Ch. 18Ch. 18What is Economics?What is Economics?

Section 1:Section 1:

The Fundamental Economic The Fundamental Economic ProblemProblem

What is Economics?What is Economics?

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

Sometimes referred to as the science of Sometimes referred to as the science of decision makingdecision making

Everyone makes economic choicesEveryone makes economic choices

Economic Decision MakingEconomic Decision Making

The goal as a decision maker is to make The goal as a decision maker is to make rational, rational, reasonable choices with the reasonable choices with the limited resources that we have.limited resources that we have.

Imagine you have $10 in your pocket, Imagine you have $10 in your pocket, what do you do with it??what do you do with it??

You have to choose between your You have to choose between your needsneeds and your and your wants.wants.

Needs and WantsNeeds and Wants

Needs – the things we need for survivalNeeds – the things we need for survival– FoodFood– ClothingClothing– ShelterShelter

Wants – the things we would like to have; Wants – the things we would like to have; luxuriesluxuries– CarsCars -- XBOX 360-- XBOX 360– iPodsiPods -- Wii-- Wii

Problem of ScarcityProblem of Scarcity

The fundamental problem of economics is The fundamental problem of economics is scarcity scarcity – when we do not have enough – when we do not have enough resources to produce all the things we resources to produce all the things we would like to have.would like to have.

Scarcity is…Scarcity is…

unlimited wants + limited resources =unlimited wants + limited resources =

CHOICESCHOICES

Economics DefinedEconomics Defined

Remember, Economics is the study of how Remember, Economics is the study of how we make decisions in a world with limited we make decisions in a world with limited resources BUT…resources BUT…

It is also the study of how things are made, It is also the study of how things are made, bought, sold, and used.bought, sold, and used.

Because of Scarcity, we have to answer Because of Scarcity, we have to answer the 3 basic economic questions…the 3 basic economic questions…

3 Economic Questions3 Economic Questions

What to ProduceWhat to Produce– As a country with limited resources do we:As a country with limited resources do we:

1. use our resources for National Defense 1. use our resources for National Defense

2.2. Provide services domestically for the Provide services domestically for the unfortunate.unfortunate.

3 Economic Questions (cont.)3 Economic Questions (cont.)

How to ProduceHow to Produce– As a societyAs a society we have to ask ourselves how we have to ask ourselves how

are we going to produce products and are we going to produce products and servicesservices

Example: Energy needsExample: Energy needsShould the U.S. allow drilling in the Alaskan Should the U.S. allow drilling in the Alaskan

wilderness at the expense of the wilderness at the expense of the environment? Or should we restrict drilling environment? Or should we restrict drilling and as a nation deal with higher fuel prices and as a nation deal with higher fuel prices and foreign dependence on oil?and foreign dependence on oil?

3 Economic Questions (cont.)3 Economic Questions (cont.)

For Whom to ProduceFor Whom to Produce– Who will receiveWho will receive the goods and services we the goods and services we

produce?produce?– The U.S. decides distribution through a pricing The U.S. decides distribution through a pricing

systemsystem– Other nations allow government involvement Other nations allow government involvement

when it comes to distribution (majority rule, when it comes to distribution (majority rule, equal sharing)equal sharing)

Ch. 18 section 2Ch. 18 section 2Making Economic DecisionsMaking Economic Decisions

When we make any economic decision, we must When we make any economic decision, we must take into account all the costs and benefits of a take into account all the costs and benefits of a particular action.particular action.

Economic choices involve Economic choices involve trade offs trade offs and and opportunity costsopportunity costs

Trade-OffsTrade-Offs

Trade Off:Trade Off: The alternative you face when you The alternative you face when you decide to do one thing over another. decide to do one thing over another. The thing The thing you chose to do or the action you take.you chose to do or the action you take.

Exchanging one thing for the use of anotherExchanging one thing for the use of another

Can apply to money or time for product or Can apply to money or time for product or serviceservice

Opportunity CostOpportunity Cost

Opportunity Cost:Opportunity Cost: The cost of your next best The cost of your next best use of your time or money when you chose to do use of your time or money when you chose to do one thing over the other. The thing you gave up. one thing over the other. The thing you gave up.

This refers to the value of what you lose when This refers to the value of what you lose when you make a trade-offyou make a trade-off

EX. I go to the movies this Friday at 7:30pm; EX. I go to the movies this Friday at 7:30pm; have to miss football gamehave to miss football game

Costs Costs

All businesses have costs, but not all costs All businesses have costs, but not all costs are the same.are the same.

Fixed Cost:Fixed Cost: Flat cost. Does not change Flat cost. Does not change with production. EX: Rent on land or office with production. EX: Rent on land or office spacespace

Variable Cost:Variable Cost: Changes with production. Changes with production. EX: Raw materials and labor wagesEX: Raw materials and labor wages

Costs (cont.)Costs (cont.)

Total Cost:Total Cost: Adding the Fixed and Variable Adding the Fixed and Variable Cost together.Cost together. Average Total Cost: Average Total Cost: Total cost divided by Total cost divided by quantity producedquantity produced

$ 1500/50 bicycle helmets = $30 per helmet$ 1500/50 bicycle helmets = $30 per helmet

Marginal Cost:Marginal Cost: Extra cost to produce one Extra cost to produce one more unit of a product. more unit of a product.

$1500 to produce 30 bicycle helmets and $1550 $1500 to produce 30 bicycle helmets and $1550 to produce 31. What is our cost for 1 more unit to produce 31. What is our cost for 1 more unit made?made?

Cost Benefit AnalysisCost Benefit Analysis

We usually do something because we We usually do something because we expect to achieve some benefitexpect to achieve some benefit

Marginal Benefit:Marginal Benefit: Additional benefit Additional benefit associated with an action.associated with an action.

We perform action for the chance of We perform action for the chance of additional satisfaction; the moment it gets additional satisfaction; the moment it gets bad WHY DO IT??bad WHY DO IT??

Cost Benefit Analysis (cont.)Cost Benefit Analysis (cont.)

Cost Benefit Analysis:Cost Benefit Analysis: An economic An economic model used to compare the marginal costs model used to compare the marginal costs and marginal benefits of a decision.and marginal benefits of a decision.

You choose the action when the benefits You choose the action when the benefits outweigh the costs; if costs outweigh the outweigh the costs; if costs outweigh the benefits, it time to walk away.benefits, it time to walk away.

Ex. Farmer deciding how many acres to Ex. Farmer deciding how many acres to plantplant