
- Carter Doctrine - Oil & Middle East
- Get UN to provide peacekeepers for civil war
- CITGO - Venezuela Oil - partnership with government sponsored company
- China produces 95% - Rare Earth Metal Ban - WTO legal action
- smuggle out Xenon / blackmarket?
- Xenon Commodity Hedge?
_______________________________________________________________________
To: Dept. of Procurement
From: VE CEO
Subject: Funding for Equipment
As you know, the firm has had a great deal of trouble in securing funding to purchase plant equipment
necessary to keep up with the demand for our product. I have called two or three banks that we have gone to in the past. They can only provide about $1,000,000, about one-half the amount that we require. In the space below, please suggest two or three solutions to this problem.
- Issue Stock - Dilutes existing shares
- Have the banks underwrite investment grade bonds
- strategic partnership (i.e., Toyota & Tesla)
- Divest or sell of assets or underperforming business units
_______________________________________________________________________
As part of the whole-class discussion, have students explain their answers to the
following questions:
— What conclusions can you draw about how scarcity affects businesses?
— What are some of the suggestions you offered to help solve each of the three problems
described in the memos?
— For each of the three problems, which was the best solution suggested?
III. Trade-offs/Opportunity Costs
• Distribute Worksheet 2C, “Trade-offs/Opportunity Costs.” Have students complete the exercise
on the worksheet.
Trade-offs/Opportunity Costs
Due to the scarcity of resources, heads of businesses cannot afford to do all the things they want.Therefore it is necessary to make choices. When we choose one thing we want over the other alternatives, that is called a “trade-off.” Making such a choice costs us the value of the next best alternative. The valueof the thing or things that we are giving up is called the opportunity cost. If we decide to spend money on a CD, rather than going to the movies, that is a “trade-off.” The value of going to the movies (the second
choice) is the “ opportunity cost.”
Exercise. Assume that you are an entrepreneur who owns a factory that makes cell phones. You would
like to expand your business and need a loan of $200,000 from the bank to do so. After waiting many
months you learn that your loan has been approved. Your problem is where to spend the money. Five
options appear below—each costs $200,000. To help determine where the money will be spent complete the form below.
Place a check mark next to the one area where you would spend the money. You may mark only one area and cannot choose to spend less than the full amount.
After making your decision, indicate three serious problems that will result from not spending money
on areas other than the one you selected.
1. ____________________________________________________________________________
2. ____________________________________________________________________________
3. ____________________________________________________________________________
• Call on four or five students to explain where they thought the money should have been spent.
Then have the class vote on which alternative they favor. As part of the whole-class discussion,
have students explain their answers to the following:
— What was the opportunity cost of deciding to spend the money as the majority of the class
did?
— In considering not spending as much on your second choice, was the class’s decision a
correct one?
— Based on what you learned about opportunity cost and trade-offs, what advice would you
give to an entrepreneur about making spending decisions?
Summary/Assessment
Have students find an article in the business section of the newspaper that shows how businesses are
affected by the problem of scarcity. Ask students to summarize the article and explain how it shows how
businesses are affected by economic conditions.
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