Transcript Section 1: The Fundamental Economic Problem

What is Economics

Basic Economics
Section 1: The Fundamental
Economic Problem
Economics

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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 things that we would like to have.
 Entertainment, vacations, clothing, shoes, PS3s, jewelry…
 Things that make life more “comfortable and enjoyable
FUN”
Box 2 cont…
Goods

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

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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?

A country wants more $ to go to education, so less
money has to go to medical research or National
Defense
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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
time-consuming
activities…

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…
Economics 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:

Costs or expenses that are the same no matter
how many units are produced.

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Ex: rent, car payment
Variable costs:

Expenses that change with the # of products
produced!
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Ex: Wages, energy bill…
Total costs:

Add fixed costs to variable costs we have TOTAL costs!
Final and crucial cost remains:
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Marginal Costs: Extra
or additional cost of
producing one
additional unit of
output…
Total cost is $2500
to produce 5 tv’s
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$3000 to produce 6
tvs…

What is the
marginal cost of the
additional (6th)
unit?
 $500!
Let’s put this all together!
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We are going to
manufacture TV's.
Fixed costs: remain
the same no matter
how many tv’s we sell
or don’t sell…
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The rent of our building
that makes the tv’s.
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Variable costs: parts
to make the tv, or to
ship the tv… keep up
with demand
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Total costs: rent +
parts and shipping…
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1.
Business use 2 key measures of
revenue:
Total
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# of units sold manipulated by the
average price per unit!

42 units of a product are sold at $8 each,
the total revenue is ___?
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$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 COSTBENEFIT ANALYSIS
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Analysis requires you to compare marginal costs and marginal benefits
of a decision…
Being an Economically Smart Citizen!: 3 terms to describe
our economy!
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The US uses a market economy
economic system in which supply, demand and
prices help people make decisions and use
resources.
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Most economic decisions are made by people
looking out for their own and their families’
self-interests!

Can we afford this…do I NEED this
Capitalism
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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.
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A 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
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WE MAKE THE CHOICES!
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Incentives:
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Rewards that are offered to
make people take certain actions.
Ex: Sales/Discounts
Rational Choice:
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Choosing the alternative that has
greatest value from among
comparable-quality products