Download What is Economics? - Duplin County Schools

What is Economics?
Chapter 18
ADD: The Fundamental
Economic Problem is SCARCITY
Economic Choices:
 Needs are things required for survival, such as food,
clothing, and shelter; Wants are the things we would like
to have
 Economics is the study of how individuals and
nations make decisions in a world where resources
are limited
Economic Choices
 In microeconomics economists explain how individual
economic decisions are made;
 macroeconomics they study decisions made by
governments, industries, or societies
 An economic model is a theory that tries to explain
human economic behavior
Economic Choices
 Every country has its own economic system or
way of producing things people want or need
(US is free enterprise capitalism)
The Problem of Scarcity
 Resources are the things used in making goods and
providing services; they include tools, natural resources,
and human resources
 Scarcity occurs when we do not have enough
resources to produce all the things we would like to
have; because of scarcity we have to make choices
ADD : UNLIMITED WANTS – LIMITED
RESOURCES
The Problem of Scarcity
 The four basic economic questions:
 WHAT to produce
 HOW to produce
 HOW MUCH to produce
 FOR WHOM to produce
Trade-offs & Opportunity Costs
Because of scarcity, individuals have to made trade-offs A trade off is the alternative you face if you decide to
do one thing rather than another
 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; opportunity cost is always an
opportunity that is given up
Costs and Revenues
Businesses have several different types of costs:
 Fixed costs are expenses that are the same no matter
how many units of a good are produced (ex. Mortgage
& property taxes)
 Variable costs are expenses that change with the number
of items produced; they increase as production grows (ex.
Wages & raw materials)
Which is a fixed cost? Variable cost?
Costs and Revenues
 Total costs are fixed costs plus variable costs; to find
average total cost divide total cost by quantity produced
 FIXED + VARIABLE= TOTAL COSTS
Fixed Costs ($1,000) and Variable Costs ($500)
What is the total costs?
-$1,500 for the Month
Costs and Revenues
 Marginal cost is the additional cost of producing one
additional unit of output
$1,500 to produce 30 bicycle helmets
$1,550 to produce 31 bicycle helmets
What is the marginal cost of the 31st
helmet?
$50
Costs and Revenues
Businesses use 2 measures of revenue to decide the
output:
 Total revenue is the number of units sold multiplied by
the average price per unit
 UNITS SOLD X AVG. PRICE= TOTAL REVENUE
Total Revenue Example: 42 units x $2= $84
Costs and Revenues
 Marginal revenue is the change in total revenue- the
extra revenue- that results from selling one more
unit of output
 It not always constant; sometimes it may start high and
decrease as more and more units are produced and sold
Marginal Revenue Example
MRT sells DVDs for $10 each
MRT sells 100 DVDs a month
What is their total revenue? ($1,000)
If MRT sell three more DVDs, what is their marginal
revenue? $30 ($1,030 new total revenue)
Costs and Revenues
 Marginal benefit is the additional satisfaction or benefit
received when one more unit is produced
 Often the best decision is made by comparing marginal
benefits against marginal costs; to do so economists
use a cost-benefit analysis
 If the costs outweigh the benefits, we should reject
the option
 Diminishing marginal benefit occurs when marginal
benefit declines compared to the marginal costs