What is Economics? Chapter 18

What is Economics? Needs Wants Defined ~ the study of how we make decisions in a world where resources are limited Needs Wants versus Textbook pp. 406-407

What is the Economy? What is Scarcity? Defined ~ the activity in a nation that together affects the production, distribution, and use of goods and services What is Scarcity? Defined ~ fundamental economic problem that occurs when you do not have enough resources to produce all of the things you would like to have Textbook pp. 407-408

Key Economic Questions for Societies WHAT to produce HOW to produce For WHOM to produce Economic Models ~ simple representations of the real world used to explain how the economy works Textbook pp. 408-409

Measuring Costs Opportunity Cost ~ cost of the next best use of your time or money when you choose to do one thing over another Fixed Cost ~ expenses that remain the same no matter how many units of goods are produced (ex. Property taxes, mortgage) Variable Cost ~ expenses that change with the number of products produced (ex. Wages, raw materials) Textbook pp. 411-412

Measuring Costs Total Cost ~ addition of fixed costs plus variable costs; average total cost is simply the total cost divided by the quantity produced Marginal Cost ~ the extra or additional cost of producing one additional unit of output (ex. If the cost of producing 30 helmets is $1,500 and the cost to make 31 helmets is $1,550, then the marginal cost for one helmet is $50) Textbook pp. 412-413

Measuring Revenue Total Revenue ~ the number of units sold multiplied by the average price per unit (ex. If Xbox 360 is $200 and a store sells 10 systems, then the total is $2,000) Marginal Revenue ~ the extra revenue that would result from selling one more unit of output Marginal Benefit ~ the additional or extra benefit resulting from an action Textbook pp. 412-413

Cost-Benefit Analysis Defined ~ economic model that compares the marginal costs and marginal benefits of a decision; if costs outweigh the benefit, then the option should be rejected Textbook pp. 413-414

How many acres should the farmer plant before the cost begins to outweigh the benefits? A: No more than 15 acres

Market Economy An economic system in which supply, demand, and prices help people make decisions and allocate resources Textbook pp. 416-417

American Economy Capitalism ~ a system in which private citizens own the means of production (most, if not all, businesses owned by individuals Free Enterprise ~ competition for profits among businesses with very little government interference Textbook p. 417

Incentives Rewards that are offered to try to persuade people to take certain economic actions Textbook p. 417

Competition = Lower Consumer Prices Rational Choice ~ making consumer decisions based on opportunity cost

Study of Economics 2 Schools of Thought Microeconomics ~ Small scale economic decisions made by individual consumers and businesses Macroeconomics ~ Big picture study of economic decision making of governments and trends in national economies as a whole Textbook p. 419