Chapter 18: What is Economics?

Section 1: Economic Problems Economics – The study of how we make decisions based on limited resources. Scarcity – Occurs when we do not have enough of something we want or need. –Needs are required for survival. –Wants are things we would like to have

3 Economic Questions 1. WHAT to Produce? –Have to decide what you are going to make. –Is there a need (market) for your good? 2. HOW to Produce? –Do you need a big factory? Or can you handle the demand for yourself? 3. FOR WHOM to Produce? –Usually this means price. How much are you going to charge for your good?

Economic Models Models – Simplified representations of the real world. Used to help explain and predict how the economy will work. Based on assumptions, and can be wrong. Models are changed all the time to try to improve them.

Section 2: Making Economic Decisions Trade-Offs –Choosing one thing rather than another. Opportunity Costs –The cost of the next best use of your time or money when you make your choice. –Basically, its what you could have had, but didn’t choose.

Costs of Business Fixed Costs –Costs that are the same no matter how much you produce. –Ex: Rent/Mortgage and Taxes Variable Costs –Costs that change as your production increases/decreases. –Ex: Wages to workers, Raw Materials, Electricity.

Cost of Business (cont) Total Costs –Adding the Fixed and Variable Costs together. –Ex: $500 (FC) + $1500 (VC) = ? Marginal Costs –This is the cost of producing one extra unit

Revenues Total Revenue –# of units sold multiplied by average cost of each unit. –Ex: 50 units sold X $10 avg. cost = $500 TR Marginal Revenue –The change in revenue by selling one additional unit. –May not pay to make more. Marginal Benefit –The extra benefit from doing something.

Cost Benefit Analysis This is when you analyze and weigh the benefits of producing extra vs. the costs. See the graph on pg. 413 –At what point should the farmer NOT farm additional acres?

Section 3: Being an Economically Smart Citizen You can be a powerful force in economics. Your dollar is your vote. What is valuable and what is not.

Your Role in the Economy Market Economy –When supply, demand, and prices determine what we buy. Free Enterprise –Companies allowed to compete for profits with little Gov’t interference. Capitalism –Where private citizens own all or most of the means of production Incentives –Rewards offered to persuade you to do something.

Gov’ts Role in Economy Maintain competitive markets –Through tax breaks to help some or lawsuits to hurt others. Provide services the public wants but can’t do themselves. –Public Education, National Defense, Welfare Influence the decisions you make –“Carrot and the Stick” –Subsidies (Grants of money)/ Tax breaks (Carrot) –Sin Taxes (Tobacco, Alcohol) (Stick)

Making Wise Choices Rational Choices –As a consumer, you make choices that you believe will best satisfy you wants for the lowest possible price. –Not the same for everyone. Being fully informed as a consumer allows you to “vote” with your money.

Crossword Puzzle Words Economics- Marginal Revenue Scarcity - Market Economy Wants- Capitalism Needs- Free Enterprise Economic Model- Incentives Opportunity Costs- Microeconomics Variable Costs- Macroeconomics Fixed Costs