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Chapter 18: What is Economics?
Section 1: Economic Problems
• Economics – The study of how we make decisions based on limited resources.
• Scarcity – Occurs when we do not have enough of something we want or need. – Needs are required for survival. – Wants are things we would like to have
3 Economic Questions• 1. WHAT to Produce?
– Have to decide what you are going to make.
– Is there a need (market) for your good?
• 2. HOW to Produce?– Do you need a big factory? Or can you
handle the demand for yourself?
• 3. FOR WHOM to Produce?– Usually this means price. How much
are you going to charge for your good?
Economic Models
• Models – Simplified representations of the real world.
• Used to help explain and predict how the economy will work.
• Based on assumptions, and can be wrong.
• Models are changed all the time to try to improve them.
Section 2: Making Economic Decisions
• Trade-Offs – Choosing one thing rather
than another.
• Opportunity Costs – The cost of the next best use
of your time or money when you make your choice.
– Basically, its what you could have had, but didn’t choose.
Costs of Business• Fixed Costs
– Costs that are the same no matter how much you produce.
– Ex: Rent/Mortgage and Taxes
• Variable Costs– Costs that change as your
production increases/decreases.
– Ex: Wages to workers, Raw Materials, Electricity.
Cost of Business (cont)
• Total Costs– Adding the Fixed and Variable
Costs together. – Ex: $500 (FC) + $1500 (VC) = ?
• Marginal Costs– This is the cost of producing one
extra unit
Revenues
• Total Revenue – # of units sold multiplied by
average cost of each unit. – Ex: 50 units sold X $10 avg.
cost = $500 TR
• Marginal Revenue – The change in revenue by
selling one additional unit. – May not pay to make more.
• Marginal Benefit– The extra benefit from doing
something.
Cost Benefit Analysis
• This is when you analyze and weigh the benefits of producing extra vs. the costs.
Section 3:
• Being an Economically Smart Citizen
• You can be a powerful force in economics.
• Your dollar is your vote. What is valuable and what is not.
Your Role in the Economy • Market Economy
– When supply, demand, and prices determine what we buy.
• Free Enterprise– Companies allowed to compete
for profits with little Gov’t interference.
• Capitalism– Where private citizens own all or
most of the means of production
• Incentives– Rewards offered to persuade you
to do something.
Gov’ts Role in Economy• Maintain competitive markets
– Through tax breaks to help some or lawsuits to hurt others.
• Provide services the public wants but can’t do themselves.– Public Education, National Defense, Welfare
• Influence the decisions you make – “Carrot and the Stick”– Subsidies (Grants of money)/ Tax breaks (Carrot)– Sin Taxes (Tobacco, Alcohol) (Stick)
Making Wise Choices
• Rational Choices – As a consumer, you make
choices that you believe will best satisfy you wants for the lowest possible price.
– Not the same for everyone.
• Being fully informed as a consumer allows you to “vote” with your money.
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