What is Economics? Chapter 18 (Part 2)

Trade Offs  Economic problems are surprisingly simple in that there are few terms/rules to consider  Complex however because of the impact  Economic decisions are made on the amount of scarcity that does or does not exist  When making decisions, we must all consider the trade-offs – the alternative you face if you decide to do one thing rather than another  If you buy a dvd player, you are trading your money for the dvd player and not something else that might cost the same amount  Trade-offs do not always involve money  Civics Test vs. Party  Larger Scale – country wants to put more money into education…..this money must come from somewhere else, the sacrifice of the money from that other location for education is a trade-off

Opportunity Costs  Opportunity Costs – the cost of the next best use of your time or money when you choose to do one thing rather than another  Going to College:  Books  Transportation  Tuition  Lack of full-time income because you are at class and studying  Opportunity Costs is more than just dollars  It involves all the possible discomforts and inconveniences linked to a choice  Example: You decide to clean the house, your cost is time you could spend listening to music or visiting friends  When you trade-off you lose the ability to engage in your next highest valued alternative – in Economics, opportunity cost is always an opportunity is given up

Types of Costs  There are multiple ways to figure/compute cost  Let’s say you are producing bicycle helmets 1. Fixed Costs – Cost that are the same no matter how many units of a good are produced. Example – a mortgage payment, this will no change for you no matter how many helmets you are producing. 2. Variable Costs – Expenses that change with the number of items produced, these increase as production grows Example – The more helmets you produce, the more plastic you will have to buy 3. Total Costs – Total costs is the sum of fixed cost and variable cost Average Total Costs – The costs per item produced, example – Fixed Cost = $1000, Variable Cost = $500, Total Cost = $1500…..50 helmets produced, $1500/50 = $30 total cost per helmet 4. Marginal Costs – The additional cost of producing one additional unit of output Total Costs for 30 helmets is $1500, for 31 it is $1550….the marginal cost therefor is what?

Types of Revenue  Measures of revenue help a business decide what amount of output will produce the greatest profits  Total Revenue -  The number of units sold times the average price per unit  42 units sold at a price of $2 = $84 is the total revenue  Marginal Revenue-  When a business is thinking about changing its output, it must consider how its revenue will change as a result.  Marginal revenue is the change in total revenue that results from selling one more unit of output  Marginal Benefit – the additional satisfaction or benefit that is received when one more unit is produced.  Practice- Calculate the Marginal Revenue  Best Buy sells DVDs for $10, Best Buy sells 100 DVDs a month  If Best Buy sells 2 more DVDs this month at $10 what is the marginal revenue?

Cost-Benefit Analysis  The best decisions are made by comparing the marginal benefits against the marginal costs.  To do this we use a type of decision making known as Cost-Benefit Analysis  This tells us to choose an action when the benefits are greater than the costs, if the costs outweigh the benefits we should reject  How many acres would I want to plant? Why?