Economics: Study of Decision-Making in a Limited Resource World

1. What is Economics? Chapter 18

2. What is Economics? Defined ~ the study of how we make decisions in a world where resources are limited Needs Wants versus Textbook pp. 406-407

3. What is the Economy? Defined ~ the activity in a nation that together affects the production, distribution, and use of goods and services What is Scarcity? Defined ~ fundamental economic problem that occurs when you do not have enough resources to produce all of the things you would like to have Textbook pp. 407-408

5. Key Economic Questions for Societies • WHAT to produce • HOW to produce • For WHOM to produce Economic Models ~ simple representations of the real world used to explain how the economy works Textbook pp. 408-409

6. Measuring Costs • Opportunity Cost~ cost of the next best use of your time or money when you choose to do one thing over another • Fixed Cost~ expenses that remain the same no matter how many units of goods are produced (ex. Property taxes, mortgage) • Variable Cost~ expenses that change with the number of products produced (ex. Wages, raw materials) Textbook pp. 411-412

7. Measuring Costs • Total Cost~ addition of fixed costs plus variable costs; average total cost is simply the total cost divided by the quantity produced • Marginal Cost~ the extra or additional cost of producing one additional unit of output (ex. If the cost of producing 30 helmets is $1,500 and the cost to make 31 helmets is $1,550, then the marginal cost for one helmet is $50) Textbook pp. 412-413

8. Measuring Revenue • Total Revenue~ the number of units sold multiplied by the average price per unit (ex. If Xbox 360 is $200 and a store sells 10 systems, then the total is $2,000) • Marginal Revenue~ the extra revenue that would result from selling one more unit of output • Marginal Benefit~ the additional or extra benefit resulting from an action Textbook pp. 412-413

9. Cost-Benefit Analysis • Defined ~ economic model that compares the marginal costs and marginal benefits of a decision; if costs outweigh the benefit, then the option should be rejected Textbook pp. 413-414

10. How many acres should the farmer plant before the cost begins to outweigh the benefits? A: No more than 15 acres

11. Market Economy • An economic system in which supply, demand, and prices help people make decisions and allocate resources Textbook pp. 416-417

13. American Economy • Capitalism ~ a system in which private citizens own the means of production (most, if not all, businesses owned by individuals • Free Enterprise~ competition for profits among businesses with very little government interference Textbook p. 417

14. Incentives • Rewards that are offered to try to persuade people to take certain economic actions Textbook p. 417

15. Competition = Lower Consumer Prices Rational Choice ~ making consumer decisions based on opportunity cost

16. Study of Economics2 Schools of Thought • Microeconomics ~ Small scale economic decisions made by individual consumers and businesses • Macroeconomics ~ Big picture study of economic decision making of governments and trends in national economies as a whole Textbook p. 419