Imagine that off campus lunch passes are very scarce and thus only 50 students will be granted off campus lunch privileges. Evaluate the costs and benefits of using each of the following methods of allocating (distributing) off campus lunch passes: Allocation Method Benefits (What will be gained? Consider individual benefits as well as benefits to the school.) Appearance and Personality 1. Costs (What will be given up or sacrificed? Consider individual costs as well as costs to the school.) 1. 2. 2. 1. 1. 2. 2. 1. 1. 2. 2. Market (Passes will be auctioned. Buyers willing to pay the highest price will receive the passes.) 1. 1. 2. 2. First Come First Serve (Passes will be handed out to the first 50 students in line on the first Monday in August each year.) 1. 1. Force (Fight for it) Government (Student Council Members Choose) 2. 2. Which of the five allocation (distribution) methods listed above would most likely be preferred by each person? 1. Judy is a close friend of four student council members. ______________________ 2. Jimbo is an active boxer and has had extensive training in Karate. ______________ 3. June’s parents are billionaires and big spenders. ____________________________ 4. Jack spends his entire summer watching television and he does not have a summer job. __________________ 5. Jill and Jackson are models for several major clothing designers. ______________ 6. Which method would provide the strongest incentive to provide more off campus lunch passes? Defend your answer. _____________________________________ __________________________________________________________________. Notes Economic Systems Market Economy - an economy that relies chiefly on market forces to allocate goods and resources and to determine prices. (Capitalism / Free Enterprise) Economic incentives exist that encourage risk-taking, production, and profit seeking. Competition is intense. Government plays a limited role. For example, the government protects property rights, regulates businesses, and preserves competition by preventing monopolies. Command Economy – an economic system that relies on centralized decisions to determine what goods will be produced and how those goods will be allocated. There are few incentives to take business risks and there is no economic freedom. Usually the government makes the major economic decisions. Traditional Economy – economic decisions are made based on habit, ritual, and custom. There are few incentives to innovate and creativity may be viewed as a threat. Fundamental Economic Concepts Factors of Production – land, labor, capital and entrepreneurship - land – natural resources used to produce goods and services. - labor – workers who produce goods or offer services - capital – tools, machines, equipment used to produce goods and services - entrepreneurship – individuals who take risks and organize the other factors of production into potentially profitable enterprises. Scarcity – the fundamental economic problem faced by all economic systems. This problem exists because we have unlimited wants and needs but limited resources to satisfy those wants and needs. Three Big Questions – because of scarcity, all economic systems must ask and answer the Three Big Questions. 1) What will be produced? 2) How will it be produced? 3) Who gets the goods and services that are produced? The way these three questions are answered determines the type of economic system in place. Trade Offs and Opportunity Cost Opportunity Cost – The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. For example: If you are offered a full time position with Shell Oil and a full time position with Boeing and you chose to accept the job with Shell, your opportunity cost would be the job with Boeing. Opportunity cost is the next best alternative. The job with Boeing was the next best alternative. Trade Offs – all alternatives within a set of alternatives that were not selected. If you accepted the job with Shell but were offered jobs with Boeing, Valero, IBM, and Exxon, the jobs with Boeing, Valero, IBM, and Exxon are all trade-offs.