Chapter 18

Objectives:

7.01, 7.02, 7.03

How Economic Systems Work

• We choose between:– Needs: things required for survival– Wants: things we desire and make life more

comfortable; like entertainment, vacations, etc.

• Economics: the study of how we make decisions in a world in which resources are limited– Also study of how things are made, bought, sold

and used

How Economic Systems Work

• Two branches of Economics:–Microeconomics- studies the behavior and

decision-making of small units, like business or individuals

–Macroeconomics- deals with economy as a whole and decision-making of large units, like gov’ts, industries, and societies

• Economic Model: a theory that tries to explain human economic behavior

How Economic Systems Work

• Economic System: the way a country (or society) produces the things its people want and need– Each country has its own system– Systems determine how economic decisions will

be made– Things a country produces depend on

resources available

How Economic Systems Work

• Resources: the things used in making goods and providing services– Tools, natural resources (like soil or water), and

human labor

• Scarcity: when a country/society does not have enough resources to produce everything it needs or wants– Forces people to make choices– Sometimes people have to choose alternatives

How Economic Systems Work

• Because of scarcity, societies must choose:– What items to produce– How to produce these items– Whom the items are produced for

Making Economic Decisions

• Trade-offs: the alternatives that one faces when they decide to do one thing rather than another– Individuals, businesses, and societies make

trade-offs.

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

Making Economic Decisions

• Types of Costs for Businesses:– Fixed Costs: costs that remain the same– Variable Costs: expenses that change with the

number of items produced• Examples would be wages and raw materials

– Total Costs: Fixed Costs + Variable Costs– Marginal Costs: the additional cost of producing

one additional unit of output

Making Economic Decisions

• Types of Revenue:– Total Revenue: Number of units sold multiplied

by the average price per unit– Marginal Revenue: The change in total revenue

that results from selling one more unit of output.• Marginal Benefit: the additional satisfaction or benefit

received when one more unit is produced

Making Economic Decisions

• Types of Costs for Businesses:– Fixed Costs: costs that remain the same– Variable Costs: expenses that change with the

number of items produced• Examples would be wages and raw materials

– Total Costs: Fixed Costs + Variable Costs– Marginal Costs: the additional cost of producing

one additional unit of output

Making Economic Decisions

• Types of Revenue– Total Revenue: The number of units sold

multiplied by the average price per unit– Marginal Revenue: the extra revenue that

results from selling one more unit• Marginal Benefit: the additional satisfaction/benefit

when one more unit is produced– This is often a goal of businesses

Making Economic Decisions

• Cost-Benefit Analysis: model that compares the marginal costs and the marginal benefits of a decision– See Chart on page 508– This is a tool that most businesses use