1. The Fundamental Economic Problem
Chapter 18

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

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

4. 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

5. 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.

6. Making Economics Decisions
Chapter 18-2
Making Economics Decisions

7. 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

8. 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

9. Go to page 415
Answer questions 1-6

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

11. Answer
Scarcity

12. 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?

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

14. 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?

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

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

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

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

19. 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

20. 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

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

22. 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

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

24. Chapter 19
The American Economy

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

26. 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

27. 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

28. Review
How do economist define natural resources?

29. Answer
“Gifts of nature”, that make production possible

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

31. Answer
Start new businesses, bring products to market

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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. Review
Name 3 things that government produces

40. Answer
Housing, transportation, national defense,

41. Capitalism and Free Enterprise
Chapter 19
Capitalism and Free Enterprise

42. 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

43. 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