Introduction to Economics Chapter 17

What is Economics? Lesson 1 Essential Questions: Why and how do people make economic choices? How do economic systems influence societies? It Matters Because: As someone who uses goods and services and will someday be a worker, you are part of the American economic system. Guiding Question What is scarcity, and how does it affect economic choices?

Our Wants and Resources Wants- desires individuals and nations have that can be met by getting a good or service Wants fall into 2 groups Goods- includes things that we can touch or hold Services- work that is done for us Healthcare, lawyer services, accounting services

Economics Limited Resources- unlimited wants and limited resources forces us to make choices Economics- the study of how individuals and nations make choices about ways to use scarce resources to fulfill their needs and wants Resources – a thing that can be used in making products and services people want

3 Types of Resources Natural Resources- nation’s land, soil, trees, oil, iron and more Labor- includes workers and their abilities (knowledge and skills) The more workers you have the more you can produce Capital- Buildings, tools, factories, computers, trucks, trains and more

The Basic Economic Problem Scarcity- occurs when we do not have enough resources to produce all the things we want to have Economics looks at how we go about dealing with this basic economic problem

Societies and Economic Choices Guiding Question – What determines how societies make economic choices? Scarcity is an economic problem in every nation Nations have to make choices also Three Basic Economic Questions What goods and services will be produced? How will they be produced? Who will they be produces for

Economic Systems Economic System- a nation’s way of producing things its people want and need Each country has its own economic system

Traditional Economy Traditional Economy- decisions of what, how, and for whom to produce is based on custom or habit Follow family traditions of production Not very productive Does not adopt new and better ways to produce

Market Economy Market Economy- individuals and businesses own all resources and make economic decisions on the basis of price. It answers the three economic questions based on profit and price.

Command Economy Command Economy- economic system in which the government makes the major economic decisions. Government decides what, how, and for whom to produce Individuals and businesses don’t have much say

The American Economy The United States economy is based on a market economy Businesses compete for profit with little interference from the government Elements of a command economy Government makes rules on how workers are treated Provides services such as education, defense, and disaster relief Elements of traditional Economy Many people decide to work in the same traditional jobs The United states is a mixed market economy- Our economy has elements of traditional, market, and command economies

Economic Decisions Lesson 2 Essential Questions: Why and how do people make economic choices? How do economic systems influence societies? It Matters Because: You make economic decisions everyday, and you will do so for the rest of your life Guiding Question Why are trade offs important in making economic decisions?

Trade Off Trade off- the alternative you face when you decide to do one thing rather than another People make trade offs all the time Businesses also make trade-offs Invest in research for new products or spend money on advertising to increase sales of old products Governments also face trade-offs Spend money to build new schools or build new roads

Opportunity Cost Opportunity Cost- the cost of the next-best use of your money or time when you choose to do one thing rather than another Only the next-most-attractive alternative

Measuring Costs and Revenues Guiding Questions – How do costs and revenues influence economic decision making? Assessing Costs- “Joe’s Seafood Depot” Joe’s Seafood Depot has been making and selling seafood for 10 years. Joe wonders if his business would be better off if it were open longer every day.

Different Types of Costs Fixed costs- an expense that does not change no matter how much a business produces Rent, insurance Variable costs- an expense that changes depending on how much a business produces Total cost- the combination of all fixed and variable costs Marginal cost- the additional or extra opportunity cost associated with each increase of one unit of sales Marginal cost means that variable costs increased

Different Types of Revenues Revenue- the money a business receives from selling its goods and services The sum of money Joe receives from his customers Marginal Revenue- the additional income received from each increase of one unit of sales

Marginal Analysis Marginal analysis- compares the additional benefit of doing something with the additional cost of doing it If benefit is greater than additional cost, the rule is to do it If the cost is greater than the benefit, the rule is don’t do it Do it until marginal cost is equal to marginal revenue Benefit-Cost Analysis- economic model that compares the marginal costs and marginal benefits of a decision Helps businesses choose among two, three, or more projects Benefit/cost ratio= Revenue Cost

Demand and Supply in a Market Economy Lesson 3 Essential Questions: Why and how do people make economic choices? How do economic systems influence societies? It Matters Because: Demand and supply work together to set the prices of the goods and services you buy and use. Guiding Question How do demand and supply affect prices?

Demand and Supply Make Markets Where do prices come from? What do they tell us? Why do they change? Are prices important? Command economy- government set the prices Market economy- prices are set by the interaction between demand and supply Demand and supply- are a result of two groups Consumer- a person who buys goods and services Producers- a person or business that provides goods and service

Demand and Supply Demand- the amount of a good or service that consumers are willing and able to buy over a range of prices Supply- the amount of a good or service that producers are willing and able to sell over a range of prices When prices go up producers increase supply When prices go down producers decrease supply

Markets and Competition Representing information on a schedule as a line on a graph. (Page 470) Demand curve- shows the amount demanded at a particular price Slopes down to the right Supply curve- shows the quantity supplied at a particular price Slopes up to the right

Demand and Supply curve together show a Market Market- a location or an arrangement that allows buyers and sellers to get together and buy or sell a certain product Competition- efforts by different businesses to sell the same good or service To be efficient markets must have many competing buyers and sellers

How Prices Are Set Market Economy Equilibrium price Surplus Shortages People buy and sell what they want, its like a democratic vote for a product or service Markets help prevent too much or too little production of goods and services Equilibrium price The price set for a good or service in the market place, where demand and supply are perfectly balanced Surplus amount of a good or service supplied by producers is greater than the amount demanded by consumers Shortages the supply of the good or service available is less than the demand for it Forces applied by surpluses and shortages, keep a price at its equilibrium level

Factors Affecting Demand Number of Consumers If more consumers enter the market the demand curve shifts to the right If more consumers leave the market the demand curve shifts to the left Change in Customer Income If consumers earn more, they tend to buy more, the demand curve shifts to the right Less income, consumers buy less, the demand curve shift to the left Change in Customer Preference Change in like or dislike of a product will shift the demand curve left or right Finding out a product is harmful will make people want to buy less of it

Factors Affecting Supply Number of suppliers increases As the number of suppliers increases, the availability of a good or service increases More is produced, the supply curve moves to right Suppliers leave the market Supply curve moves to the left Fewer suppliers, prices go up Fewer choices, producers charge more Cost of production As cost of production goes down, producers increase supply As cost of production goes up producers decrease supply

The Economic Role of Prices Prices and the Economic Questions What to produce? How to produce? For whom to produce? Prices as Measures of Value Consumers and producers use the prices to value goods and services Prices as Signals If consumers think an item is priced too high, they will not buy it. Lack of demand sends a signal to the producer that the price is too high. The reverse is also true for consumers