Economic Choices
• Economics is the study of how we make
decisions in a world where resources are
limited.
• It is sometimes called the science of decision
making.
• Needs are things we need for survival, such
as food, clothing, and shelter.
• Wants are things we would like to have.
(pages 406–408)
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Economic Choices (cont.)
• The fundamental economic problem
is scarcity–we do not have enough resources to
produce all the things we would like to have.
• Because of scarcity, we must make choices
among alternatives.
(pages 406–408)
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Economic Choices (cont.)
• Society must decide what to produce with its
limited resources.
• For example, society may have to choose
whether to produce goods for defense or
services for poor people.
• Society must decide how to produce.
• For example, should we accept more
pollution from factories in exchange for
greater output of products?
(pages 406–408)
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Economic Choices (cont.)
• Society must decide for whom to produce.
• Who will receive the goods and services?
• In the United States, most goods and services
are distributed through the price system.
(pages 406–408)
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Using Economic Models
• The economy includes all the activity
in a nation that together affects the
production, distribution, and use of goods
and services.
(pages 408–409)
Using Economic Models (cont.)
• To study a part of the economy, economists
use economic models.
• These are simplified representations
of the real world, based on economic
theories.
• Businesses and governments often base
decisions on solutions that emerge
from testing economic models.
(pages 408–409)
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Using Economic Models (cont.)
• Models are based on assumptions.
• The quality of the model’s results can be no
better than the assumptions on which it is
based.
(pages 408–409)
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Using Economic Models (cont.)
• Economists use models to better understand
the past or present and
to predict the future.
• If predictions based on a model turn
out to be wrong, economists revise
the model.
(pages 408–409)
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Checking for Understanding (cont.)
Identify What is the basic economic
problem that makes choices necessary?
The basic economic problem is scarcity.
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Trade-Offs
• Economic decision making requires that we
take into account all the costs and all the
benefits of an action.
• Economic choices involve trade-offs,
or exchanging one thing for the use of
another.
• For example, when you buy a product, you
exchange money for the right to own that
product rather than something else you could
buy for the same price.
(pages 410–413)
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Trade-Offs (cont.)
• People, businesses, and societies make tradeoffs every time they choose to use their
resources in one way and not in another.
• More money for education may mean less
money to spend on medical research or
national defense.
(pages 410–413)
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Trade-Offs (cont.)
• Opportunity cost is what you cannot buy or
do when you choose to do or buy one thing
rather than another.
• It is the next best alternative that you had to
give up for the choice you made.
(pages 410–413)
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Trade-Offs (cont.)
• Opportunity cost includes more than just
money.
• It also includes the discomforts and
inconveniences linked to the choice made.
• For example, the opportunity cost of cleaning
the house includes not only the price of
cleaning products, but also the time you spent
cleaning instead of doing something else, like
listening to music.
(pages 410–413)
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Trade-Offs (cont.)
• All businesses have fixed and variable costs.
• Fixed costs are expenses that are the same no
matter how many units of a good are
produced.
• Variable costs are expenses that change with
the number of products produced.
• If a business produces more, variable costs
like raw materials and wages will increase.
(pages 410–413)
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Trade-Offs (cont.)
• Fixed costs plus variable costs equal total
costs.
• To find average total cost, divide total cost by
the quantity produced.
• Marginal cost is the extra cost of producing
one additional unit of output.
• If it costs an extra $50 to produce one more
bicycle helmet, the marginal cost
is $50.
(pages 410–413)
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Trade-Offs (cont.)
• Businesses measure total revenue and marginal
revenue to decide what amount of output will
produce the greatest profits.
• Total revenue equals the number of units sold
times the average price per unit.
• Marginal revenue is the change in total
revenue that results from selling one more
unit of output.
(pages 410–413)
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Trade-Offs (cont.)
• We usually do something because we expect
to achieve some benefit.
• Marginal benefit is the additional benefit
associated with an action.
(pages 410–413)
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Cost-Benefit Analysis
• Cost-benefit analysis is an economic model
used to compare marginal costs and marginal
benefits of a decision.
• You should choose an action when the
benefits are greater than the costs.
• If costs outweigh benefits, you should reject
the option.
(pages 413–414)
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Cost-Benefit Analysis (cont.)
• Suppose you are a farmer trying to decide how
many acres to plant.
• The graph on page 413 of your textbook shows
a cost-benefit analysis for this decision.
• You will plant the most productive land first.
• The extra benefits decline as you plant less
productive land.
• The graph shows that after 15 acres, the extra
costs outweigh the extra benefits of planting
more acres.
(pages 413–414)
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Cost-Benefit Analysis (cont.)
• The result of this analysis tells you to plant no
more than 15 acres.
• You could do a similar analysis to determine
what to produce.
• For example, you could compare the results
of planting crops other than wheat.
• The crop that produces the greatest marginal
benefit is the one you should plant.
(pages 413–414)
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Cost-Benefit Analysis (cont.)
• You could use this method to decide for whom
to produce.
• You could compare the costs and benefits of
selling your wheat nearby
or 100 miles away.
• You would choose to distribute your product
wherever the marginal benefit was greatest.
(pages 413–414)
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Checking for Understanding
Define Match the terms on the right with their definitions on the
left.
__
C 1.
__
E 2.
__
B 3.
the additional or extra opportunity cost
associated with an action
economic model that compares the
marginal costs and marginal benefits of
a decision
the cost of the next best alternative use
of time and money when choosing to do
one thing rather than another
D 4.
__
the additional or extra benefit associated
with an action
A 5.
__
the alternative you face if you decide to
do one thing rather than another
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A. trade-off
B. opportunity
cost
C. marginal cost
D. marginal
benefit
E. cost-benefit
analysis
Understanding Your Role in the
Economy
• The United States has a market economy.
• Most economic decisions are not made by the
government, but by individuals looking out
for their own and their families’ selfinterests.
(pages 416–418)
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Understanding Your Role in the
Economy (cont.)
• A market economy is participatory.
• The choices you make as a consumer affect
the products that businesses
make and the prices they receive for their
products.
• Likewise, the products offered and their
prices affect the choices you make.
(pages 416–418)
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Understanding Your Role in the
Economy (cont.)
• A market economy is based on capitalism, a
system in which citizens own most of the
means of production.
• It is also based on free enterprise–
businesses compete for profit with a
minimum of government interference.
(pages 416–418)
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Understanding Your Role in the
Economy (cont.)
• Keeping informed means reading news stories,
listening to news reports, and gathering
information about economic activities of
businesses and government.
(pages 416–418)
Understanding Your Role in the
Economy (cont.)
• Incentives are rewards offered to try to
persuade people to take certain economic
actions.
• Price is one incentive.
• Others are bonuses for salespeople
and low credit rates for consumers.
• Knowing how incentives work will help you
make wise choices.
(pages 416–418)
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Understanding Your Role in the
Economy (cont.)
• One role of government in the economy is to
help maintain competitive markets.
• Another role is to provide services, such as
education and national defense, that the
private sector does not provide.
(pages 416–418)
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Understanding Your Role in the
Economy (cont.)
• Competition forces businesses to use society’s
resources efficiently to produce goods and
services people prefer and to produce quality
products at low costs.
• Low production costs keep prices low for
consumers.
(pages 416–418)
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Understanding Your Role in the
Economy (cont.)
• Government can use incentives to encourage
people and businesses
to take certain actions.
• For example, offering scholarships
encourages more people to get higher
education.
• Government can also discourage certain
actions.
• For example, tax laws can punish
companies that cause pollution.
(pages 416–418)
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Understanding Your Role in the
Economy (cont.)
Fumes from motor vehicles contribute to air
pollution. What could the government do to
encourage actions that would reduce this source
of pollution?
(pages 416–418)
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Understanding Your Role in the
Economy (cont.)
Government could increase the tax on gasoline.
It could impose an extra tax on “gas-guzzling” vehicles. It
could make laws that require carmakers to produce more
fuel-efficient cars. The federal or state government could
withhold funding from local governments where air
pollution exceeds an acceptable standard. This would
encourage the local governments to find ways to
encourage people to drive less, such as by improving the
public transportation system or adding carpool lanes.
(pages 416–418)
Making Wise Choices
• Rational choice is choosing the alternative that
has the greatest value from among comparablequality products.
• You make a rational choice when you buy the
goods and services that you believe will best
satisfy your wants for the lowest possible
cost.
(pages 418–419)
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Making Wise Choices (cont.)
• Wise consumers will not all make the same
choices.
• A rational choice is one that generates the
greatest perceived value for any given
expenditure.
• Wise decision making by individuals also
benefits society by making the best use of
scarce resources.
• Being fully informed is the best way to make
the best economic as well as political
decisions.
(pages 418–419)
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Making Wise Choices (cont.)
How is good consumer decision making similar
to good political decision making?
To make the best possible choices when you
vote, you must be informed about candidates
and issues. The same is true when you cast your
dollar “votes” for goods and services. Being
fully informed is the best way to make the best
choices.
(pages 418–419)
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Checking for Understanding
Define Match the terms on the right with their definitions on the
left.
__
E 1.
__
A 2.
__
B 3.
choosing the alternative that has the
greatest value from among comparablequality products
A. market
economy
system in which individuals own the
factors of production and make
economic decisions through free
interaction
C. free enterprise
a system in which private citizens own
most, if not all, of the means of
production and decide how to use them
within legislated limits
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B. capitalism
D. incentive
E. rational
choice
Checking for Understanding (cont.)
Define Match the terms on the right with their definitions on the
left.
__
D 4.
reward offered to try to persuade people
to take certain economic actions
A. market
economy
__
C 5.
economic system in which individuals
and businesses are allowed to compete
for profit with a minimum of
government interference
B. capitalism
C. free enterprise
D. incentive
E. rational
choice
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Section 1: The Fundamental Economic
Problem
• The fundamental economic problem is
scarcity.
• Economists define needs as those things that
are necessary for survival.
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Section 2: Making Economic Decisions
• Individuals face trade-offs among
alternatives.
• The opportunity cost of an economic
decision is the alternative given up when one
course of action is chosen over another.
• Cost-benefit analysis is a process that
involves comparing the costs of a course of
action to its benefits.
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Section 3: Being an Economically
Smart Citizen
• In a market economy, people and businesses act
in their own best interests to answer the WHAT,
HOW, and FOR WHOM questions.
• The economic system of the United States is
based on capitalism and free enterprise.
• The study of economics helps people make
informed decisions.
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Reviewing Key Terms
Define Match the terms on the right with their definitions on the
left.
__
E 1.
a basic requirement for survival
A.
capitalism
__
A 2.
term for a market economy in
which the productive resources are
privately owned
B.
economics
C.
economic model
D.
incentive
E.
need
F.
opportunity cost
G.
rational choice
H.
scarcity
I.
trade-offs
J.
want
__
B 3.
__
H 4.
__
I 5.
study of how people satisfy
seemingly unlimited and competing
wants with the careful use of scarce
resources
problem that results from a
combination of limited resources
and unlimited wants
alternatives that must be given up
when one choice is made rather
than another
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Reviewing Key Terms (cont.)
Define Match the terms on the right with their definitions on the
left.
F 6.
__
__
G 7.
D 8.
__
the cost of the next best
alternative use of money, time, or
resources when one choice is
made rather than another
A.
capitalism
B.
economics
C.
economic model
choosing the alternative that has
the greatest value from among
comparable-quality products
D.
incentive
E.
need
F.
opportunity cost
G.
rational choice
H.
scarcity
I.
trade-offs
J.
want
a reward offered to try to
persuade people to take certain
economic actions
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Reviewing Key Terms (cont.)
Define Match the terms on the right with their definitions on the
left.
__
C 9.
a representation that describes
how the economy works or is
expected to perform
A.
capitalism
B.
economics
J 10. good or service that makes life
__
more comfortable but is not
required for survival
C.
economic model
D.
incentive
E.
need
F.
opportunity cost
G.
rational choice
H.
scarcity
I.
trade-offs
J.
want
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Reviewing Main Ideas
What are the three basic economic questions?
The questions are what to produce, how to
produce, and for whom to produce.
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Reviewing Main Ideas (cont.)
Why is an economic model useful?
It describes how an economy works or is
expected to perform.
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Reviewing Main Ideas (cont.)
What do economists call exchanging one good
or service for another?
It is called a trade-off.
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Reviewing Main Ideas (cont.)
When we make an economic choice, we expect
to gain something from it. What do economists
call this gain?
Economists call this gain the marginal benefit.
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Reviewing Main Ideas (cont.)
Why can our economy be defined as a
participatory economy?
It is participatory because our choices will
reflect what goods and services are produced.
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Critical Thinking
Categorizing Information Your friend says, “I
need some new clothes.” Under what conditions
would this be expressing a need? A want?
It would be a need if the clothes were absolutely
necessary for survival. It would be a want if it
were a simple desire for more clothes.
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Critical Thinking (cont.)
Drawing Inferences Nick is planning on
attending college. The tuition is $10,000 per year.
Assuming Nick goes to college for four years, is
the opportunity cost of his attending college
$40,000? Why or why not?
The opportunity cost is what Nick forfeits to
attend college. Suppose Nick would work fulltime if he did not go to college earning $18,000
a year. This $18,000 is the annual opportunity
cost of his attending college.
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Analyzing Visuals
Read the figure on page 408 of your textbook.
Select a specific good. Then list the three
economic choices that were made to produce the
good.
Possible answer:
What to Produce: Boots
How: Acquire resources and build factories
For Whom: Those who live in cold climates
or work outdoors
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Directions: Choose the best answer to the following
question.
Scarcity results from
F
trade-offs and opportunity costs.
G
limited wants and limited resources.
H
limited resources and seemingly unlimited wants.
J
the cost of the next best alternative use of resources.
Test-Taking Tip As you read the stem of the multiple choice
question, try to anticipate the answer before you look at the
choices. If your answer is one of the choices,
it is probably correct.
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In what way is a market economy based on free
enterprise?
Businesses are allowed to compete for profit
with minimum governmental interference.
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Explore online information about the topics introduced
in this chapter.
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Civics Today: Citizenship, Economics, & You Web site. At this site, you
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Charts
Choices All Societies Face
Cost-Benefit Analysis
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Reading a Circle Graph
Why Learn This Skill?
Today, we can gather a great many facts and figures.
Presenting the facts and figures in organized ways
makes them more understandable. A circle graph,
sometimes called a pie chart, organizes data visually.
Its circular shape represents a whole amount. The
wedge-shaped sectors inside the circle represent
particular parts of the whole. Reading circle graphs
can help you see relationships and make
comparisons.
Click the Speaker button
to replay the audio.
Reading a Circle Graph
Learning the Skill
To read a circle graph, follow these steps:
• Examine the title of the graph. The title tells you what the
graph is about, or the kind of information the graph
displays.
• Look at the sectors dividing the circle into parts.
The size of each sector tells you its portion of the whole.
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Reading a Circle Graph
Learning the Skill
• Examine the labels for each sector. The name
of a sector tells you the category of information
it represents. The sector labels usually give mathematical
data, or statistics, as well. The data may be shown as
percentages or perhaps actual amounts.
• Study the sizes of the sectors. See how they relate
to the whole. See how the size of each sector compares
with the sizes of other sectors.
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Reading a Circle Graph
Practicing the Skill
On a separate sheet of paper,
answer the following
questions about the circle
graph on page 415 of your
textbook.
Reading a Circle Graph
1. What kind of information does
the graph illustrate?
The graph illustrates the personal
consumer spending in the U.S. in
2000.
2. How many sectors are
included?
Eight sectors are included.
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Reading a Circle Graph
3. What category takes up
the largest sector?
Housing and household items
take up the largest sector.
4. How does the largest
sector compare with the
whole?
The largest sector is onefourth of the whole.
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Reading a Circle Graph
5. How does the amount spent
on recreation compare with
the amount spent on
education?
Four times as much is
spent on recreation as
on education.
6. What category represents
the smallest amount of
consumer spending?
Education represents the
smallest amount of consumer
spending.
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Mathematics The area of economics that uses
mathematical models to analyze, interpret, and
predict economic behavior is known as
econometrics.
There are several freedoms in free enterprise–
the freedom to work where a person wants, the
freedom to start one’s own business, the freedom to
acquire property, the freedom to choose what goods
to buy and sell, and even the freedom to fail.
Sometimes people fail in their business efforts
because other people have the freedom to spend
their money as they choose.
Luxuries such as
concert tickets often
become necessities in
the eyes of
consumers. How do
consumers satisfy
their seemingly
unlimited wants?
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They satisfy their
wants by making
choices.
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