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Transcript of Chapter 18
What is Economics? Economics is the study of how we make decisions in a world in which resources are limited as well as the study of how things are made, bought, sold, and used.
Rational choices – how to spend your money. Needs and wants Needs – things required for survival.
Food, clothing, shelter
Wants – things you would like to have.
Entertainment, vacations, luxury goods On a half-sheet of paper, write a list of needs and a list of wants.
Try to come up with at least 5 for each.
When you've complete this, write two of you examples on the white board. Because resources are limited, we do not have enough of everything to satisfy our needs and wants. 5 Economic Questions
1. Where do products come from?
2. Who makes them?
3. How do they get to stores?
4. Who buys them?
5. Why do people buy them? Microeconomics The study of the behavior of making small economic decisions – individual and small businesses. Macroeconomics The study of how decisions are made on a large scale – whole country economies and the world economy. Economic Model A theory that tries to explain human economic behavior. Each country has its own economic system or a way of producing the things that people want and need.
This system helps determine how the economic questions will be answered. Scarcity – the limits on resources – not enough of something for everyone.
Resources are things that are used to make goods and services.
Land – also natural resources
Labor – the workforce
Capital – buildings, tools, machines, things used to make other things
Entrepreneurs – Individuals who start new businesses. Some countries have many more resources than other countries.
Resources that are plentiful help a country to be more successful.
Scarcity of resources affect how decisions will be made in using resources that are available. Alternatives have to be used when you do not have the resources you need.
How to best use alternatives is another economic decision that individuals and countries have to make. What to produce?
What resources are available?
Is it something that people want or need?
What is most important in the alternatives of what to produce? Choices How to Produce?
After you decide what to produce then you have to decide how?
Try to produce as cheaply as possible.
Will it harm our environment or society? For Whom to Produce?
Who will benefit the most?
Do we get choices?
Who needs it the most?
How much will it cost and who can afford it?
Distribute equally, first come, majority, force? Making Economic Decisions
18-2 When making economic choices we need to understand all the costs and the benefits of our choices.
Trade-offs – the alternative you face if you decide to do one thing rather than another.
Decisions you make everyday involve trade-offs Time – how best to use it.
Money – how best to spend it.
Study or go to party.
Study or sleep.
Study or work.
Video Games or groceries
Movies or electric bill. Types of trade-offs Opportunity cost is the next best use of your time or money when you choose to do one thing rather than another.
Clean your room or go outside and play.
Going to college or getting a job right out of high school. Opportunity Cost Costs and Revenues Types of Costs – money you spend to produce something.
Marginal Costs Fixed Costs - These costs are the same no matter how many units of a good are produced.
Mortgage, Rent, and property taxes stay the same. Variable Costs - These costs change with the number of items produced.
Wages, raw materials
These costs increase and decrease as you produce more or less Total Costs - When you add Fixed and variable costs together you get total cost.
To get average total cost you must divide the total cost by the number of units produced. Marginal Costs - This is the additional cost to produce just one more item or unit of output.
Take the total cost and the number of items produced - $1,500 to produce 30 bicycle helmets.
It costs $1550.00 to produce 31 helmets, so the marginal cost is $50.00 to produce 1 additional unit. Total Revenue and Marginal Revenue
Total Revenue is the number of units sold multiplied by the average price per unit.
42 units sold at $2.00 per unit, total revenue is $84.00
Marginal revenue is how the total revenue will change if you produce one more or one less item. Marginal Revenue example
DVD’s at $10.00 each
Sell 100 DVD’s – Total Revenue is $1,000
If you sell 1 more DVD then the total revenue will be $1,010
The marginal revenue is $10.00 – this is the change in revenue if you sell one more DVD Marginal Benefit - This is the additional satisfaction or benefit when one more unit is produced Cost-Benefit Analysis - When you compare the marginal benefits to the marginal costs you are trying to make a rational decision.
This is cost benefit analysis
You choose the best action when the benefit is greater than the cost
If the costs outweigh the benefit then you should choose another option Law of diminishing marginal benefit
Benefits diminish as you continue to keep making the same choices.
Example – If you farm 25 acres all in one crop, not all the soil is the same and at some point it is going to cost you more to plant the land than the benefit you get from the crop. At what point should the farmer stop farming more acres? Pick any two examples that you create and make a simple chart for both.
On each chart, label the marginal cost, marginal benefit, and equilibrium point.