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