Understanding Economics: Decisions, Scarcity, and Trade-offs

1. Chapter 18 What is Economics? Section 1- The Fundamental Economic Problem

2. Economics–the study of how we make decisions in a world where resources are limited

4. Scarcity–the fundamental economic problem; we have unlimited wants, but a limited amount of resources

5. Scarcity we must make decisions about how to balance our needs (food, clothing, shelter, etc.) with our wants

6. Needs • Goods and services that are necessary for survival. • Food • Water • Shelter

7. Wants • Goods and services that are not necessary but that we desire or wish for. • Gaming system • Larger house • Designer jeans

9. With our resources, we can buy Goods or Services Something that someone does for you. • Some thing that you can use or consume.

10. The 3 Basic Economic Questions

11. (1) Society must decidewhatto produce with its limited resources Which goods and services will be produced?

12. (2) Society must decide how to produce. What methods should we use?

13. (3) Society must decidefor whom to produce. Who will receive the goods and services?

15. 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).

16. Using Economic Models

17. Economic Models–simplified representations of the real world based on economic theories; used by economists to study a part of the economy

18. Economists use models to better understand the past or present and to predict the future

19. Businesses and government often base their decisions on the results of economic models

20. Chapter 18 What is Economics? Section 2 Making Economic Decisions

21. Making Economic Decisions • Scarcity forces people to make choices about how they will use their resources • Must take into account all costs and benefits

22. 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

23. 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 work college

24. Measures of cost • Fixed costs • Expenses that are the same no matter how many units are produced • Examples: mortgage, car payments, rent

25. Measures of Cost • Variable costs • Expenses that change with the number of products produced • Examples: electric bill, water bill, grocery shopping

26. Measures of Cost • Total costs • Add fixed costs and variable costs • Businesses look at average total costs (divide total cost by quantity produced) TOTAL COSTS Fixed costs + Variable costs =

27. 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?

28. Marginal benefit • Additional/extra benefit associated with an action • We do things because we expect to receive a benefit

29. Cost-benefit analysis • Comparing the marginal costs and marginal benefits of a decision