Ch. 18
What is Economics?
Section 1:
The Fundamental Economic
Problem
What is Economics?
Economics is the study of how we make
decisions in a world where resources
are limited.
Sometimes referred to as the science of
decision making
Everyone makes economic choices
Economic Decision Making
The goal as a decision maker is to make
rational, reasonable choices with the
limited resources that we have.
Imagine you have $10 in your pocket,
what do you do with it??
You have to choose between your needs
and your wants.
Needs and Wants
Needs – the things we need for survival
– Food
– Clothing
– Shelter
Wants – the things we would like to have;
luxuries
– Cars
– iPods
-- XBOX 360
-- Wii
Problem of Scarcity
The fundamental problem of economics is
scarcity – when we do not have enough
resources to produce all the things we
would like to have.
Scarcity is…
unlimited wants + limited resources =
CHOICES
Economics Defined
Remember, Economics is the study of how
we make decisions in a world with limited
resources BUT…
It is also the study of how things are made,
bought, sold, and used.
Because of Scarcity, we have to answer
the 3 basic economic questions…
3 Economic Questions
What to Produce
– As a country with limited resources do we:
1. use our resources for National Defense
2. Provide services domestically for the
unfortunate.
3 Economic Questions (cont.)
How to Produce
– As a society we have to ask ourselves how
are we going to produce products and
services
Example: Energy needs
Should the U.S. allow drilling in the Alaskan
wilderness at the expense of the
environment? Or should we restrict drilling
and as a nation deal with higher fuel prices
and foreign dependence on oil?
3 Economic Questions (cont.)
For Whom to Produce
– Who will receive the goods and services we
produce?
– The U.S. decides distribution through a
pricing system
– Other nations allow government involvement
when it comes to distribution (majority rule,
equal sharing)
Ch. 18 section 2
Making Economic Decisions
When we make any economic decision, we must
take into account all the costs and benefits of a
particular action.
Economic choices involve trade offs and
opportunity costs
Trade-Offs
Trade Off: The alternative you face when you
decide to do one thing over another. The thing
you chose to do or the action you take.
Exchanging one thing for the use of another
Can apply to money or time for product or
service
Opportunity Cost
Opportunity Cost: The cost of your next best
use of your time or money when you chose to do
one thing over the other. The thing you gave up.
This refers to the value of what you lose when
you make a trade-off
EX. I go to the movies this Friday at 7:30pm;
have to miss football game
Costs
All businesses have costs, but not all costs
are the same.
Fixed Cost: Flat cost. Does not change
with production. EX: Rent on land or office
space
Variable Cost: Changes with production.
EX: Raw materials and labor wages
Costs (cont.)
Total Cost: Adding the Fixed and Variable
Cost together.
Average Total Cost: Total cost divided by
quantity produced
$ 1500/50 bicycle helmets = $30 per helmet
Marginal Cost: Extra cost to produce one
more unit of a product.
$1500 to produce 30 bicycle helmets and $1550
to produce 31. What is our cost for 1 more unit
made?
Cost Benefit Analysis
We usually do something because we
expect to achieve some benefit
Marginal Benefit: Additional benefit
associated with an action.
We perform action for the chance of
additional satisfaction; the moment it gets
bad WHY DO IT??
Cost Benefit Analysis (cont.)
Cost Benefit Analysis: An economic
model used to compare the marginal costs
and marginal benefits of a decision.
You choose the action when the benefits
outweigh the costs; if costs outweigh the
benefits, it time to walk away.
Ex. Farmer deciding how many acres to
plant