1. Chapter 18 What is economics?
The study of how we make decisions in a world where resources are limited.

2. Bell Starter Economics Needs Wants Scarcity Economic model Trade-off
Opportunity cost
Marginal benefit
Cost-benefit analysis
Market economy
Capitalism
Free enterprise
Incentive
Rational choice

3. Why Study Economics?
Read the following examples of possible newspaper headlines and describe how these headline events could effect you.
War in the Middle East Threatens Oil Supply
Cost of College Education continues to Rise
Government Indicators warn of Possible Recession
New Law Prevents Teens from Working more than Two days a Week
Computer Related Industries experience Great Shortage in Workers
Cost of Health Care continues to Spiral Upward
Unions report that Many Jobs being Lost to Oversees Workers

4. Fundamental Economics

5. Economic Choices
Economics is the study of how we make decisions in a world where resources are limited. It is sometimes called the science of decision making.
MICRO: SMALL
MACRO: LARGE
Needs are things we need for
survival, such as food,
clothing, & shelter. Wants
are things we would
like to have.

6. WANTS VS NEEDS: WHAT IS THE DIFFERENCE?
NEED: REQUIRED TO SURVIVE
WATER
FOOD
CLOTHING
SHELTER
WANT: THING WE WOULD LIKE TO HAVE BUT DO NOT NEED TO SURVIVE
PEPSI
CAVIAR
FUR COAT
BEACH HOUSE

7. Needs and Wants Divide a sheet of paper in half
On one side write Needs. On the other write Wants
On the next slide is a list of products. Place the product in the correct category (need or want)
No discussion! Place according to definition given in class.

8. toothpaste
Soap
Bed
Chewing gum
Wristwatch
Coat
Jeans
Air conditioner
Socks
glasses
MP3 player
Fruit
Television
Haircut
Water
Pedicure
Deodorant
Movies
Computer
Cell phone
Hair spray
Pizza
Microwave oven
Jewelry
vegetables
electricity
Refrigerator
Porsche 911 (car)

9. Economic Choices (con’t)
The fundamental economic problem is scarcity-we do not have enough resources to produce all the things we would like to have. Because of scarcity, we must make choices among alternatives.
Three Decisions Society must make: What to produce? How to produce? For whom to produce?

10. Using Economic Models
The economy includes all the activity in a nation that together affects the production, distribution, & use of goods & services
Economic Models-representations of the real world, based on economic theories.
1. Business & government often base decisions on the model’s responses to tests.
2. Model’s based on assumptions.
3. Economists use models to predict future of economy.

11. Trade-Offs
Economic choices involve trade-offs, or exchanging one thing for the use of another.
(For example, when you by a product, you exchange money for the right to own that product rather that something else you could buy for the same price.)

12. Trade-Off (con’t)
People, businesses, & societies make trade-offs every time they chose to use their resources in one way & not in another. More money for education means less money to spend on medical research or national defense.

13. Opportunity Cost
is what you cannot buy or do when you choose to do or buy one thing rather than another.
IT IS THE NEXT BEST ALTERNATIVE THAT YOU HAD TO GIVE UP FOR THE CHOICE YOU MADE.
(example: the opportunity cost of cleaning the house includes not only the price of cleaning products, but also the time you spent cleaning instead of doing something else, like listening to music.)

14. TRADE OFFS VS OPPORTUNITY COST
ALTERNATIVE YOU FACE IF YOU DECIDE TO DO ONE THING RATHER THAN ANOTHER
CHOICE YOU HAVE BETWEEN TWO THINGS
OPPORTUNITY COST
IS THE COST OF THE NEXT BEST USE OF YOUR TIME & MONEY WHEN YOU CHOOSE TO DO ONE THING OVER ANOTHER
MONEY
DISCOMFORTS
INCONVIENCES

15. Measure of Costs Business
All business have fixed & variable costs.
Fixed costs are expenses that are the same no matter how many units of a good are produced.
Rent, mortgages, property taxes
Variable costs are expenses that change with the number of products produced. If a business produces more, variable costs like raw materials & wages will increase.
Wages, raw materials, gas for transport

16. Business Costs (continued)
Fixed costs plus variable costs equal total costs.
Marginal cost is the extra cost of producing one additional unit of output. If it costs an extra $50 to produce one more bicycle helmet, the marginal cost is $50.
Total revenue equals the # of units sold times the average price per unit.
Marginal revenue is the additional benefit associated with an action.

17. MEASURES OF COST: PROBLEMS OF PRODUCTION
SURPLUS:
ANYTHING ABOVE WHAT PEOPLE ARE WILLING TO BUY
IF YOU PRODUCE TOO MUCH THIS IS THE PROBLEM YOU HAVE
PRODUCTS LEFT ON SHELF
LOWER PRICES BECAUSE SUPPLY IS GREAT: SALES
SHORTAGES:
ANYTHING BELOW WHAT PEOPLE ARE WILLING TO BUY
IF YOU PRODUCE TOO LITTLE THIS IS THE PROBLEM YOU HAVE
PRODUCTS ARE NOT THERE
PRICES GO UP: SUPPLY IS LOW

18. MARGINAL: ONE EXTRA MARGINAL COST: COST OF MAKING ONE EXTRA PRODUCT
COST 1500 TO MAKE 10 PRODUCTS
COST 1550 TO MAKE 1 MORE
WHAT IS MARGINAL COST TO MAKE ONE MORE ITEM? ______
COST 1400 TO MAKE 1 PRODUCT
COST 1900 TO MAKE JUST ONE MORE
WHAT IS MARGINAL COST TO MAKE ONE MORE ITEM? _______

19. MARGINAL COST
REVENUE: AMOUNT YOU BRING IN OR MAKE FROM SELLING A PRODUCT
TOTAL REVENUE: # OF UNITS SOLD X AVERAGE PRICE/UNIT
MARGINAL REVENUE: CHANGE IN TOTAL REVENUE (EXTRA REVENUE FROM SELLING JUST ONE MORE UNIT OF OUTPUT
MARGINAL BENEFIT: THE ADDITIONAL OR EXTRA BENEFIT ASSOCIATED WITH AN ACTION
COST-BENEFIT ANALYSIS: ECONOMIC MODEL USED BY BUSINESSES TO SEE IF COST OUTWEIGH BENEFITS OR IF BENEFITS OUTWEIGH COST

20. Cost-benefit analysis
is an economic model used to compare marginal costs & marginal benefits of a decision.
You should choose an action when the benefits are greater than the costs. If the costs outweigh benefits, you should reject the option.
Cost-benefit analysis could be used to help determine what to produce & for whom to produce.