Fundamental of Economics Continued Economics Unit 1 Fundamental of Economics Continued

II. Making Economic Decisions A. Costs of Producing 1. Fixed costs are expenses that are the same no matter how many unit of a good are produced. 2. Variable costs are expenses that change with the number of products produced. a. If a business produces more, variable costs will increase.

II. Making Economic Decisions 3. Fixed cost plus variable cost equal Total Costs. 4. Marginal cost is the extra cost of producing one additional unit of output. If TC was $20 for 4 widgets and $22 for 5 widgets, Marginal cost would be $2 for the fifth widget.

II. Making Economic Decisions B. Benefit of Producing 1. Businesses measure total revenue and marginal revenue to decide what amount of output to produce. 2. Total revenue equals the number of units sold times the average price per unit. # of widgets * P 3. Marginal revenue is the change in the total revenue that results from selling one more unit of output. Always Price!

II. Making Economic Decisions C. Cost-Benefit Analysis 1. Cost-benefit analysis is an economic model used to compare marginal costs and marginal benefits of a decision. a. A producer should choose an action when the benefits are greater than the costs. If costs outweigh benefits, the producer should reject the option.

III. Economic Systems A. Basic economic questions - society must make choices on how to allocate their resources. In order to do this, they must consider and answer the three basic questions. 1. What goods and services shall be produced? 2. How shall they be produced? 3. For whom shall they be produced?

III. Economic Systems B. Basic kinds of economic systems Economic systems are a set of rules by which a nation answers the basic questions of what, how and for whom. This determines how it decides to distribute its resources to satisfy its people's wants.

III. Economic Systems 1. Traditional - An economy in which the basic questions are answered directly by the people involved, with the answers usually based on how things were done in the past. 2. Command - An economy in which the basic economic questions are answered by government officials, with individuals having little control over economic decisions; also called planned economy

III. Economic Systems 3. Market - An economy in which the basic economic questions are answered by households and businesses through a system of freely operating markets. 4. Mixed - An economy that has characteristics of both a command and a market economy.

IV. The Market Economy A. The US has a market economy (mixed). 1. Most economic decisions are not made by the government, but by individuals looking out for their own and their families self-interests. 2. A market economy is participatory.

IV. The Market Economy 3. Incentives are rewards offered to try to persuade people to take certain economic actions. a. Price b. Wages c. Subsidies

IV. The Market Economy 4. A market economy is based on capitalism, a system in which citizens own most of the means of production. 5. It is also based on free enterprise- businesses compete for profit with a minimum of government interference.

IV. The Market Economy C. Role of the Government 1. US is technically a mixed economic system 2. One role of government in the economy is to help maintain competitive markets. a. Competition forces businesses to use society’s resources efficiently to produce goods and services people prefer and to produce quality products at low costs.

IV. The Market Economy 3. Another role is to provide services, such as education and national defense, that the private sector does not provide.

IV. The Market Economy D. The Spread of Capitalism 1. Capitalism developed gradually over hundreds of years. 2. Two concepts underlie the market system: people can work for economic gain and government should have a very limited role in the economy.

IV. The Market Economy 3. In his book, Wealth of Nations, Scottish economist Adam Smith scientifically described the basic principles of economics for the first time. Smith believed that individuals, in seeking profit, end up benefiting society as a whole. 4. From the writings of Smith and other came the idea of laissez-faire, meaning “to let alone.” Government should not interfere in the market-place.

V. Circular Flow of Economic Activity A. Markets- a location or other situation that allows buyers and sellers to exchange a certain economic product. 1. Markets can be local, regional, national, or global. B. A circular flow of economic activity- movement of resources, goods, services, and money- takes place among these groups.

V. Circular Flow of Economic Activity D. Consumers earn their income in factor markets, where productive resources are bought and sold. Workers sell their labor for income. People who own land loan it in return for rent. People who own financial capital exchange it for interest.

V. Circular Flow of Economic Activity E. People spend their income in product markets, where producers offer goods and services for sale. Businesses receive payments for their products from consumers. They spend this income on natural resources, labor, and capital to make more products.

V. Circular Flow of Economic Activity F. The Government 1. The government sector buys productive inputs in the factor markets to use in creating its goods and services. 2. While government receives some revenue from selling its services, most of it revenue comes from taxes. 3. It also uses its revenue to buy final goods and services in the product markets.

Circular Flow of Economic Activity

Circular Flow of Economic Activity

VI. Economic Growth A. When a nation’s total output increases over time, the economy grows. B. Productivity is a measure of the amount of output produced by a given amount of inputs 1. It reflects how efficiently resources are being used.

VI. Economic Growth C. Specialization- People, businesses, and countries concentrate on the goods or services they can produce better than anyone else. D. Division of labor is the breaking down of a job into separate, smaller tasks performed by different workers.

VI. Economic Growth E. Human capital is the sum of all the skills, abilities, and motivation of people. 1. When businesses invest in things like training and employee health care, worker productivity tends to increase.

VI. Economic Growth F. Because of specialization, the American economy displays a high degree of economic interdependence. 1. We rely on others, and others rely on us, to provide the goods and services we consume. 2. As a result, events in one part of the world can have an economic impact on other parts of the world.