Ch. 18 What is Economics?

1. Ch. 18What is Economics? Section 1: The Fundamental Economic Problem

2. What is Economics? • Economics is the study of how we make decisions in a world where resources are limited. • Sometimes referred to as the science of decision making • Everyone makes economic choices

3. Economic Decision Making • The goal as a decision maker is to make rational, reasonable choices with the limited resources that we have. • Imagine you have $10 in your pocket, what do you do with it?? • You have to choose between your needs and your wants.

4. Needs and Wants • Needs – the things we need for survival • Food • Clothing • Shelter • Wants – the things we would like to have; luxuries • Cars -- XBOX 360 • iPods -- Wii

5. Problem of Scarcity • The fundamental problem of economics is scarcity – when we do not have enough resources to produce all the things we would like to have. • Scarcity is… unlimited wants + limited resources = CHOICES

6. Economics Defined • Remember, Economics is the study of how we make decisions in a world with limited resources BUT… • It is also the study of how things are made, bought, sold, and used. • Because of Scarcity, we have to answer the 3 basic economic questions…

7. 3 Economic Questions • What to Produce • As a country with limited resources do we: 1. use our resources for National Defense • Provide services domestically for the unfortunate.

8. 3 Economic Questions (cont.) • How to Produce • As a societywe have to ask ourselves how are we going to produce products and services Example: Energy needs Should the U.S. allow drilling in the Alaskan wilderness at the expense of the environment? Or should we restrict drilling and as a nation deal with higher fuel prices and foreign dependence on oil?

9. 3 Economic Questions (cont.) • For Whom to Produce • Who will receivethe goods and services we produce? • The U.S. decides distribution through a pricing system • Other nations allow government involvement when it comes to distribution (majority rule, equal sharing)

10. Ch. 18 section 2Making Economic Decisions • When we make any economic decision, we must take into account all the costs and benefits of a particular action. • Economic choices involve trade offs and opportunity costs

11. Trade-Offs • Trade Off:The alternative you face when you decide to do one thing over another. The thing you chose to do or the action you take. • Exchanging one thing for the use of another • Can apply to money or time for product or service

12. Opportunity Cost • Opportunity Cost:The cost of your next best use of your time or money when you chose to do one thing over the other. The thing you gave up. • This refers to the value of what you lose when you make a trade-off • EX. I go to the movies this Friday at 7:30pm; have to miss football game

13. Costs • All businesses have costs, but not all costs are the same. • Fixed Cost: Flat cost. Does not change with production. EX: Rent on land or office space • Variable Cost: Changes with production. EX: Raw materials and labor wages

14. Costs (cont.) • Total Cost:Adding the Fixed and Variable Cost together. • Average Total Cost: Total cost divided by quantity produced $ 1500/50 bicycle helmets = $30 per helmet • Marginal Cost:Extra cost to produce one more unit of a product. $1500 to produce 30 bicycle helmets and $1550 to produce 31. What is our cost for 1 more unit made?

15. Cost Benefit Analysis • We usually do something because we expect to achieve some benefit • Marginal Benefit: Additional benefit associated with an action. • We perform action for the chance of additional satisfaction; the moment it gets bad WHY DO IT??

16. Cost Benefit Analysis (cont.) • Cost Benefit Analysis: An economic model used to compare the marginal costs and marginal benefits of a decision. • You choose the action when the benefits outweigh the costs; if costs outweigh the benefits, it time to walk away. • Ex. Farmer deciding how many acres to plant