The Fundamental Economic Problem Chapter 18

BellRinger A- Why do we have to make rational economic choices? B- What are the three choices a society has to make?

Answer A- Scarcity of Resources B- What to produce, How to produce, For Whom to Produce

Economic Choices Not enough productive resources to satisfy all our wants and needs Plentiful resources can be scarce, not free Economics- study of how we make decisions in the world where resources are limited Scarcity-we do not have enough resources to produce all of our wants Needs- required for survival Wants- things we’d like to have Scarcity determines what is produced, how to produce for whom it is produced

Choices all Societies Face Economic Models Choices all Societies Face Unlimited wants Limited resources Scarcity What How For Whom Economy means all activity in a nation like production, distribution, use of goods and services Economic models: simplified representations of real world to show how economy works, may predict what would happen Models are based on assumptions or things we take for granted is true.

Making Economics Decisions Chapter 18-2 Making Economics Decisions

Trade Offs Scarcity forces people to make choices about how they will use their resources Take into account all the costs and all of the benefits of an action Trade off- alternative you face if you decide to do one thing rather than another. Example- country puts money into education instead of roads, or military

Trade offs Opportunity Costs- cost of the next best use of your time or money when you choose to do one thing rather than another example: cleaning the house is more than supplies, it is time Measures of Cost- Fixed Cost- same no matter how many units you produce Variable cost- expensed that change with the number of products produced Total Cost- fixed cost + variable cost Marginal Cost- extra cost of producing one more unit

Go to page 415 Answer questions 1-6

What is the Basic economic problem that makes choices necessary? Review What is the Basic economic problem that makes choices necessary?

Answer Scarcity

What is the purpose of an economic model? Are they always accurate? Review What is the purpose of an economic model? Are they always accurate?

Answer To help explain and predict economic behavior in the real world No, based on assumptions which may or may not be true

4. What does making a trade-off require you to do? Question S-2 4. What does making a trade-off require you to do?

4. Forgo one thing for another Answer 4. Forgo one thing for another

5. How do fixed costs differ from variable costs? Review 5. How do fixed costs differ from variable costs?

Answer 5. Fixed cost are the same no matter what while variable costs are expenses that change based on the number of products purchased.

Being an economically Smart Citizen Chapter 18-3 Being an economically Smart Citizen

Market Economy WE have a Market Economy Supply, demand and prices help people make economic decisions and allocate resources in Market Economy Market Economy is participatory because the choices you make as a consumer affect what businesses will produce

Capitalism Another name for market economy Private citizens own all or most of the means of production Market economy is based on FREE ENTERPRISE This means businesses can compete for profit with minimum government involvement

Your role in the Economy Keep informed Understand incentives (rewards) Understand role of government

Government Roles Make markets competitive Influences the decisions of people and businesses by reward or punishing certain actions Competitive markets establish prices gov’t should not intervene to help one group over another group

Making Wise Choices Good decision leads to satisfaction Rational Choice- choosing the alternative that has the greatest value from among comparable-quality products

Chapter 19 The American Economy

Chapter 19-1-Economic Resources Goods- tangible products like books and automobiles Services- work that is performed for someone else

Four Factors of Production Natural Resources- those that come from the earth, gifts of nature, ex. Fertile fields Labor- labor force or human resources Capital- capital goods- tools used to construct or make products, ex. Trucks. Are the result of production. Consumer goods- satisfy wants 4. Entrepreneur- people who start a business, introduce new products, improve management

Gross Domestic Product GDP- total value in dollars of all the final goods and services Intermediate goods go into making the final goods Sale of used goods, secondhand sales, are not apart of GDP Measuring GDP- monetary measure. Standard of Living- quality of life based on the possession of necessities and luxuries that make life easier. Does not reflect quality only quantity

Review How do economist define natural resources?

Answer “Gifts of nature”, that make production possible

Review 2. What are the major functions of the entrepreneur?

Answer Start new businesses, bring products to market

Economic Activity and Productivity Chapter 19-2 Economic Activity and Productivity

Circular Flow of Economic Activity Market is a location or other situation that allows buyers and sellers to exchange a certain economic product Various Sectors: Consumer Business Government

Consumer Sector Consumers earn income in factor markets- productive resources are bought and sold Those who own land, may loan it, (rent) Those who own capital exchange it for interest

Business Sector Incomes are spent in the product market- were producers offer goods and services for sale. Business sector receives payments in the products they sell and services to consumers Payments go to pay for natural resources, labor and capital

Government Sector Made of 3 levels of government Gov’t receives revenue from the services it sells Total cost of government services is seldom covered by fees, most revenue from taxes on business and individuals Gov’t uses revenue to purchase final goods and services in product markets

Productivity and Economic Growth Productivity- measure of the amount of output produced by a given amount of inputs in a specific period of time- most efficient capital goods sought Specialization- businesses, countries try to produce goods and services better than anyone else

3. Division of Labor- break down jobs into separate, smaller tasks performed by different workers 4. Human Capital- sum of skills, abilities, and motivational people 5. Economic Interdependence- we rely on others and others rely on us

Review Name 3 things that government produces

Answer Housing, transportation, national defense,

Capitalism and Free Enterprise Chapter 19 Capitalism and Free Enterprise

Features of Capitalism Markets- places were prices of goods and services are exchanged Consumer sovereignty- king of market Economic Freedom- choice in products Private Property Rights- freedom to own and use property Competition- struggle to get best product at the lowest prices Profit Motive- free to risk savings to gain wealth Voluntary Exchange-act of buyers and sellers freely and willingly engaging in market transactions

Spread of Capitalism Developed gradually in medieval and early modern Europe People could work for gain Gov’t should have limited role Adam Smith was a Scottish economist and philosopher Wrote the Wealth of Nations in 1776 on English Society Profit seekers benefit society Laissez-Faire- let alone by the government