economics part ii. all businesses have costs. 1. fixed costs – costs that are the same no matter...
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![Page 1: Economics Part II. All businesses have costs. 1. Fixed costs – costs that are the same no matter how many units of a good are produced. Such as](https://reader033.vdocuments.us/reader033/viewer/2022061612/56649eb15503460f94bb7904/html5/thumbnails/1.jpg)
Economics Part II
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All businesses have costs.
1. Fixed costs – costs that are the same no matter how many units of a good are produced. Such as
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a) Mortgage payments
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b) Property taxes
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2. Variable costs -
Expenses that change with the number of products that are produced.
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These expenses will increase as production grows and will decrease as production decreases.
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a) wages – If you have more people working, you can make more products, but your expenses for wages will also go up.
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If you reduce the number of people you have working, production goes down and so do your expenses for wages.
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b) Raw materials
The more items you produce, the more raw materials you will need and the more expenses you will have for raw materials.
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3. Total costs
variable costsFixed +
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4. Average total cost – the total cost divided by the quantity produced.
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Example: If the total cost of making bicycle helmets is $1,500 and 50 are produced, the average total cost is $30 per helmet.
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5. Marginal costs -
The extra, or additional cost of producing one additional unit of output.
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Example: If the total cost to produce 30 bicycle helmets is $1,500 and $1,550 to produce 31 helmets, the additional cost to produce one more is $50.
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IV. Revenue
Businesses measure two key measures of revenue to decide what amount of output will produce the greatest profits.
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1. Revenue – number of units sold times the price per unit.
If you sold 10 helmets for $35, the revenue would be $350.
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X $35 = $350
Revenue
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2. Marginal Revenue – the change in total revenue – the extra revenue – that results from selling one more unit of output.
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V. Economic models:
The economy includes all the activity in a nation that together affect production, distribution and the use of goods and services.
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Economic models are simplified representations of the real world based on economic theories.
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VI. Cost- Benefit Analysis is an economic model used to compare marginal costs and marginal benefits of a decision.
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VII. Producing Goods and Services
A. Economic output includes goods and services.
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B. Four factors of production:
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1. Natural Resourcesa. soil
b. water
c. forests
d. Raw materials/minerals
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2. Human resourcesa. skills
b. knowledge
c. energy
d. Physical capabilities
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3. Capital
a. moneyb. machineryc. factoriesd. equipment
e. trucks
f. tools
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4. Management
a. Owners of sole proprietorships
b. partners
c. Corporate managers
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Entrepreneurs
Individuals who start new businesses, introduce new products, and improve management techniques.
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C. Gross Domestic Product
1. The Gross Domestic Product (GDP) is a measure of the size of the economy.
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It is the total value, in dollars of all final goods and services produced in the country during a single year.
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2. GDP does not count intermediate goods, which are components of final goods.
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It also does not count the sale of used goods, which do not represent new production.
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3. GDP is expressed in terms of money.
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This enables us to compare the relative worth of goods and services, which is more meaningful than simply numbers of products.
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4. To compute GDP, identify all goods and services produced and their average prices.
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Multiply the number produced of each item by its average price.
Then add up everything.
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5. If the new GDP is higher than the previous one, then the economy is expanding.
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If it is lower, the economy is declining.
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Economists study GDP figures regularly to analyze business cycle patterns.
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6. Standard of living is the quality of life based on the possession of necessities and luxuries that make life easier.
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When GDP grows faster than the population, there are more goods and services, on average, for us to enjoy.
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7. GDP does not measure society’s overall well-being.
Other things- such as :
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Reduction in crime and drug abuse or
Greater equality of opportunity
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Can make a country better off without raising the GDP.
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8. It also does not account for the improvements in product quality.