Economic Principles – chapter 18 _...

Vocabulary chapter 28 Economics Opportunity Cost Microeconomics Fixed Costs Macroeconomics Variable Costs Economic Systems Total Costs Scarcity Marginal Costs Need Marginal Benefit Want Cost Benefit Analysis Trade-off

What is Economics? Economics: Study of how decisions are made when resources are limited. Economy All activity that affects production, distribution & use of goods & services Economists study past and present to predict the future. Based on assumptions Businesses & government make decisions based on models Just like science they use examples. What is wrong with this? Can’t predict the future.

Scarcity: There is not enough time, money or resources to produce everything everyone wants. This is the fundamental problem of economics and it affects individuals, businesses, and countries - Everyone Because of Scarcity we must answer 3 questions in economics What to Produce? How to Produce? Whom to produce for? What to produce – examples public services or defense (guns or butter) Ex: North Korea more weapons than food How to produce – what type of industry? Or pollution vs manufacturing, or oil vs wildlife Whom to produce for? – how will the goods be distributed and at what cost? – Price determines who it goes to

Economic Decision Making The goal as a decision maker is to make rational, reasonable choices with the limited resources that we have. You have to choose between your needs and your wants Need: things needed for survival Want: luxuries – things we would like to have

Which of the following best describes scarcity? Not enough goods for everyone Not enough resources to provide every desire Lack of desire to produce enough resources The amount that people want

What is the fundamental economic problem? Money Time Scarcity Economics

All of the following are questions we must ask because of scarcity except: When to produce? How to produce? What to produce? Whom to produce for?

Making Economic Decisions Scarcity forces people to make choices. You must take into account all of the costs and benefits when making an economic decision These economic choices involve trade offs and opportunity costs

Trade-off: Decision that must be made when choosing between items Trade-off: Decision that must be made when choosing between items. Doing one thing over another Ex – Do you want vanilla or chocolate ice cream? Opportunity cost: Value of the next best alternative that was given up when a choice was made. The value is time or money. When choosing to do something, you lose. You lose the ability(opportunity) to do something else with your time or money Ex. Choosing to go to the movies instead of spending that same time doing homework or going to a game.

What was the opportunity cost of passing the Health Care Bill? More people will have health care coverage. Grandparents will be put to sleep because of Death Panels. Obama will become the Devil and the Four Horseman will arrive. The government will have less money to spend on other services like the military.

All Costs Are Not The Same Fixed Costs - Expense is the same no matter how much is produced Example – Rent – It will not change Variable Costs - Expenses that change with number of items produced. Example – materials, wages Fixed Costs + Variable Costs = Total Cost Marginal Cost - extra cost of produce one more unit of product Cost Benefit analysis graph pg 508 – businesses use cost-benefit analysis to compare the marginal benefit to the marginal cost to make an economic decision.

Cost Benefit Analysis Why do you usually do something? Marginal Benefit additional benefit for producing one more unit. Is it worth it? If not, why do it? To achieve a benefit!

Cost Benefit Analysis (cont.) Cost Benefit Analysis: An economic model used to compare the marginal costs and marginal benefits of a decision. You choose the action when the benefits outweigh the costs; if costs outweigh the benefits, it time to walk away. Ex. Farmer deciding how many acres to plant

What is an example of a fixed cost of doing business? Wages Cost of fuel Price of materials Rent on a building