Download Economics Part 2

Economics Part II
All businesses have costs.
1. Fixed costs – costs that
are the same no matter
how many units of a good
are produced. Such as
a) Mortgage payments
b) Property taxes
2. Variable costs Expenses that change with
the number of products that
are produced.
These expenses will
increase as production
grows and will decrease
as production decreases.
a) wages – If you
have more people
working, you can
make more
products, but your
expenses for wages
will also go up.
If you reduce the number
of people you have
working, production goes
down and so do your
expenses for wages.
b) Raw materials
The more items you
produce, the more raw
materials you will need and
the more expenses you will
have for raw materials.
3. Total costs
Fixed
+
variable costs
4. Average total cost –
the total cost divided by
the quantity produced.
Example: If the total cost
of making bicycle helmets
is $1,500 and 50 are
produced, the average
total cost is $30 per
helmet.
5. Marginal costs The extra, or additional cost
of producing one additional
unit of output.
Example: If the total cost
to produce 30 bicycle
helmets is $1,500 and
$1,550 to produce 31
helmets, the additional
cost to produce one more
is $50.
IV. Revenue
Businesses measure two
key measures of revenue to
decide what amount of
output will produce the
greatest profits.
1. Revenue – number of
units sold times the price
per unit.
If you sold 10 helmets for
$35, the revenue would
be $350.
X $35 = $350
Revenue
2. Marginal Revenue –
the change in total
revenue – the extra
revenue – that results
from selling one more unit
of output.
V. Economic models:
The economy includes all
the activity in a nation that
together affect production,
distribution and the use of
goods and services.
Economic models
are simplified
representations of
the real world
based on
economic
theories.
VI. Cost- Benefit Analysis
is an economic model
used to compare
marginal costs and
marginal benefits of a
decision.
VII. Producing Goods
and Services
A. Economic output
includes goods and
services.
B. Four factors of
production:
1. Natural Resources
a. soil
b. water
c. forests
d. Raw materials/minerals
2. Human resources
a. skills
b. knowledge
c. energy
d. Physical capabilities
3. Capital
a. money
b. machinery
c. factories
d. equipment
e. trucks
f. tools
4. Management
a. Owners of sole
proprietorships
b. partners
c. Corporate managers
Entrepreneurs
Individuals who start new
businesses, introduce new
products, and improve
management techniques.
C. Gross Domestic
Product
1. The Gross Domestic
Product (GDP) is a
measure of the size of the
economy.
It is the total value, in dollars
of all final goods and
services produced in the
country during a single year.
2. GDP does not
count intermediate
goods, which are
components of final
goods.
It also does not count the
sale of used goods,
which do not represent
new production.
3. GDP is expressed in
terms of money.
This enables us to
compare the relative
worth of goods and
services, which is more
meaningful than simply
numbers of products.
4. To compute GDP,
identify all goods and
services produced and
their average prices.
Multiply the number
produced of each item by
its average price.
Then add up everything.
5. If the new GDP is
higher than the previous
one, then the economy is
expanding.
If it is lower, the
economy is declining.
Economists study GDP
figures regularly to analyze
business cycle patterns.
6. Standard of living is the
quality of life based on the
possession of necessities
and luxuries that make life
easier.
When GDP grows
faster than the
population, there are
more goods and
services, on average,
for us to enjoy.
7. GDP does not measure
society’s overall well-being.
Other things- such as :
Reduction in crime and
drug abuse or
Greater equality of
opportunity
Can make a country
better off without raising
the GDP.
8. It also does not
account for the
improvements in product
quality.