Chapter 18 What is Economics? Section 1- The Fundamental Economic Problem

Economics – the study of how we make decisions in a world where resources are limited

Scarcity – the fundamental economic problem; we have unlimited wants, but a limited amount of resources

Scarcity  we must make decisions about how to balance our needs (food, clothing, shelter, etc.) with our wants

Needs Goods and services that are necessary for survival. Food Water Shelter

Wants Goods and services that are not necessary but that we desire or wish for. Gaming system Larger house Designer jeans

With our resources, we can buy Goods or Some thing that you can use or consume. Services Something that someone does for you.

The 3 Basic Economic Questions

(1) Society must decide what to produce with its limited resources Which goods and services will be produced?

(2) Society must decide how to produce. What methods should we use?

(3) Society must decide for whom to produce. Who will receive the goods and services?

The Guns vs. Butter Dilemma In times of scarce resources (recessions), governments must make choices about whether to spend money on defense (guns) or the needs of regular Americans (butter).

Using Economic Models

Economic Models – simplified representations of the real world based on economic theories; used by economists to study a part of the economy

Economists use models to better understand the past or present and to predict the future

Businesses and government often base their decisions on the results of economic models

Chapter 18 What is Economics? Section 2 Making Economic Decisions

Making Economic Decisions Scarcity forces people to make choices about how they will use their resources Must take into account all costs and benefits

Trade off alternative you face if you decide to do one thing rather than another Examples: 1.buying a candy bar or buying a drink 2. studying for a test or talking on the phone with friends OR

Opportunity Cost Cost of the next best use of your time/$ if you chose to do one thing rather than another –Includes discomforts and inconveniences Examples: going to college or going to work college work

Measures of cost Fixed costs –Expenses that are the same no matter how many units are produced –Examples: mortgage, car payments, rent

Measures of Cost Variable costs –Expenses that change with the number of products produced –Examples: electric bill, water bill, grocery shopping

Measures of Cost Total costs –Add fixed costs and variable costs –Businesses look at average total costs (divide total cost by quantity produced) Fixed costs + Variable costs = TOTAL COSTS

Measures of Cost Marginal cost –Extra/additional cost of producing one additional unit of output Example: if it costs $20 to make 5 cd’s and $24 to make 6 cd, how much is the marginal cost of producing the 6 th cd?

Marginal benefit Additional/extra benefit associated with an action We do things because we expect to receive a benefit

Cost-benefit analysis Comparing the marginal costs and marginal benefits of a decision