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CHAPTER 18/19 NOTES NAME: _____________________ CHPT 18.1: BASICS OF ECONOMICS 1. A NEED is something we need to survive. Food, shelter, water, clothing. 2. A WANT is something we would like to have. Unlike needs, these are luxuries we do not need to survive. 3. ECONOMICS is the study of how we make decisions in a world where resources are limited. 4. The study of how businesses/individuals make economic decisions is MICROECONOMICS. Economists refer to this as the “small-picture” view on the economy, 5. The study of a nation’s economy, or the “big-picture” is MACROECONOMICS. 6. Economic behavior can be explained with ECONOMIC MODELS, which are basically – a chart. 7. An ECONOMIC SYSTEM is a nation’s way of producing things people want/need. a. The USA has a CAPITALISM system based on FREE ENTERPRISE. 8. Scarcity is the concept that all resources are LIMITED and that is impossible for everyone to have everything. Due to this concept, we as consumers need to make rational choices about what we buy/use. 9. There are three basic questions any “entity” has to answer before producing…. a. WHAT to produce. b. HOW to produce. c. FOR WHOM to produce. CHPT 18.2: MAKING ECONOMIC CHOICES 10. Anytime you make a decision to do something – there is always a TRADE-OFF In other words, life is full of choices. This isn’t just money-related, it’s LIFE. 11. The “cost” of what you’re giving up when you choose to do something is what we refer to as the OPPORTUNITY COST of a decision. For example, let’s assume you have a quiz tomorrow. You can spend some time tonight either studying or texting your buddies. If you chose to text your buddies – the opportunity cost of that decision would possibly be doing horrible on your quiz tomorrow. 12. Businesses have to balance our their COSTS and REVENUES Obviously, if they want to survive – their revenue should be greater than their costs. 13. There are several categories of costs: a. FIXED: same every month. Examples include; property taxes, mortgage payments, salaries. b. VARIABLE: change every month, depending on sales/business done. c. TOTAL: this is simply fixed and variable added together. 14. There are several categories of revenue: a. TOTAL: number of units sold multiplied by sale price. b. MARGINAL: revenue gained from selling one product. (Take total revenue and divided by number of units sold.) c. MARGINAL BENEFIT: similar to marginal revenue in definition and method of figuring out. CHAPTER 18/19 NOTES NAME: _____________________ 15. A cost-benefit analysis is a chart that helps one make wise economic choices. Example When you analyze this chart, you need to pay attention to where the lines (benefit/cost) intersect. Anything above that intersection point results in PROFIT. Anything below it results in losing money. So – based on this data, what is the maximum number of acres you would farm? CHAPTER 18 REVIEW (18.1) 1. What is the difference between needs and wants? 2. What is the difference between microeconomics and macroeconomics? 3. What type of economic system does the USA have – and what is based on? 4. What is scarcity? How does it affect us? 5. What are the three questions societies must answer before they produce goods? 6. What is economics? (18.2) 7. If you have the choose between working out at the gym or working at grocery store as a cashier – what would be the opportunity cost for doing either? (Answer from both options) 8. What is the difference between fixed and variable costs? 9. If it costs $4,000 to produce 200 Playstation 3’s, what does it cost to produce 1? 10. If you sell 45 2-liter sodas for end up with $90, what is your marginal revenue? 11. When examining a cost-benefit analysis chart, at what point does an individual stop gaining profit and begin actually losing money? 12. Chuck E. Cheese owns his own business. In the month of April, he spends $4,200 on salaries, $1,750 on materials, $2,000 on the mortgage payment, and $750 on electricity. What is Mr. Cheese’s fixed costs for the month? What are his total costs? CHAPTER 18/19 NOTES NAME: _____________________ CHPT 19.1: ECONOMIC RESOURCES 1. There are four factors of production: a. NATURAL RESOURCES: gifts of nature; such as water, trees, oil, etc. b. LABOR: people who work c. CAPITAL: goods used to produce other goods. d. ENTREPRENEURS: people who start businesses. They are arguably the most important since they make use of the other three factors of production to produce goods. 2. GROSS DOMESTIC PRODUCT, or GDP is the measure of total value of all goods/services produced in a nation within a given year. We used this to determine/measure the economic well-being of a nation. a. REAL GDP: is the same as GDP, except inflation is factored in. 3. GDP is not a perfect statistic – it’s primary flaw is that it calculates QUANTITY but not QUALITY. It also doesn’t account for goods/services provided for free. CHPT 19.2 ECONOMIC ACTIVITY 4. There are two types of markets: a. FACTOR where income is earned. Businesses “invest” in this market when they pay their employees. b. PRODUCT: where income is spent on goods/services. 5. There are four sectors in our economy: c. CONSUMER: largest sector. Self-explanatory. d. BUSINESS: businesses that produce/sell goods. Spends money in both factor/product markets (paying employees, buying capital goods) e. GOVERNMENT: our government purchases from product markets. f. FOREIGN: buying/selling from foreign countries. 6. PRODUCTIVITY refers to our attempt to “get the most” out of our resources. We do this because of SCARCITY. There are three ways to improve productivity. g. SPECIALIZATION: concentrate on producing one good/service. h. DIVISION OF LABOR: splitting a job into smaller tasks. Example would be an assembly line. i. HUMAN CAPITAL: refers to “investing” in the workers. Training, better pay, benefits, paying for school, etc. 7. ECONOMIC INTERDEPENDENCE: refers to the fact we have to rely on others – and others rely on us to produce goods/services. This relationship is beneficial since it results in higher quantity/quality of goods. The downside to this relationship is that if something goes wrong in one country – everyone generally suffers. CHPT 19.3: CAPITALISM/FREE ENTERPRISE 8. As you learned earlier – our economy is based on CAPITALISM. This means that private individuals own the means of production. Our government tends to have very little involvement in the economy, which refers to the concept of free enterprise. 9. The key to American capitalism is the MARKET. This is where producers/consumers negotiate prices. CHAPTER 18/19 NOTES NAME: _____________________ 10. Another key to American capitalism is ECONOMIC FREEDOM. This means we generally participate in the economy how we please. We can buy whatever we can afford. We can generally work wherever we want, etc. This “freedom” has a catch – if we make poor choices/decisions – the government WILL NOT help you out. 11. PRIVATE PROPERTY RIGHTS: another part of capitalism – that means we have to the right to whatever with our property as we want. Our ability to own property is an incentive for us to work/save/invest. 12. The key element to capitalism is COMPETITION. This forces businesses to develop products of high quality and lower prices to attract customers. 13. Businesses operate due to the PROFIT MOTIVE. 14. VOLUNTARY EXCHANGE: the act of a buyer/seller engaging in a transaction. 15. The idea of capitalism was developed by ADAM SMITH, who promoted this idea in his book Wealth of Nations. a. His main idea was “LAISSEZ-FAIRE”. which Is French for “to leave alone.” He felt that the economy would fix itself if things went wrong. 16. Nowadays, we primarily use the KEYNESIAN THEORY, which believes the government SHOULD step in and get involved occasionally. CHAPTER 19 REVIEW 19.1 19.2 1. What are some examples of 7. What are factor markets? services? 8. What are product markets? 2. What are some examples of 9. What are the four sectors of our goods? economy? 3. What are the four factors of 10. What are three ways to improve production? productivity? 4. What is GDP? 11. What is the downside of economic 5. What is the difference between interdependence? GDP and REAL GDP? 6. What can GDP tell us about a country? 19.3 12. What are two things our economy is based on? 13. What did Adam Smith write? 14. What motivates businesses to produce high-quality products at low prices? 15. What does laissez-faire mean?