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.