Chapter 18
Objectives:
7.01, 7.02, 7.03
How Economic Systems Work
• We choose between:
– Needs: things required for survival
– Wants: things we desire and make life more
comfortable; like entertainment, vacations, etc.
• Economics: the study of how we make
decisions in a world in which resources are
limited
– Also study of how things are made, bought, sold
and used
How Economic Systems Work
• Two branches of Economics:
– Microeconomics- studies the behavior and
decision-making of small units, like business or
individuals
– Macroeconomics- deals with economy as a
whole and decision-making of large units, like
gov’ts, industries, and societies
• Economic Model: a theory that tries to
explain human economic behavior
How Economic Systems Work
• Economic System: the way a country (or
society) produces the things its people want
and need
– Each country has its own system
– Systems determine how economic decisions will
be made
– Things a country produces depend on
resources available
How Economic Systems Work
• Resources: the things used in making goods
and providing services
– Tools, natural resources (like soil or water), and
human labor
• Scarcity: when a country/society does not
have enough resources to produce
everything it needs or wants
– Forces people to make choices
– Sometimes people have to choose alternatives
How Economic Systems Work
• Because of scarcity, societies must choose:
– What items to produce
– How to produce these items
– Whom the items are produced for
Making Economic Decisions
• Trade-offs: the alternatives that one faces
when they decide to do one thing rather
than another
– Individuals, businesses, and societies make
trade-offs.
• Opportunity Cost: the cost of the next best
use of your time or money when you choose
to do one thing rather than another
Making Economic Decisions
• Types of Costs for Businesses:
– Fixed Costs: costs that remain the same
– Variable Costs: expenses that change with the
number of items produced
• Examples would be wages and raw materials
– Total Costs: Fixed Costs + Variable Costs
– Marginal Costs: the additional cost of producing
one additional unit of output
Making Economic Decisions
• Types of Revenue:
– Total Revenue: Number of units sold multiplied
by the average price per unit
– Marginal Revenue: The change in total revenue
that results from selling one more unit of output.
• Marginal Benefit: the additional satisfaction or benefit
received when one more unit is produced
Making Economic Decisions
• Types of Costs for Businesses:
– Fixed Costs: costs that remain the same
– Variable Costs: expenses that change with the
number of items produced
• Examples would be wages and raw materials
– Total Costs: Fixed Costs + Variable Costs
– Marginal Costs: the additional cost of producing
one additional unit of output
Making Economic Decisions
• Types of Revenue
– Total Revenue: The number of units sold
multiplied by the average price per unit
– Marginal Revenue: the extra revenue that
results from selling one more unit
• Marginal Benefit: the additional satisfaction/benefit
when one more unit is produced
– This is often a goal of businesses
Making Economic Decisions
• Cost-Benefit Analysis: model that compares
the marginal costs and the marginal benefits
of a decision
– See Chart on page 508
– This is a tool that most businesses use