Chapter 18 What is Economics?

Section 1- The Fundamental Economic Problem

Economics –

the study of how we make decisions in a world where resources are limited

Scarcity –

the fundamental economic problem;

we have unlimited wants, but a limited amount of resources

Scarcity

we must make decisions about how to balance our needs (food, clothing,

shelter, etc.) with our wants

Needs• Goods and services

that are necessary for survival.

• Food• Water• Shelter

Wants• Goods and services

that are not necessary but that we desire or wish for.

• Gaming system• Larger house• Designer jeans

With our resources, we can buy Goods or• Some thing that you

can use or consume.

Services• Something that

someone does for you.

The 3 Basic Economic Questions

(1) Society must decide what to produce with its limited resources

Which goods and services will be produced?

(2) Society must decide how to produce.

What methods should we use?

(3) Society must decide for whom to produce.

Who will receive the goods and services?

The Guns vs. Butter Dilemma• In times of scarce resources

(recessions), governments must make choices about whether to spend money on defense (guns) or the needs of regular Americans (butter).

Using Economic Models

Economic Models –

simplified representations of the real world based on economic theories;

used by economists to study a part of the economy

Economists use models to better understand the past or present and to

predict the future

Businesses and government often base their decisions on the results of

economic models

Chapter 18 What is Economics?

Section 2 Making Economic Decisions

Making Economic Decisions• Scarcity forces people to make choices

about how they will use their resources

• Must take into account all costs and benefits

Trade off• alternative you face if you decide to

do one thing rather than another

• Examples: • 1.buying a candy bar or buying a drink

• 2. studying for a test or talking on the phone with friends

OR

OR

Opportunity Cost• Cost of the next best use of your time/$ if

you chose to do one thing rather than another– Includes discomforts and inconveniences

• Examples: going to college or going to work

college work

Measures of cost• Fixed costs

–Expenses that are the same no matter how many units are produced

–Examples: mortgage, car payments, rent

Measures of Cost• Variable costs

–Expenses that change with the number of products produced

–Examples: electric bill, water bill, grocery shopping

Measures of Cost• Total costs

–Add fixed costs and variable costs

–Businesses look at average total costs (divide total cost by quantity produced)Fixed

costs+Variable costs = TOTAL

COSTS

Measures of Cost• Marginal cost

–Extra/additional cost of producing one additional unit of output

• Example: if it costs $20 to make 5 cd’s and $24 to make 6 cd, how much is the marginal cost of producing the 6th cd?

Marginal benefit• Additional/extra benefit associated

with an action

• We do things because we expect to receive a benefit

Cost-benefit analysis• Comparing the marginal costs and

marginal benefits of a decision