Chapter 18: What is Economics

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• Chapter 18 What is Economics?
• Sections 1-3 - Pages 406-419

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Freedom of Choice

• The U.S. has a free enterprise system where
  consumers and producers make major economic
  decisions.
• Unlike other nations, where the governments make
  all the decisions, the U.S. government tries to
  place as little restrictions as possible on the
  growth of our economy.

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The Fundamental Economic Problem

• The problem is, we do not have enough resources
  to satisfy all of our needs.
• Economics teaches us to make choices in a world
  of limited resources.

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Economic Choices

• Needs Things we need to survive.
• Wants Things we would like to have.

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What is the difference between wants and needs?
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Scarcity

• Scarcity Occurs when our wants exceed our
  needs.
• When this happens we have to make trade-offs.

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Trade-Off

• Can afford an apartment within walking distance
  to a lake.

• Want a house on the beach.

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WHAT to Produce

• What to produce depends on the economic needs and
  resources of a person or community.
• Ex Improving roads or building a baseball
  stadium?

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HOW to Produce

• How one produces is the responsibility of the
  individual producers.
• If we need more wood, do we destroy a rainforest?
• At what point should the government intervene to
  keep producers from over-polluting?

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FOR WHOM to Produce

• A society must determine who will get the goods
  and services. (Distribution)

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Because scarcity exists, we must make choices.
-Explain why this is so.
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Using Economic Models

• Economy All the activity in a nation that
  together affects the production, distribution,
  and use of goods and services.
• Economic Models Simplified representation of
  the real world that economists develop to
  describe how the economy behaves and is expected
  to perform in the future.

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• Economic models are based on assumptions.
• Assumptions are assumed to be true unless proven
  to be wrong.
• If assumptions are proven right, the model can be
  used again.
• If assumptions are proven wrong, the model might
  be changed.

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• An economic model is no better than the
  assumption(s) the model is based on.

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Please copy the example of the economic model
from the overhead.
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Making Economic Decisions

• Section 2
• Page 410

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Trade-Offs

• Scarcity forces people to make choices about how
  they will use their resources.

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• How you choose to use your time, money, or
  resources
• Trade-off The alternative you face if you
  decide to do one thing rather than another.

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• Example The U.S. government chooses to put more
  money into education and spend less on national
  defense.
• Here tax revenue (money collected form taxes) is
  a resource.
• If the government chooses to provide every
  student with a computer they might have to buy
  less air craft for the war in Iraq.

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• Because we live in a world of limited resources,
  we are forced to make trade-offs every time we
  choose to use our scarce resources in one way and
  not the other.

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Opportunity Cost

• The cost of the next best use of your time or
  money when you choose to do one thing rather than
  another.

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• Example Going shopping with friends vs.
  studying for a test.
• Here time is a resource.
• You choose to give up the fun you will have
  hanging out with your friends because you want a
  good grade on the test.

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Read Rain Forest Trade-Offs
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Measures of Cost

• Whenever a company wants to produce a good or
  provide a service, they must figure out how much
  they are willing to spend and how much to
  produce.
• How do they go about figuring this out???

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Fixed Costs

• Costs that do not change regardless of how much
  is produced.

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Variable Costs

• Cost that vary or change with the number of
  products that are produced.
• Example raw materials (gas, wood, cotton,
  oranges) wages paid to workers (overtime)

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Total Costs

• Fixed costs plus variable costs.
• FC VC TC
• Amount Produced

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Marginal Costs

• The extra or additional cost of producing one
  additional unit of output.

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Total Revenue

• The number of units sold multiplied by the
  average price.

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Marginal Revenue

• The change in total revenue from selling one more
  unit of output.

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Marginal Benefit

• The additional or extra benefit associated with
  an action.
• More money, a new client, more customers, etc

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Cost-Benefit Analysis

• We make decisions (or changes) when the benefits
  are greater than the costs.

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Using Cost-Benefit Analysis

• Doing a Cost-Benefit Analysis will help you to
  discover the number of units you should produce
  in order to earn the greatest profit.

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Reading a Circle Graph

• Page 415

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Being an Economically Smart Citizen

• Chap. 18 Section 3
• Page 416

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Microeconomics vs. Macroeconomics

• Microeconomics Looking at the small picture.
• Ex) Decisions by individuals and business.
• Macroeconomics Looking at the big picture.
• Ex) Decisions by the government.

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All People

• Make choices about how to use limited resources.
• Decide the ownership of resources.
• Structure markets for the distribution of goods
  and services.

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Supply and Demand

• Interaction of supply and demand determines price.

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• Demand is the amount of a good or service that
  consumers are willing and able to buy at a
  certain price.

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• Supply is the amount of a good or service that
  producers are willing and able to sell at a
  certain price.

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Understanding Your Role in the Economy

• Market Economy An economy based on capitalism
  free enterprise where supply, demand, and prices
  are used to allocate resources.

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Characteristics of major economic systems
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Command economy

• Central ownership of property/resources.
• Centrally-planned economy.
• Lack of consumer choice.

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Free market

• Private ownership of property/ resources.
• Profit.
• Competition.
• Consumer sovereignty. (Producers get to decide
  what they will produce.)
• Individual choice.

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Mixed economy

• Most common economic system today.
• Individuals businesses as decision makers for
  the private sector.
• Government as decision maker for the public
  sector.
• A greater government role than in a free market
  economy.

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• The U.S. economy is a Mixed Economy.

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• In the U. S. private individuals, businesses, and
  the government share economic decision making.

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Keeping Informed

• Develop an awareness of what the government and
  business are doing by gathering information from
  many sources.

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Understanding Incentives

• Incentives Rewards that influence our
  economic behavior.
• Price
• Free Cereal Prize
• Free T-shirt
• Low interest rates to switch credit cards

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Understanding the Role of Government

• Many believe the government should only intervene
  in order to maintain competitive markets.

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• Others want the government to provide services
  like
• Education
• Defense
• Justice
• Welfare

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• The government can punish or reward individuals
  and companies according to how they use
  resources.
• Ex Carrots College Scholarships for high
  grades.
• Ex Sticks A fee for polluting.

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• The government can even discourage consumption
• Ex Placing a high tax on tobacco to discourage
  use.

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Making Wise Choices

• Resources are scare and will become more scare in
  the future.
• Wise decision-making benefits society.
• Good decisions lead to increased satisfaction.

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• It is important to know how to make a rational
  choice which has the greatest value among other
  choices.

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HOMEWORK

• QUIZ over Benchmark 9 Terms next class !
• Both Worksheets
• Oh, the things you buy
• The Cautious Consumer Comparison
• (Due A classes Feb. 27th B classes Feb.
  28th)