As American citizens, we live in a land of economic opportunity.Our economy provides us with a great variety of jobs, goods, andservices. We can contribute to the nation’s economic success bytaking advantage of these opportunities. In Unit 6, you will studythe American economic system and learn how it works and howit affects our lives.

Use the American History Primary Source DocumentLibrary CD-ROM to find primary sources about thedevelopment and growth of the American economy.

What do you think economics is? Describe how, in your opinion,economics affects you. After you complete your study of Unit 6,compare your initial ideas with the new information you learn.

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Sacagawea, the Shoshonewho assisted the Lewis andClark expedition, is featuredon this one-dollar coin.

Sacagawea, the Shoshonewho assisted the Lewis andClark expedition, is featuredon this one-dollar coin.

The United States has a free enterprise system underwhich consumers and producers make the major economicdecisions. As you study this chapter, think about how oureconomic system works and affects your daily life.Writeyour ideas in your civics journal.

To learn more about basic economic issues, view theEconomics & You video lesson 2: What Is Economics?

Organizing Information Study Foldable Make the following foldable to helpyou organize your thoughts and information as you try to answer this question:What Is Economics?

Reading andWriting As you readthe chapter, writewhat you learn abouteconomics under theappropriate tab of yourfoldable. Write themain ideas andsupporting facts ofeach main topic.

Step 2 Turn the paper and fold it into thirds.

Step 4 Label as shown.

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The study of economics will help youmake better decisions. ▲

This will makethree tabs.

Funda-mental

EconomicProblem

MakingEconomicDecisions

Being an Economically

Smart Citizen

WHAT IS ECONOMICS?

Bob Torrez/Getty Images

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Fold it so the leftedge is about

inch from theright edge.

Step 1 Fold a sheet of paper in halffrom side to side.

Step 3 Unfold and cut the toplayer only along both folds.

Chapter Overview Visit the CivicsToday Web site at civ.glencoe.comand click on Chapter Overviews—Chapter 18 to preview chapterinformation.

GUIDE TO READING

Main Idea

Economics is the study ofhow individuals and soci-eties make choices aboutways to use scarceresources to fulfill theirneeds and wants.

Key Terms

economics, needs,wants, scarcity,economic model

Reading Strategy

Organizing InformationAs you read the section,complete a diagram likethe one below by identify-ing the three economicchoices every societymust make.

Read to Learn

• What is scarcity?• How do wants and

needs differ?

EconomicChoices

The FundamentalEconomic Problem

SECTION

406 Chapter 18 What Is Economics?David R. Frazier

A school library that couldn’t afford books for a visuallyimpaired second-grader sparked a remarkably effective economicslesson for his class and led to a prestigious award for the teacher.Bonnie Nyce, whose project was one of five top winners of America’sNational Awards for Teaching Economics, teaches second grade at thePlains Elementary School in Timberville, Virginia. When one studentpointed out that classmate Zach Shifflett, blind since birth, could onlystand around during the class’s weekly visit to the library, she saw anopportunity. Through her OperationCARE program (Children LearningAbout Braille Reading andEconomics), the class raised morethan $2,000 for the purchase ofBraille books. Ms. Nyce noted,“My hope is that the children who participated in OperationCARE will pursue furtherexperiences in economics,assured that it is not a frighteningtopic but an interesting, relevantone that deserves attention at every level of learning.”

Economic Choices In order to be a well-informed citizen, it is essential to have

a good understanding of economics and the American eco-nomic system. Well-informed citizens do more than makechoices in the voting booth, they also make rational economicchoices, and they make these choices every day.

The choices we face are based on the fact that we do nothave enough productive resources to satisfy all of our wantsand needs. Even a seemingly plentiful resource such as water isconsidered scarce because it is not free; we pay to have it.

This is where economics comes in, because economics isthe study of how we make decisions in a world where resourcesare limited. As you will discover, the study of economics willhelp us think about the process of making decisions—econom-ics is sometimes called the science of decision making.

Second-graders make adifference.

Scarcity As individuals, we have many needs

that are required for survival, such as food,clothing, and shelter. In addition, we alsohave an enormous number of wants, orthings we would like to have, such as enter-tainment, vacations, and other items thatmake life more comfortable and enjoyable.

The fundamental economic problem isthe issue of scarcity. Scarcity occurs when-ever we do not have enough resources toproduce all of the things we would like tohave. In fact, even a country as rich as theUnited States does not have enough pro-ductive resources to produce all of ourgoods such as cars, houses, and clothing,and to provide all of our services such aspublic transportation, education, nationaldefense, entertainment, and many otherthings we would like to have. Scarcity is theresult, and because of scarcity, we have tomake choices among alternatives. For

example, a rational consumer comparesprices and makes choices based on his orher limited resources. A rational consumerasks whether or not he or she can afford tobuy a small car or a big car, own a home orrent, purchase brand name items or genericones, and so on.

WHAT to ProduceOne of the choices a society has to

face is that of WHAT to produce. Forexample, if resources are limited, we mayhave to choose between making goods fordefense or producing services for peoplewho are retired or are too ill to work. Or,we may have to choose between improv-ing our roads or schools or even a nearbystadium for athletic events. Any civicleader in any community in Americacould extend this list almost indefinitelygiven the wants and needs they have intheir own communities.

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Economic Choices Our society has needs and wants.We need to provide police and fire protection. We want toprovide things like community pools. What is the differ-ence between wants and needs?

HOW to ProduceA second choice that society has to make

is that of HOW to produce. If we need morecrude oil to satisfy our energy needs, shouldwe allow drilling in an Alaskan wildlife sanc-tuary, or should we restrict oil recovery tomore traditional areas? When it comes tomanufacturing products in factories, howmuch pollution should we allow firms togenerate? After all, businesses like to pro-duce as cheaply as possible, and that some-times means leaving waste behind that maypollute the environment. As you can see, thequestion of HOW to produce is faced byevery producer of a good or service.

FOR WHOM to ProduceAfter goods and services are produced, a

society must determine how the goods andservices will be distributed among its mem-bers.Who receives the new cars? Who benefits

from a new school? As you will read, most ofthe goods and services in the United Statesare distributed through a price system.

These questions concerning WHAT,HOW, and FOR WHOM to produce arenot very easy for any society to answer.Nevertheless, they must be answered solong as there are not enough resources tosatisfy people’s unlimited wants.

Explaining Becausescarcity exists, we must make choices.Explain why this is so.

Using Economic ModelsTo economists, the word “economy”

means all the activity in a nation thattogether affects the production, distribution,and use of goods and services.When study-ing a specific part of the economy—risingunemployment, for example—economistsoften formulate theories and gather data.The data that economists collect are usedto make economic models. Economicmodels are simplified representations ofthe real world that are used to explain howthe economy works, or to predict whatwould happen if something in the economyshould change. For example, a model canbe used to predict what will happen to thetotal production of goods and services if anew tax law is passed. Many of these mod-els appear as graphs like the one shown onthe top of page 413.

It is important to remember that mod-els are based on assumptions, or things thatwe take for granted as true.We use them asfacts even though we can’t be sure that theyare facts. For example, you might assumethat a restaurant is out of your price range.You might not even try it because youassume you cannot afford it. However, youmight be wrong—the prices at the restau-rant might be quite reasonable.The quality

Choices All Societies Face

HOWto produce

FOR WHOMto produce

WHATto produce

LimitedResources

UnlimitedWants

Choices All Societies Face

Scarcity

In a world of scarcity, choiceshave to be made. What are the three basic economic questions?

408 Chapter 18 What Is Economics?

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Checking for Understanding

1. Key Terms Use each of the fol-lowing terms in a sentence thatwill help explain its meaning:economics, needs, wants,scarcity, economic model.

Reviewing Main Ideas2. Identify What is the basic eco-

nomic problem that makeschoices necessary?

3. Describe What is the purposeof an economic model? Do economic models always accu-rately predict economic behavior?Explain your answer.

Critical Thinking

4. Evaluating Information How doyou think the study of economicscan help you become a betterdecision maker?

5. Classifying Information On adiagram like the one below,provide at least three examplesof items you have had to dowithout because limitedresources could not keep up with your wants.

Analyzing Visuals

6. Infer Study the chart on page408. If a company decides touse mass production methodsthat require more equipmentand fewer workers, the companyis addressing which question?

Scarcity

SECTION ASSESSMENT

of a model is no better than the assump-tions the model is based on.

It is also important to keep in mind thatmodels can be revised. If an economicmodel results in a prediction that turns outto be right, the model can be used again. If

the prediction is wrong, the model might bechanged to make a better prediction thenext time.

Identifying What is aneconomic model?

�BE AN ACTIVE CITIZEN�7. Record Find an example in your

local newspaper of one effect ofscarcity. Your example may comefrom an article, editorial, oradvertisement. Describe whateconomic choices were made.

Chapter 18 What Is Economics? 409Reprinted with special permission of King Features Syndicate

Analyzing Visuals Luxuries such as concert tickets often becomenecessities in the eyes of consumers. How do consumers satisfy theirseemingly unlimited wants?

GUIDE TO READING

Main Idea

Trade-offs are presentwhenever choices aremade.

Key Terms

trade-off, opportunitycost, marginal cost,marginal benefit,cost-benefit analysis

Reading Strategy

Organizing InformationAs you read this section,complete a diagram likethe one below by explain-ing what you need toknow to become a gooddecision maker.

Read to Learn

• How are trade-offs andopportunity costsrelated?

• What is the purpose ofa cost-benefit analysis?

MakingDecisions

Making EconomicDecisions

SECTION

410 Chapter 18 What Is Economics?Richard Gilbert/Unicorn Stock Photography

“Beach replenishment was designed for the specific purpose of saving the federal government millions of dollarsthat would otherwise be spent in disasterassistance. More than 60 years ago, theU.S. Army Corps of Engineers . . . design[ed]a detailed cost-benefit analysis to determinewhich disaster-prone coastal areas could beprotected through beach replenishment. . . .When this year’s [major storm] hit, . . . theArmy Corps of Engineers reported thatreplenished beaches prevented more than$2.9 million in damage along nine beachesin New York and New Jersey.”

—-USA TODAY, April 9, 2001

Trade-Offs Economic decision making is surprisingly simple. It

involves only a few terms and rules. In fact, you probablyalready think about many problems the same way that econo-mists do.

The situation in the story above is a good example. In thiscase, preventive action was taken because the cost of doingsomething (the expense of beach restoration) was less than thebenefit to be gained (the advantage of not having to pay for dis-aster assistance). Most economic decisions are made the sameway—with common sense and careful analysis.

As you learned previously, scarcity forces people to makechoices about how they will use their resources. Economicdecision making requires that we take into account all the costsand all of the benefits of an action.

The economic choices people make involve exchangingone good or service for another. If you choose to buy a DVDplayer, you are exchanging your money for the right to ownthe DVD player rather than something else that might cost thesame amount. A trade-off is the alternative you face if youdecide to do one thing rather than another.

A family enjoys a day atthe beach on the

Jersey shore.

Chapter 18 What Is Economics? 411

Economists identify many trade-offs inlife. For example, more pollution-free airmeans less driving, and more driving meansless pollution-free air. Taking more time tostudy for a test means having less time totalk on the telephone with friends, and talk-ing for a long time on the telephone meansspending less time studying for the test.

Think of a trade-off on a large scale. Acountry wants to put more money into edu-cation. This strategy may be a good one,but putting more money into educationmeans having less money available formedical research or national defense.Individuals, families, businesses, and soci-eties are forced to make trade-offs everytime they choose to use their resources inone way and not in another.

Opportunity CostSuppose you decide to go to college

after you graduate from high school. If youdo, you will quickly discover that the cost ofcollege is more than the cost of books,transportation, tuition, and other fees. Oneof the biggest costs is the full-time incomethat you will not be able to earn because ofthe time you will have to spend studyingand going to classes.

Economists have a term for this broadmeasure of cost. Opportunity cost is thecost of the next best use of your time ormoney when you choose to do one thingrather than another.

Note that opportunity cost includesmore than just money. It also takes intoaccount all the possible discomforts andinconveniences linked to the choice made.After all, the opportunity cost of cleaningthe house is not just the price of cleaningproducts. It also includes the time youcould spend doing other things, like lis-tening to music or visiting with yourfriends.

Other Measures of CostSuppose you are in the business of pro-

ducing bicycle helmets. Do you know howmany helmets you would produce? Would

Rain Forest Trade-OffsHow do trade-offs of resources affect ourfuture? The Amazon Basin in Brazil is theworld’s largest tropical rain forest and riversystem. Within the basin an area equal to5,000 soccer fields is being destroyed everyday, though. Farmers burn the forests to gainfarmland for other profitable crops. Loggers cutand export the fine hardwoods for a profit.People have penetrated the forests to strip theAmazon of its curative and medicinal plants.Do research on the Amazon rain forest to findout what the trade-offs mean for the future.

Costs of Decisions If you have basketballpractice while your friends are having aparty, part of the opportunity cost of basket-ball practice is missing the party. Why doesevery choice involve an opportunity cost?

410-415 U6 CH18 S2 CT-860970 6/22/04 1:29 PM Page 411

it be 100, 500, or 10,000? You may have afeeling that you should not produce too fewor too many, but how would you know whattoo few and too many were? To begin toanswer these questions, we need to lookmore closely at costs and revenues.

Fixed CostsAll businesses have costs, but not all costs

are the same. The first kind of cost is fixedcosts—costs, or expenses, that are the sameno matter how many units of a good are pro-duced. Mortgage payments and propertytaxes are two examples of fixed costs. Itmakes no difference whether your companyproduces no bicycle helmets or a very largenumber, fixed costs remain the same.

Variable CostsAnother kind of cost is variable costs.

Variable costs are expenses that change withthe number of products produced. Wagesand raw materials are examples of variablecosts. These expenses will increase as pro-duction grows. Conversely, these expenseswill decrease when production decreases.

Total CostsIf we add fixed costs to variable costs,

we have total costs. Suppose you want tocompute total costs for a month. If fixedcosts are $1,000 for the month and variablecosts are $500, then total costs are $1,500for the month. Many businesses focus onaverage total cost. To arrive at average totalcost, simply divide the total cost by thequantity produced. For example, if the totalcost of making bicycle helmets is $1,500and 50 are produced, then average totalcost is $30 ($1,500 / 50 � $30).

Marginal Costs One final and very crucial cost con-

cept remains—marginal cost. Marginalcost is the extra, or additional, cost ofproducing one additional unit of output.Suppose total cost is $1,500 to produce30 bicycle helmets, and $1,550 to pro-duce 31 helmets. What is the marginalcost of the additional (31st) unit? Thechange in total cost is $50 and the changein the number of units is 1, so the mar-ginal cost is $50.

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Opportunity Cost Making decisions involves opportunity costs.What do you think is the opportunity cost of attending college?

Businesses use two key measures of rev-enue to decide what amount of output willproduce the greatest profits. The first istotal revenue, and the second is marginalrevenue.

Total revenue is the number of unitssold multiplied by the average price perunit. If 42 units of a product are sold at $2each, the total revenue is $84.

Marginal RevenueWhen a business is thinking about a

change in its output, it will consider how itsrevenue will change as a result of thatchange in output. What will be the addi-tional revenue from selling another unit ofoutput? Marginal revenue is the change intotal revenue—the extra revenue—thatresults from selling one more unit of output.

Marginal BenefitFinally, we usually do something

because we expect to achieve some benefit.In other words, we are concerned with themarginal benefit, the additional or extrabenefit associated with an action. When wedefine our costs and benefits in marginalterms, we can then proceed to our cost-benefit decisions.

Identifying What doeconomists call the next best alternative thathad to be given up for the one chosen?

Cost-Benefit AnalysisOnce we define the marginal costs and

benefits of a decision, we can analyze thedecision. To do this analysis, economistscreate an economic model called a cost-benefit analysis. This analysis requiresyou to compare the marginal costs andmarginal benefits of a decision. Rationaleconomic decision making tells us tochoose an action when the benefits aregreater than the costs. If the costs out-weigh the benefits, we should reject thechosen option (or alternative).

Using Cost-Benefit AnalysisThe graph on this page shows a sam-

ple cost-benefit analysis. Suppose you area farmer trying to decide how much ofyour 25 acres to plant with wheat. Assumethat the marginal (or extra) cost ofplanting and harvesting the wheat is thesame for all 25 acres. As a result, the line showing marginal cost would be ahorizontal line.

Let’s assume, though, that some of theland is better than others. As a result, thesize of the harvest that you can expectfrom each acre goes down as the numberof acres increases. After all, you wouldplant the most fertile land first. As more

Chapter 18 What Is Economics? 413Les & Viola Van/Unicorn Stock Photography

AcresAcres

MarginalBenefitsMarginalBenefits

MarginalCosts

MarginalCosts

5 10 15 20 255 10 15 20 25

Cost-Benefit Analysis

As long as the marginal benefit of farm-ing more acres exceeds the marginalcost, the farmer is better off farmingmore acres. At what point should thefarmer stop farming more acres?

414 Chapter 18 What Is Economics?

Checking for Understanding

1. Key Terms Use each of the fol-lowing terms in a sentence thatwill help explain its meaning:trade-off, opportunity cost, mar-ginal cost, marginal benefit, cost-benefit analysis.

Reviewing Main Ideas2. Explain What does making a

trade-off require you to do?3. Describe In what way is mar-

ginal benefit related to economicchoice?

Critical Thinking

4. Making Comparisons How dofixed costs differ from variablecosts?

5. Categorizing Information Identifya large purchase you would liketo make. What are the trade-offsinvolved and what are the criteriayou use to evaluate the alterna-tives? Illustrate your decision inthe form of a grid like the onebelow.

Analyzing Visuals

6. Infer Study the graph on page413. Should the farmer plantmore than 15 acres? Why?

SECTION ASSESSMENT

land is planted, you must use land that isless productive. As the graph on page 413shows, the line representing marginal ben-efit would be downward-sloping, indicat-ing diminishing marginal benefits.

The information in the graph makes iteasy to decide how much land you shouldplant. Clearly, you should plant the first 5 acres, because the marginal cost is lowwhen compared with the marginal benefitsto be gained. It would also be beneficial toplant 10 acres, even though the benefits area bit lower. In fact, it would make sense toplant up to 15 acres because to that pointthe marginal benefit is greater than themarginal cost. However, you would notwant to plant more than 15 acres. After 15 acres, the extra cost is greater than theextra benefit.

Answering the Basic QuestionsThe previous example shows how to use

a cost-benefit analysis to answer the ques-tion of how much to produce. The samemethod can be used to answer other basiceconomic questions.

For instance,you could pre-pare a similargraph showingthe costs andbenefits of plant-ing those 25acres with cropsother than wheat.Then you compare the results for all thedifferent crops. Assuming the marginalcosts are the same for all crops, the one thatproduces the greatest marginal benefits isthe one you should plant. In this way, cost-benefit analysis can be used to answer thequestion of WHAT to produce.

You can also use this method to decideFOR WHOM to produce. Think of thecosts and benefits of selling your wheat in anearby town compared to selling it in atown 100 miles away. Shipping the wheatfarther will probably cost more than truck-ing it locally, so that makes the marginalbenefit of selling it nearby greater.

Describing What is thepurpose of cost-benefit analysis?

�BE AN ACTIVE CITIZEN�7. Compare Because your time is

limited, you are constantly facingtrade-offs. Make a list of thetrade-offs you have made inchoosing how you used your timeduring a one-week period. Whatactivities did you choose to do?What were the opportunity costsinvolved in your choices?

Student Web Activity Visitciv.glencoe.com and click onStudent Web Activities—Chapter 18 to learn moreabout protecting consumerdecisions.

Alternatives Criteria 1 Criteria 2

Chapter 18 What Is Economics? 415

Critical Thinking

Why Learn This Skill?Today, we can gather a great many facts andfigures. Presenting the facts and figures inorganized ways makes them more understand-able. A circle graph, sometimes called a piechart, organizes data visually. Its circularshape represents a whole amount. The wedge-shaped sectors inside the circle represent par-ticular parts of the whole. Reading circlegraphs can help you see relationships andmake comparisons.

Learning the SkillTo read a circle graph, follow these steps:• Examine the title of the graph. The title tells

you what the graph is about, or the kind ofinformation the graph displays.

• Look at the sectors dividing the circle intoparts. The size of each sector tells you itsportion of the whole.

• Examine the labels for each sector. Thename of a sector tells you the category ofinformation it represents. The sectorlabels usually give mathematical data, orstatistics, as well. The data may be shown as percentages or perhaps actualamounts.

• Study the sizes of the sectors. See howthey relate to the whole. See how the sizeof each sector compares with the sizes ofother sectors.

Practicing the SkillOn a separate sheet of paper, answer the fol-lowing questions about the circle graph on this page.

What kind of information does the graphillustrate?How many sectors are included?What category takes up the largest sector?How does the largest sector compare withthe whole?How does the amount spent on recreationcompare with the amount spent on education?What category represents the smallestamount of consumer spending?

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1

Clothing andPersonal Items

6%

Food15%

Recreation8%

Education2%

Transportation12%

Other13%

Housing andHousehold Items

25% Medical Care19%

Source: U.S. Bureau of the Census

Personal Consumer Spending in the United States, 2000

Practice key skills with Glencoe’sSkillbuilder Interactive WorkbookCD-ROM, Level 1.

Reading a Circle Graph

Locate a circle graph in the news, library, oryour school resources. Write three sentencesbased on the graph: one sentence describingthe kind of information displayed, one relat-ing a sector category with the whole, andanother comparing two individual sectors.

Applying the Skill

GUIDE TO READING

Main Idea

In a market economy,people and businessesact in their own bestinterests to answer theWHAT, HOW, and FORWHOM questions.

Key Terms

market economy,capitalism, free enterprise, incentive,rational choice

Reading Strategy

Organizing InformationAs you read this section,complete a diagram likethe one below by describ-ing your rights and respon-sibilities in a marketeconomy.

Read to Learn

• Why is it important tobe informed about economic activity?

• What is rationalchoice?

My Role in the Economy

Being anEconomicallySmart Citizen

SECTION

416 Chapter 18 What Is Economics?Joe Raedle/Newsmakers

“There are two senses in which increasing economicliteracy contributes greatly to the functioning of our society. First, a free-market economy works well only when the participants—producers,consumers, savers, investors—have theinformation they need to make intelligentdecisions. Second, democracy works wellonly when citizens participate, vote andmake their views known to public officials.Without a basic understanding of how theeconomy works, what the essential termsand concepts are, the average citizen islikely to feel completely left out of anyconversation, whether in the media oraround the water cooler, about what ishappening in the economy and what todo about it.”

—Alice Rivlin, Vice Chair, Boardof Governors of the FederalReserve System, May 13, 1999

Understanding Your Role in the EconomyTo be good economic citizens, we must be informed. This

means that we need to have an understanding of what part weplay and how we affect the economy, and how the economyaffects us. We have a market economy. This is an economicsystem in which supply, demand, and prices help people makedecisions and allocate resources. Most economic decisions aremade by individuals looking out for their own and their fami-lies’ self- interests. A market economy is a participatory econ-omy because the choices you make as a consumer affect theproducts that businesses make. Your choices also affect theprices that businesses receive for their products. Likewise,the products offered and their prices affect the choices youmake.When people understand that they are a part of a largerprocess, their self-esteem rises.

Making democracy work

Chapter 18 What Is Economics? 417

A market economy is sometimesdescribed as being based on capitalism.This is a system in which private citizensown most, if not all, of the means of produc-tion. A market economy is also based onfree enterprise, because businesses areallowed to compete for profit with a mini-mum of government interference. Both“capitalism” and “free enterprise” describethe economy of the United States.

Keeping InformedKeeping informed about how our econ-

omy works means developing an awarenessof other features of the economy. You willlearn about many aspects of our economyin later chapters. Keeping informed alsomeans reading news stories, listening tonews reports, and gathering informationabout the economic activities of businessand government.

Understanding IncentivesAnother important part of being eco-

nomically smart citizens is understandinghow economic incentives influence behav-ior. Incentives are rewards that are offeredto try to persuade people to take certaineconomic actions. Price is one incentive, butthere are many others. Businesses offerbonuses to salespersons who sell more of aproduct than expected. Credit-card compa-nies offer low interest rates to try to con-vince consumers to choose their creditcards. Knowing how these incentives workcan help individuals make wise choicesabout them.

Understanding the Role ofGovernment

Understanding how our economyworks also helps us understand the properrole of government in our economy. Forexample, if we understand how competitivemarkets establish prices, then we can see

Courtesy family of Barbara Brown

When 16-year-old Barbara Brown ofVictoria County, Texas, says, “Don’t

Be Crude,” she means it. She’s not talkingabout being impolite—she’s referring to theoil recycling program that she and two fel-low 4-H friends drummed up in 1997. Don’tBe Crude started when Brown’s friend sawher father pouring used motor oil onto theground—a common practice among thelocals. The girls worried that the oil waspolluting the land and groundwater. Theyfelt they had to take action.

“We went to the county governmentand talked about starting oil recyclingsites,” says Brown. “We also talked to alocal oil recycling company, and the TexasNatural Resource Conservation Commis-sion.” Soon after, Brown told TIME, Don’tBe Crude was given county approval. Arecycling company set up several storagetanks in the area. The used crude waseventually carted away and made intoasphalt for Texas highways. Today, thereare six recycling sites in Victoria Countyalone, serving more than 30,000 people.At least two neighboring counties also par-ticipate in the program.

“The response has been great,” saysBrown, who has received the EnvironmentalProtection Agency’s (EPA) PresidentialEnvironmental National Youth Award, and the Texas Conservation Commission Environ-mental Excellence Award. Now Brown alsoworks as an adviser to Earth Force, a youth-led environmental group. For more informa-tion about EarthForce, go towww.earthforce.org. Don’tBe Crude’s Website is www.dontbecrude.org

Barbara Brownfrom Texas

why it is important for government to letthis process work. As a result, economistsargue that the role of government should be

to maintain competitive markets, not tointervene to establish prices for the benefitof one group or another.

At the same time, there are a number ofservices such as public education, nationaldefense, justice, and even welfare that theprivate sector does not provide. A major roleof government is to provide these services.

The government also plays importantroles in the economy as a whole. For exam-ple, the government tries to make marketscompetitive. Competition forces firms orbusinesses to use the society’s resources moreefficiently to produce not only the goods andservices that people prefer, but also to pro-duce quality products at low costs. With lowcosts of production, consumers benefit bypaying low prices for products.

Finally, the government influences thedecisions of people and businesses by reward-ing or punishing certain actions. It can offer“carrots”—incentives—to encourage peopleto take certain actions. For example, the gov-ernment can encourage the consumption ofservices such as education by awarding schol-arships and financial aid. The governmentcan encourage the production of goodsthrough subsidies (grants of money), forexample, farm subsidies.The government canalso use taxes as “sticks” to discourage otheractions. For instance, tax laws can punishcompanies that cause pollution. The govern-ment can also discourage the consumption ofgoods by imposing high taxes on them. Anexample of such a tax is the cigarette tax.

Describing What areincentives?

Making Wise Choices The ultimate goal of being an economi-

cally literate citizen is to be able to makewise choices. Good decision making leads tomore satisfaction because we consider all thecosts and benefits before making a decision.

Stephen Wozniak (1950– )Steven Jobs (1955– )Before the two Steves—Wozniakand Jobs—started tinkering withelectronic gadgets, there wasno such thing as a “personal”computer. “Woz” and Jobs hadan idea, however. They wantedto figure out how to bring huge,complicated computers to ordi-nary people. Woz created the

machine—a cross between a television and a typewriter—and the software to run it. Jobsplanned the company to build and sell thecomputer.

To raise capital, the two entrepreneurs soldJobs’s van and Woz’s calculator for a total of$1,350. Jobs was 21 and Woz was 26. On April1, 1976, the company—Apple Computer—

opened for business in Jobs’sgarage. That May, a local storeowner bought 100 computers at$500 each. The two partnersused the profits from the Apple Ito develop the Apple II. It camewith the first disk drive andfloppy disk for a personal com-puter, which had been inventedby Woz in two weeks. It wassoon the top-selling computer inthe world. Jobs and Woz becamemultimillionaires.

More inventions followed, including the highlysuccessful Macintosh. The two friends eventu-ally went their separate ways, but not beforebringing a revolution to the whole computerindustry—all for an investment of $1,350.

418 Chapter 18 What Is Economics?

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Checking for Understanding

1. Key Terms Use each of the fol-lowing terms in a sentence thatwill help explain its meaning:market economy, capitalism,free enterprise, incentive, rationalchoice.

Reviewing Main Ideas2. Identify What is an incentive?

Provide an example of a govern-ment incentive.

3. Explain Why must we use ourresources wisely?

Critical Thinking

4. Analyzing Information Explainthe importance of the consumerin a market economy.

5. Organizing InformationComplete a diagram like the onebelow, and list different types ofincentives.

Analyzing Visuals

6. Write Look at the photographon page 405. Write a caption forthe photograph that includes theterms incentive and rationalchoice.

Types ofIncentives

SECTION ASSESSMENT

When you make consumer decisionsbased on opportunity cost, you are engagingin rational choice. Rational choice ischoosing the alternative that has the greatestvalue from among comparable-quality prod-ucts. As a consumer, you will make rationalchoices when you purchase the goods andservices you believe can best satisfy yourwants for the lowest possible costs.

Do not get the impression that wiseconsumers will all make the same choices.Remember the definition: A rational choiceis one that generates the greatest perceivedvalue for any given expenditure. Rationalchoices that are based on careful consumerdecision making will still lead to billions ofdifferent consumer choices yearly.

Being an economically smart citizenwill help you to use scarce resources wisely.Resources are scarce in the world today,and they are likely to become even morescarce in the future. If each of us uses thoseresources wisely, society as a whole bene-fits. In this way, wise decision making byindividuals benefits society.

In a sense, the economic decisions wemake are similar to the political decisionswe make. A successful democracy is based

on an informed electorate. When we go tovote for political candidates, we areexpected to understand the issues so thatwe can make the best possible choices. Thesame is true when we cast our dollar“votes” for goods and services. Being fullyinformed is the best way for all of us tomake the best choices.

Explaining Do all rationalconsumers think alike? Why or why not?

�BE AN ACTIVE CITIZEN�7. Record For one week, keep

track of all your economic deci-sions—the money you spendand the choices you make. Beaware of each decision and yourreasons for making it.

Chapter 18 What Is Economics? 419

Microeconomics andMacroeconomicsAs you read this textbook, keep in mind thateconomics is divided into two branches. Inmicroeconomics, economists look at thesmall picture. They study the behavior anddecision making by small units such as indi-viduals and businesses. Macroeconomicslooks at the big picture. It deals with theeconomy as a whole and decision makingby large units such as government. Think ofother terms you know that start with theprefixes micro and macro.

Reviewing Key TermsWrite the key term that matches each definitionbelow.

1. a basic requirement for survival

2. the term for a market economy in which theproductive resources are privately owned

3. the study of how people satisfy seeminglyunlimited and competing wants with thecareful use of scarce resources

4. the problem that results from a combinationof limited resources and unlimited wants

5. an alternative that must be given up whenone choice is made rather than another

6. the cost of the next best alternative use ofmoney, time, or resources when one choiceis made rather than another

7. when you choose the alternative that has the greatest value from among comparable-quality products

8. a reward offered to try to persuade people to take certain economic actions

9. a representation that describes how theeconomy works or is expected to perform

10. a good or service that makes life more com-fortable but is not required for survival

Reviewing Main Ideas11. What are the three basic economic questions?

12. Why is an economic model useful?

13. What do economists call exchanging onegood or service for another?

14. What is marginal cost?

15. When we make an economic choice, weexpect to gain something from it. What doeconomists call this gain?

16. What economic model helps you compare themarginal costs and marginal benefits of adecision?

17. What is capitalism?

18. Why can our economy be defined as a partici-patory economy?

Section 2

• Individuals face trade-offs among alternatives.• The opportunity cost of an economic decision

is the alternative given up when one courseof action is chosen over another.

• Cost-benefit analysis is a process thatinvolves comparing the costs of a course ofaction to its benefits.

Using Your Foldables Study OrganizerUse your completed foldable to make alist of ways in which people can beeconomically smart citizens. See whocan create the longest list.

420(t)Aneal V. Vohra/Unicorn Stock Photography; (b)AP/Wide World Photos

Section 3

• In a market economy, people and businessesact in their own best interests to answer theWHAT, HOW, and FOR WHOM questions.

• The economicsystem of theUnited States is based oncapitalism andfree enterprise.

• The study ofeconomics helpspeople makeinformeddecisions.

Section 1

• The fundamental economicproblem is scarcity.

• Economists define needsas those things that arenecessary for survival.

• Wants are those thingswe desire but are notneeded to survive.

Critical Thinking19. Categorizing Information Your friend

says, “I need some new clothes.” Underwhat conditions would this be expressing a need? A want?

20. Understanding Cause and EffectAssume you want to make a model todescribe the effects of hiring senior citizens into previously held teenage jobmarkets. What factors would you analyze?

21. Drawing Inferences Nick is planning onattending college. The tuition is $10,000 peryear. Assuming Nick goes to college for fouryears, is the opportunity cost of his attend-ing college $40,000? Why or why not?

Practicing Skills Reading a Circle Graph Study the circlegraph on page 415. Then answer the followingquestions.

22. What are the top three categories of con-sumer spending?

23. Draw a circle graph like the one shown.Develop your own categories that reflecthow you spend your income. Then calculatethe amount you spend in each category.

Economics Activity24. List your five favorite foods. Then visit five

different food stores, or scan food adver-tisements in newspapers, and compare theprices of your listed items at each store.Explain why you think the stores had similaror different prices for each item.

25. With a partner, locate a source of statisticson the United States in your library. One

good source would be the StatisticalAbstract of the United States. Select a topicthat has a statistical table, such as theemployment rate for different age groups.Study the table. Then write a summary ofwhat the statistics show. Share your find-ings with the class.

Analyzing Visuals 26. Examine the figure from page 408. Select

a specific good. Then list the three eco-nomic choices that were made to producethe good.

Technology Activity27. Search the Internet for recent articles dis-

cussing scarcity. Summarize two articlesand share your findings with the class.

Effects of HiringSenior Citizens

Self-Check Quiz Visit the Civics Today Web site atciv.glencoe.com and click on Self-Check Quizzes—Chapter 18 to prepare for the chapter test.

StandardizedTest Practice

Directions: Choose the bestanswer to complete the following

statement.

Scarcity results fromF trade-offs and opportunity costs.G limited wants and limited resources.H limited resources and seemingly

unlimited wants.J the cost of the next best alternative

use of resources.

Test-Taking TipAs you read the stem of the multiple choicequestion, try to anticipate the answer before

you look at the choices. If your answer isone of the choices, it is probably correct.

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