1. Economics

2. Chapter 18 Section 1

3. How Economics Works Economics is the study of how we deal with scarcity. ▫Unlimited needs and wants with limited resources.

4. Economics is divided into two branches- Microeconomics – the small picture. Studies the decision making of the individual or of a business Macroeconomics – The big picture. Studies the decision making of government, industries, and societies.

5. Economic Systems There are many economic systems. The US utilizes free enterprise capitalism. ▫Businesses are allowed to compete for profit with a small amount of government interference.

6. Scarcity and the Need to Choose The goods and services that a country can produce depend on its resources. ▫Resources are anything used in the making of goods and providing services. Examples? Natural Resources vs. Human Resources

7. Scarcity occurs whenever we do not have enough resources to produce all the things society wants. There is always scarcity. (Unlimited wants and needs vs. Limited Resources) Because of scarcity, we must make choices.

8. Chapter 18 Section 2

9. Trade-offs Because we must make choices (What to produce, how to produce, and for whom to produce), there are always trade-offs. A trade-off is what you give up in order to produce something. Remember: we cannot produce everything Trade-offs do not only apply to money; they apply to personal choices. Ex: Time.

10. Opportunity Cost Opportunity Cost is the cost of the next best use of your time or money when you choose to do one thing rather than another. IMPORTANT: It is the cost of the NEXT BEST use. It is NOT the cost of the combined alternatives.

11. Costs All businesses have costs, but not all costs are the same type. Fixed Costs – costs/expenses that are the same no matter how many units of a good are produced. ▫Examples: Mortgage payments and property taxes Variable Costs – costs/expenses that change with the number of items produced. ▫Examples: Wages and raw materials ▫Variable costs increase as production grows and decreases when production decreases. Total Costs – Fixed Costs + Variable Costs.

12. Marginal Costs Marginal Costs – the additional cost of producing one additional unit of output. ▫It costs $1,500 to produce 30 bicycle helmets ▫It costs $1,550 to produce 31 helmets. ▫What is the marginal cost of the additional (31 st ) unit? ▫Marginal cost = $50

13. Types of Revenue Businesses must decide what amount of output will produce the greatest profits. ▫To do this, they look at total revenue and marginal revenue. Total Revenue is the number of units sold multiplied by the average price per unit. ▫If you make 42 units and you sell them for $2 each, your total revenue is $84.

14. Marginal Revenue When a business wants to change their output, it must consider how revenue will change. ▫What is the additional cost and revenue of producing an additional unit? ▫Marginal Revenue – the change in total revenue that results from selling one more unit of output.  IT IS NOT ALWAYS CONSTANT

15. Vocab Scarcity Microeconomics Macroeconomics Free enterprise capitalism Fixed Cost Variable Cost Total Cost Marginal Cost Marginal Revenue Cost Benefit Analysis Trade-offs Opportunity Cost Diminishing Marginal Benefit Factors of Production Profit Surplus Shortage Gross Domestic Product (GDP) Specialization Division of Labor

18. Factors of Production There are four (4) factors of production Natural Resources – refers to all the “gifts of nature” that make production possible ▫EX: land, water, fish, animals, forests, and minerals Labor – the nation’s workforce. Anyone who works to produce goods and services Capital – Manufactured goods used to make other goods and services. ▫EX: machines, buildings, and tools. Entrepreneurs – An individual who starts a new business.

19. ITS TIME FOR EVERYONE’S FAVORITE GAME… NAME THAT FACTOR OF PRODUCTION! A picture will appear, you must NAME THAT FACTOR!!!!!

28. Circular Flow In economics, a market is not a place. A market is the free and willing exchange of goods and services between buyers and sellers.

29. Circular Flow Diagram Vocabulary Factor markets – The markets where productive resources are bought and sold. Product markets – markets where producers offer goods and services for sale Households – possessors of the factors of production Firms – businesses

31. GDP One measure of the economy’s size is Gross Domestic Product (GDP). GDP is the total value, in dollars, of all the final goods and services produced in a country during a single year. ▫Intermediate goods are not counted in GDP. EX: flour, wheat, and sugar used in making a loaf of bread. ▫Transfer of already produced goods is NOT counted in GDP. EX: Used cars.

32. To measure GDP, we multiply the price of each good by the quantity of that good produced and then add the amounts

33. Economists use GDP to analyze how the economy is doing (pulse check). GDP is also an important indicator of standard of living – the quality of life based on the possession of necessities and luxuries that make life easier. Many things may make a country better off without raising the GDP. EX: a reduction in crime. GDP measures quantity, it does not reflect quality.

34. Economic Growth Occurs when a nation’s total output of goods and services increases over time. ▫Circular Flow becomes larger Growth is good for an economy

35. Productivity When scarce resources are used efficiently, everyone benefits. Productivity describes the efficient use of resources. ▫How much output is produced given a level of inputs in a specific period of time. ▫Productivity goes up whenever more output can be produced with the same amount of input in the same amount of time.

36. Specialization takes place when people, businesses, regions, or even countries concentrate on goods or services that they can produce better than anyone else. ▫EX: A country that has a climate suitable for growing pineapples will specialize their economy to grow pineapples Nearly everyone depends upon others to produce many of the things that we consume. ▫Very few people consider producing their own food, shelter, and clothing.

37. When people and societies specialize, they are far more productive than if they attempted to do many things. Division of Labor is breaking down a job into small tasks performed by different workers. ▫DoL makes use of differences in skills and abilities.

38. Businesses often try to increase productivity by investing in human capital. ▫EX: Training, education, happiness, working conditions, better pay.

39. Limits on our economy? ▫Some economists argue that because the world has a finite amount of resources, our economic development has a limit on maximum growth ▫Others argue that technology and the development of technology provides for an economy that can grow indefinitely.

41. Consumer Rights In the American free enterprise system, consumers have the right to enter into just about any profession or business in which they are interested. ▫Consumers have the right to buy the products and brands that we like and to reject others.

42. Income Two types of income ▫Disposable income – money that remains after all taxes on it have been paid. ▫Discretionary income – the money that remains after paying for necessities.  Luxury items, savings

43. Protecting Consumer Rights The consumer is often, how do we say….. ▫Dumb. ▫Caveat emptor – let the buyer beware Consumerism – a movement to educate buyers about the purchases they make to demand better and safer products. ▫Congress has passed laws regarding labeling ▫Pure Food and Drug Act – requires manufacturers of food, cosmetics, and drugs to prove that their products are safe.

44. Consumer Bill of Rights Right to a safe product Right to be informed against misleading information Right to choose from a variety of products Right to be heard Right to redress – ability to gain payment if a product causes financial or physical damage.

45. Budgeting! Budget – a careful record of all the money you earn and spend. ▫Using a budget can help match your expenses and your income.

46. Budget terms Income – the money you earn Expenses – the money you spend ▫On everything and anything. Balance – the amount of money you have left over after you subtract all your expenses. Surplus – you have more income than expenses Deficit – you have more expenses than income

47. Credit Almost everyone borrows and lends money in today’s economy. Credit – borrowing money to pay for something now while promising to repay it later.

48. Credit Terms Lender – person who loans someone money Borrower – receives the loaned money Interest – the cost for the use of money Annual percentage rate (APR) – the annual cost of credit expressed as a percentage of the amount borrowed. Credit Rating – an evaluation of the likelihood of a borrower to repay a loan. ▫Based on previous credit experiences, financial situation, job history. Collateral – property that a borrower pledges as security for a loan.

49. Sources of Credit Credit Cards – Issued by bands, credit companies, and stores. ▫Allows you to charge, or pay using borrowed money. ▫Has limits.

50. Credit BenefitsDrawbacks Allows you to obtain something you want without waiting until you can save the entire purchase price. Can teach financial discipline Improved credit scores possible Interest Bankruptcy – the inability to pay debts