What is Economics?

Economic Choices Citizens must make them every day. Choices occur because resources are

limited

Needs are required, such as food and shelter

Wants make life more comfortable and enjoyable, like vacations

Economic Choices (cont.)

Economics is the study of decisions made in a world of limited resources• How things are made, bought, sold and

used

Economic Choices (cont.)

Economic models include:• Microeconomics: focuses on the small

picture (individuals and businesses)• Macroeconomics: focuses on the big

picture (governments, whole industries, societies)

US functions on free enterprise capitalism-produce things their people want and need

The Problem of Scarcity Scarcity means there is not enough Scarcity of resources forces people to

make economic decisions• No country has enough resources to

produce what is necessary

The Problem of Scarcity (cont.)

Countries have to make choices:

• What to produce?

• How to produce?

• For whom to produce?

Trade-Offs People must understand the costs

and benefits of economic choices to make the best choice

A trade-off requires someone to decide to do one thing rather than another• Made by individuals, businesses, societies

Trade-Offs (cont.)

Opportunity cost is the second best use after choosing one thing over another• Includes money, time, inconveniences, and

so on

Costs and Revenues There are ways to measure different

types of costs and benefits.

Costs and Revenues (cont.)

Types of Costs:• Fixed: does not change; has to be paid no

matter what

• Variable: changes based on what is produced

• Total: fixed costs + variable costs

• Marginal: cost of producing one additional unit of output

Costs and Revenues (cont.)

Types of Revenues (money coming in)• Total revenue = number of units sold multiplied by average price per unit

• Marginal revenue: made by selling one extra unit of a product

Costs and Revenues (cont.)

Marginal benefit is an additional benefit associated with an action

Cost-benefit analysis requires rational economic decision making