Chapter 18 What is Economics Economic Choices Needs

Economic Choices • Needs are things required for survival, such as food, clothing, and

Economic Choices • In microeconomics economists explain how individual economic decisions are made; in

Economic Choices • An economic model is a theory that tries to explain human

Economic Choices • Every country has its own economic system or way of producing

The Problem of Scarcity • Resources are things used in making goods and providing

The Problem of Scarcity • The three basic economic questions: • WHAT to produce

Trade-offs • A trade off is the alternative you face if you decide to

Trade-offs • Opportunity cost is the cost of the next best use of your

Costs and Revenues • Businesses have several different types of costs: • Fixed costs

Costs and Revenues • Variable costs are expenses that change with the number of

Costs and Revenues • Total costs are fixed costs plus variable costs; to find

Costs and Revenues • Marginal cost is the additional cost of producing one additional

Costs and Revenues • Businesses use 2 measures of revenue to decide the output:

Costs and Revenues • Marginal revenue is the change in total revenuethe extra revenue-

Costs and Revenues • Marginal benefit is the additional satisfaction or benefit received when

Costs and Revenues • Often the best decision is made by comparing marginal benefits

Costs and Revenues • If the costs outweigh the benefits, we should reject the

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Chapter 18: What is Economics?

Economic Choices • Needs are things required for survival, such as food, clothing, and shelter; wants are 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; in macroeconomics they study decisions made by governments, industries, or societies

Economic Choices • 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 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

The Problem of Scarcity • The three basic economic questions: • WHAT to produce • HOW to produce • FOR WHOM to produce

Trade-offs • A trade off is the alternative you face if you decide to do one thing rather than another

Trade-offs • 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)

Costs and Revenues • 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) $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 31 st 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 42 units x $2= $84

Costs and Revenues • Marginal revenue is the change in total revenuethe 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

Costs and Revenues • Marginal benefit is the additional satisfaction or benefit received when one more unit is produced

Costs and Revenues • Often the best decision is made by comparing marginal benefits against marginal costs; to do so economists use a cost-benefit analysis

Costs and Revenues • If the costs outweigh the benefits, we should reject the option • Diminishing marginal benefit occurs when marginal benefit declines compared to the marginal costs