Chapter Introduction
Section 1: How Economic
Systems Work
Section 2: Making
Economic
Decisions
Visual Summary
As American citizens, we live
in a land of economic
opportunity. Our economy
provides us with a great
variety of jobs, goods, and
services. The United States
has a free enterprise system
under which consumers and
producers make the major
economic decisions. We can
contribute to the nation’s
economic success by taking
advantage of economic
opportunities.
Section 1:
How Economic Systems Work
An economic system is the
way a society organizes the
production and consumption
of goods and services.
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.
Section 2:
Making Economic
Decisions
An economic system is the
way a society organizes the
production and
consumption of goods and
services. Economic decision
making requires us to
understand all the different
costs and all the benefits of a
choice.
Guide to Reading
Big Idea
An economic system is the way a
society organizes the production and
consumption of goods and services.
Guide to Reading
Content Vocabulary
• need
• resource
• want
• scarcity
• economics
• microeconomics
• macroeconomics
• economic model
• economic system
Guide to Reading
Academic Vocabulary
• rational
• capable
• generate
Do you agree that understanding
economics is an important
responsibility of all citizens?
A. Agree
B. Disagree
A. A
B. B
0%
B
A
0%
Economic Choices
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
Economic Choices (cont.)
• Citizens must make economic choices
every day.
• Needs and Wants:
– Needs are required, such as food and
shelter
– Wants make life more comfortable and
enjoyable, like vacations
– Choices occur because resources
cannot meet all wants and needs.
Economic Choices (cont.)
• Economics:
– Studies decisions made in a world of
limited resources
– Studies how things are made, bought,
sold, and used
Economic Choices (cont.)
• Economic models include
microeconomics and macroeconomics
– Microeconomics focuses on the small
picture
– Macroeconomics focuses on the big
picture
• United States functions on free enterprise
capitalism
Which of the following economic
choices would you be more likely to
make?
A. buying a CD
0%
D
A
D. buying an expensive meal
C
C. saving money in a bank
A. A
B. B
C.0% C 0%
0%
D. D
B
B. paying for math tutoring
The Problem of Scarcity
The limits on, or scarcity of, resources
forces people to make careful
economic choices.
The Problem of Scarcity (cont.)
• A scarcity of resources forces people to
make economic decisions.
• No country has enough resources to
produce all necessary goods and services.
Choices All Societies Face
The Problem of Scarcity (cont.)
• Countries have choices:
– What to produce must balance needs
– How to produce must balance problems
and benefits
– For whom to produce and how to
distribute
A. Agree
0%
B. Disagree
0%
B
A. A
B. B
A
Do you agree that when
resources are limited,
choosing to produce
weapons for defense
over improving facilities
for those who are too old
or sick to work is
acceptable?
Guide to Reading
Big Idea
An economic system is the way a
society organizes the production and
consumption of goods and services.
Guide to Reading
Content Vocabulary
• trade-off
• marginal benefit
• opportunity
cost
• cost-benefit
analysis
• marginal cost
Academic Vocabulary
• previous
• compute
• diminish
Have you ever had to give up one
thing you wanted in order to get
another? Was the choice worth it?
A. Yes
A. A
B. B
0%
B
0%
A
B. No
Trade-Offs
Economic decision making requires us
to understand all the costs and all the
benefits of a choice.
Trade-Offs (cont.)
• People must understand the costs and
benefits of economic choices in order to
best make those choices.
• A trade-off requires someone to decide to
do one thing rather than another
– Individuals make trade-offs
– Trade-offs made on larger scales—
families, businesses, societies
Trade-Offs (cont.)
• Opportunity cost is second best use of
time or money after choosing one thing
over another
– Includes money, time, inconveniences,
and so on
Do you agree that almost all
decisions involve trade-offs?
A. Agree
B. Disagree
A. A
B. B
0%
B
A
0%
Costs and Revenues
Economists have developed ways of
measuring different types of costs and
revenues.
Costs and Revenues (cont.)
• There are ways to measure different types
of costs and benefits.
• Types of Costs:
– Fixed costs—do not change, have to be
paid
– Variable costs—change based on what
is produced
Costs and Revenues (cont.)
– Total costs—both fixed costs and variable
costs
– Marginal cost—cost of producing one
additional unit of output
Costs and Revenues (cont.)
• Types of Revenue:
− Total revenue equals number of units
sold multiplied by average price per unit
− Marginal revenue—revenue made by
selling one extra unit of a product
Costs and Revenues (cont.)
• Marginal benefit—an additional benefit
associated with an action
• Cost-benefit analysis requires rational
economic decision making
– Considers the benefits of making a
choice over the costs
Cost-Benefit Analysis
Do you think the benefits of
your decisions usually
outweigh the costs?
A. Yes
B. No
A. A
B. B
0%
B
A
0%
Economics
Economics is the study of
how we make decisions in
a world in which resources
are limited. Microeconomics
deals with decision making
by small units such as
individuals and firms.
Macroeconomics deals with
the economy as a whole
and decision making by
large units such as
government.
Making Economic Decisions
Individuals satisfy their unlimited wants in a world of
limited resources by making choices.
The need to make choices arises because of
scarcity, the basic problem in economics.
Every society must answer the three basic economic
questions:
• What to produce
• How to produce
• For whom to produce
Making Economic Decisions
Individuals are forced to make trade-offs every time
they use their resources in one way and not in
another.
The cost of making a trade-off is known as
opportunity cost—the value of the next best
alternative that has to be given up to do the action
that is chosen.
Costs and Revenue
Four important measures of
cost are total cost, fixed
cost, variable cost, and
marginal cost.
A key measure of revenue is
marginal revenue, which is
the change in total revenue
when one more unit of
output is sold.
Economic Systems
Every type of economic system must answer the
three basic economic questions.
The United States has a free enterprise, or capitalist,
economic system.
needs
requirements for survival, such as
food, clothing, and shelter
wants
things we would like to have, such as
entertainment, vacations, and items
that make life comfortable and
enjoyable
economics
the study of how individuals and
nations make choices about ways to
use scarce resources to fulfill their
needs and wants
microeconomics
the economic behavior and decisionmaking by individuals and small
businesses
macroeconomics
economic behavior and decisionmaking by government or whole
industries or societies
economic model
simplified representation of the real
world that economists develop to
describe how the economy behaves
and is expected to perform in the
future
economic system
nation’s way of producing things its
people want and need
resource
the money, people, and materials
available to accomplish a
community’s goals; wealth
scarcity
not having enough resources to
produce all of the things we would like
to have
rational
reasonable
capable
having ability or competence
generate
to bring into existence
trade-off
the alternative you face if you decide
to do one thing rather than another
opportunity cost
the cost of the next best alternative
use of time and money when
choosing to do one thing rather than
another
marginal cost
the additional or extra opportunity
cost associated with an action
marginal benefit
the additional or extra benefit
associated with an action
cost-benefit analysis
economic model that compares the
marginal costs and marginal benefits
of a decision
previous
coming before or prior
compute
to determine or calculate
diminish
to lessen or reduce
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