1. What is Economics?
Chapter 18

2. What is Economics? Needs Wants
Defined ~ the study of how we make decisions in a world where resources are limited
Needs
Wants
versus
Textbook pp

3. What is the Economy? What is Scarcity?
Defined ~ the activity in a nation that together affects the production, distribution, and use of goods and services
What is Scarcity?
Defined ~ fundamental economic problem that occurs when you do not have enough resources to produce all of the things you would like to have
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5. Key Economic Questions for Societies
WHAT to produce
HOW to produce
For WHOM to produce
Economic Models ~ simple representations of the real world used to explain how the economy works
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6. Measuring Costs
Opportunity Cost ~ cost of the next best use of your time or money when you choose to do one thing over another
Fixed Cost ~ expenses that remain the same no matter how many units of goods are produced (ex. Property taxes, mortgage)
Variable Cost ~ expenses that change with the number of products produced (ex. Wages, raw materials)
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7. Measuring Costs
Total Cost ~ addition of fixed costs plus variable costs; average total cost is simply the total cost divided by the quantity produced
Marginal Cost ~ the extra or additional cost of producing one additional unit of output (ex. If the cost of producing 30 helmets is $1,500 and the cost to make 31 helmets is $1,550, then the marginal cost for one helmet is $50)
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8. Measuring Revenue
Total Revenue ~ the number of units sold multiplied by the average price per unit (ex. If Xbox 360 is $200 and a store sells 10 systems, then the total is $2,000)
Marginal Revenue ~ the extra revenue that would result from selling one more unit of output
Marginal Benefit ~ the additional or extra benefit resulting from an action
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9. Cost-Benefit Analysis
Defined ~ economic model that compares the marginal costs and marginal benefits of a decision; if costs outweigh the benefit, then the option should be rejected
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10. How many acres should the farmer plant before the cost begins to outweigh the benefits?
A: No more than 15 acres

11. Market Economy
An economic system in which supply, demand, and prices help people make decisions and allocate resources
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13. American Economy
Capitalism ~ a system in which private citizens own the means of production (most, if not all, businesses owned by individuals
Free Enterprise ~ competition for profits among businesses with very little government interference
Textbook p. 417

14. Incentives
Rewards that are offered to try to persuade people to take certain economic actions
Textbook p. 417

15. Competition = Lower Consumer Prices
Rational Choice ~ making consumer decisions based on opportunity cost

16. Study of Economics 2 Schools of Thought
Microeconomics ~ Small scale economic decisions made by individual consumers and businesses
Macroeconomics ~ Big picture study of economic decision making of governments and trends in national economies as a whole
Textbook p. 419