What is Economics? Chapter 18

ADD: The Fundamental Economic Problem is SCARCITY

Economic Choices: Needs are things required for survival, such as food, clothing, and shelter; Wants are the things we would like to have Economics is the study of how individuals and nations make decisions in a world where resources are limited

Economic Choices In microeconomics economists explain how individual economic decisions are made; macroeconomics they study decisions made by governments, industries, or societies An economic model is a theory that tries to explain human economic behavior Microeconomics- (SMALL picture) Individuals and businesses. Macroeconomics- (BIG picture) deals with the economy as a WHOLE. “Governments”

(US is free enterprise capitalism) Economic Choices Every country has its own economic system or way of producing things people want or need (US is free enterprise capitalism)

The Problem of Scarcity Resources are the things used in making goods and providing services; they include tools, natural resources, and human resources Scarcity occurs when we do not have enough resources to produce all the things we would like to have; because of scarcity we have to make choices ADD : UNLIMITED WANTS – LIMITED RESOURCES Scarcity- Unlimited WANTS, Limited RESOURCES!!!

The Problem of Scarcity The four basic economic questions: WHAT to produce HOW to produce HOW MUCH to produce FOR WHOM to produce

Trade-offs & Opportunity Costs Because of scarcity, individuals have to made trade-offs- A trade off is the alternative you face if you decide to do one thing rather than another Opportunity cost is the cost of the next best use of your time or money when you choose to do one thing rather than another; opportunity cost is always an opportunity that is given up

Costs and Revenues Businesses have several different types of costs: Fixed costs are expenses that are the same no matter how many units of a good are produced (ex. Mortgage & property taxes) Variable costs are expenses that change with the number of items produced; they increase as production grows (ex. Wages & raw materials)

Which is a fixed cost? Variable cost?

Costs and Revenues Total costs are fixed costs plus variable costs; to find average total cost divide total cost by quantity produced FIXED + VARIABLE= TOTAL COSTS Fixed Costs ($1,000) and Variable Costs ($500) What is the total costs? -$1,500 for the Month

Costs and Revenues $1,500 to produce 30 bicycle helmets Marginal cost is the additional cost of producing one additional unit of output $1,500 to produce 30 bicycle helmets $1,550 to produce 31 bicycle helmets What is the marginal cost of the 31st helmet? $50

Total Revenue Example: 42 units x $2= $84 Costs and Revenues Businesses use 2 measures of revenue to decide the output: Total revenue is the number of units sold multiplied by the average price per unit UNITS SOLD X AVG. PRICE= TOTAL REVENUE Total Revenue Example: 42 units x $2= $84

Costs and Revenues Marginal revenue is the change in total revenue- the extra revenue- that results from selling one more unit of output It not always constant; sometimes it may start high and decrease as more and more units are produced and sold

Marginal Revenue Example MRT sells DVDs for $10 each MRT sells 100 DVDs a month What is their total revenue? ($1,000) If MRT sell three more DVDs, what is their marginal revenue? $30 ($1,030 new total revenue)

Costs and Revenues Marginal benefit is the additional satisfaction or benefit received when one more unit is produced Often the best decision is made by comparing marginal benefits against marginal costs; to do so economists use a cost-benefit analysis If the costs outweigh the benefits, we should reject the option Diminishing marginal benefit occurs when marginal benefit declines compared to the marginal costs