What is Economics

Basic

Economics

Section 1: The Fundamental

Economic Problem
Economics
The

system that society uses to produce and

distribute goods and services
The study of how we make decisions in a world
where resources are limited

Why study economics???

Well

informed citizens do more than just vote, we

should know about and make smart economic
choices

Why does the government pay so much

attention to the economy???
B/c

resources are limited

BOX 2
Needs

and Wants

A need

is something that we need

Required

for survival such as food, clothing

and shelter

A want-some

have.

things that we would like to

Entertainment,

vacations, clothing, shoes,

PS3s, jewelry
Things that make life more comfortable
and enjoyable FUN

Goods

Box 2 cont

things that can be made

or manufactured/used
to satisfy our wants and
needs (books, cars)

Capital goods

the things used to

manufacture other
goods (tools, machinery)
or things that made this
school: bulldozers,
trucks, hammers..

Consumer goods

goods meant to be sold

to consumers for use

Services

work that is done for

someone for a certain
price

What is scarcity?
What is the fundamental

economic problem?
issue of scarcity
Scarcity-

this occurs when ever

we do not have enough
resources to produce all of the
things we would like to have

U.S. has this problem and

so do you and I!

rational consumer asks

whether or not he or she can
afford the expensive car or
the cheaper car

Brand

name or
generic

Putting a Price on Things

box 4
Price or VALUE is based on two
basic factors
1. Supply
2. Demand
-Supply
-the amount of a good or
service that is available for
consumers to buy
-Demand
-the amount of a good or
service that consumers are
willing to buy

Determining Price

-Price is determined by
comparing the amount of
demand to the amount of
supply and finding an
amount where they are
equal
--Market or Equilibrium Price
this is the point
at which
supply and demand
meet and price
is determined

Effects of Price

-Shortages
-when demand is greater
than supply
-What happens to price?
It goes up
-Surplus
-When supply is greater
than demand
-What happens to price?

Section 2: Making Economic

Decisions (on back)
Trade-offs: (see page 56/59 economic
terms)
The

alternative you face if you decide to do one

things rather than another
Ex:

economic choice to buy a DVD player.

Or more pollution-free air means less driving
Taking more time to study means having less time to
BIG

PICTURE?

country wants more $ to go to education, so less

money has to go to medical research or National
Defense

 You

are going to college

after high school
Spend more than just cost
of books, transportation,
tuition
Biggest cost is full-time
income that you will not
be able to earn because of
the time you will have to
spend studying and going
to class and other timeconsuming activities

 Economics

Time, not just money!

If you are going to clean
your house, you will need?
Not only that but also, the
time you could spend doing
other things like studying
or visiting with friends

have a
term for this broad
measure of cost:
OPPORTUNITY COST
(pg 59 too)
Cost

of the next best

use of your time or $
when you choose to
do one thing rather
than another.

Measures of Costs
Fixed

costs:

or expenses that are the same no matter

how many units are produced.

Costs
Ex:

rent, car payment

Variable
Expenses

costs:

produced!

Ex: Wages, energy bill

Total

that change with the # of products

costs:

Add fixed costs to variable costs we have TOTAL costs!

Final and crucial cost remains:

Marginal

Costs:
Extra or
additional cost of
producing one
additional unit of
output

Total

cost is $2500
to produce 5 tvs

$3000

tvs

to produce 6

What

is the
marginal cost of the
additional (6th)
unit?

$500!

Lets put this all together!

We

are going to
manufacture TV's.
Fixed costs: remain

the same no matter

how many tvs we sell
or dont sell

The rent of our building

that makes the tvs.

Variable costs: parts

to make the tv, or to
ship the tv keep up
with demand

Total costs: rent +

parts and shipping

1.

Business use 2 key measures of

revenue:
Total

# of units sold manipulated by the average

price per unit!

42 units of a product are sold at $8 each, the

total revenue is ___?

$336

2. Marginal

Change in total revenue (extra revenue) that

results from selling 1 more unit of output.

Marginal Benefit
We

usually do something b/c we expect to

achieve some benefit.
We are concerned with the marginal benefit-The
additional or extra benefit associated with an
action.
Once we define the marginal costs & the
benefits of a decision, we can analyze the
decision.
To do this, economists create an economic
model called a COST-BENEFIT ANALYSIS Analysis

requires you to compare marginal costs and

marginal benefits of a decision

Being an Economically Smart

Citizen!: 3 terms to describe our
economy!
The US uses a market economy economic

system in which supply,

demand and prices help people make
decisions and use resources.

Most

economic decisions are made

by people looking out for their own
and their families self-interests!

Can

we afford thisdo I NEED this

Capitalism
A

market economy is
sometimes described
as being based on
Capitalism:(c=choice)
System in which
private citizens own
most, if not all, of the
means of production.

market economy
is also based on FREE
ENTERPRISE:
B/c

business are
allowed to compete
for profit with a
minimum of
government
interference.
Generic, PS3
WE MAKE THE CHOICES!

 Incentives:
Rewards

that are
offered to make
people take certain
actions.
Ex: Sales/Discounts
Rational

Choice:

Choosing

the
alternative that has
greatest value from
among comparablequality products