Introduction to EconomicsChapter 17

What is Economics?Lesson 1

Essential Questions:• Why and how do people make economic choices?

• How do economic systems influence societies?

It Matters Because:• As someone who uses goods and services and will someday

be a worker, you are part of the American economic system.

Guiding QuestionWhat is scarcity, and how does it affect economic choices?

Our Wants and Resources Wants- desires

individuals and nations have that can be met by getting a good or service

Wants fall into 2 groupsGoods- includes things

that we can touch or hold Services- work that is

done for us Healthcare, lawyer

services, accounting services

EconomicsLimited Resources-

unlimited wants and limited resources forces us to make choices

Economics- the study of how individuals and nations make choices about ways to use scarce resources to fulfill their needs and wants

Resources – a thing that can be used in making products and services people want

3 Types of ResourcesNatural Resources-

nation’s land, soil, trees, oil, iron and more

Labor- includes workers and their abilities (knowledge and skills)The more workers you have

the more you can produce

Capital- Buildings, tools, factories, computers, trucks, trains and more

The Basic Economic ProblemScarcity- occurs

when we do not have enough resources to produce all the things we want to have

Economics looks at how we go about dealing with this basic economic problem

Societies and Economic ChoicesGuiding Question – What

determines how societies make economic choices?Scarcity is an economic

problem in every nation Nations have to make choices

also

Three Basic Economic Questions What goods and services

will be produced?How will they be produced?Who will they be produces

for

Economic SystemsEconomic System- a nation’s way of

producing things its people want and needEach country has its own economic system

Traditional EconomyTraditional Economy-

decisions of what, how, and for whom to produce is based on custom or habitFollow family traditions

of productionNot very productiveDoes not adopt new and

better ways to produce

Market EconomyMarket Economy-

individuals and businesses own all resources and make economic decisions on the basis of price. It answers the three

economic questions based on profit and price.

Command Economy Command Economy-

economic system in which the government makes the major economic decisions.Government decides

what, how, and for whom to produce

Individuals and businesses don’t have much say

The American EconomyThe United States economy is based on a market

economy Businesses compete for profit with little interference from the

governmentElements of a command economy

Government makes rules on how workers are treated Provides services such as education, defense, and disaster

reliefElements of traditional Economy

Many people decide to work in the same traditional jobs

The United states is a mixed market economy-Our economy has elements of traditional, market, and

command economies

Economic DecisionsLesson 2

Essential Questions:• Why and how do people make economic choices?

• How do economic systems influence societies?

It Matters Because:• You make economic decisions everyday, and you will do so

for the rest of your life

Guiding QuestionWhy are trade offs important in making economic decisions?

Trade OffTrade off- the alternative you face when you decide to do one thing rather than anotherPeople make trade offs all

the time Businesses also make

trade-offs Invest in research for new

products or spend money on advertising to increase sales of old products

Governments also face trade-offs Spend money to build new

schools or build new roads

Opportunity CostOpportunity Cost- the cost of the next-best

use of your money or time when you choose to do one thing rather than anotherOnly the next-most-attractive alternative

Measuring Costs and RevenuesGuiding Questions – How

do costs and revenues influence economic decision making?

Assessing Costs- “Joe’s Seafood Depot”Joe’s Seafood Depot has

been making and selling seafood for 10 years. Joe wonders if his business would be better off if it were open longer every day.

Different Types of CostsFixed costs- an expense that does not change no

matter how much a business produces Rent, insurance

Variable costs- an expense that changes depending on how much a business produces

Total cost- the combination of all fixed and variable costs

Marginal cost- the additional or extra opportunity cost associated with each increase of one unit of salesMarginal cost means that variable costs increased

Different Types of RevenuesRevenue- the money a

business receives from selling its goods and servicesThe sum of money Joe

receives from his customers

Marginal Revenue- the additional income received from each increase of one unit of sales

Marginal AnalysisMarginal analysis- compares the additional

benefit of doing something with the additional cost of doing it

If benefit is greater than additional cost, the rule is to do it

If the cost is greater than the benefit, the rule is don’t do it

Do it until marginal cost is equal to marginal revenue

Benefit-Cost Analysis- economic model that compares the marginal costs and marginal benefits of a decision

Helps businesses choose among two, three, or more projects

Benefit/cost ratio= Revenue Cost

Demand and Supply in a Market EconomyLesson 3

Essential Questions:• Why and how do people make economic choices?

• How do economic systems influence societies?

It Matters Because:• Demand and supply work together to set the prices of the

goods and services you buy and use.

Guiding QuestionHow do demand and supply affect prices?

Demand and Supply Make MarketsWhere do prices come from?What do they tell us?Why do they change?Are prices important?

Command economy- government set the prices

Market economy- prices are set by the interaction between demand and supply

Demand and supply- are a result of two groupsConsumer- a person who buys

goods and servicesProducers- a person or business

that provides goods and service

Demand and SupplyDemand- the amount of a

good or service that consumers are willing and able to buy over a range of prices

Supply- the amount of a good or service that producers are willing and able to sell over a range of pricesWhen prices go up producers

increase supplyWhen prices go down

producers decrease supply

Markets and CompetitionRepresenting information on a

schedule as a line on a graph. (Page 470)

Demand curve- shows the amount demanded at a particular priceSlopes down to the right

Supply curve- shows the quantity supplied at a particular price Slopes up to the right

Demand and Supply curve together show a MarketMarket- a location or an

arrangement that allows buyers and sellers to get together and buy or sell a certain product

Competition- efforts by different businesses to sell the same good or serviceTo be efficient markets

must have many competing buyers and sellers

How Prices Are SetMarket Economy

People buy and sell what they want, its like a democratic vote for a product or service

Markets help prevent too much or too little production of goods and services

Equilibrium price The price set for a good or service in

the market place, where demand and supply are perfectly balanced

Surplus amount of a good or service supplied

by producers is greater than the amount demanded by consumers

Shortages the supply of the good or service

available is less than the demand for it

Forces applied by surpluses and shortages, keep a priceat its equilibrium level

Factors Affecting DemandNumber of Consumers

If more consumers enter the market the demand curve shifts to the right

If more consumers leave the market the demand curve shifts to the left

Change in Customer Income If consumers earn more, they tend to buy more, the

demand curve shifts to the right Less income, consumers buy less, the demand curve

shift to the left

Change in Customer Preference Change in like or dislike of a product will shift the

demand curve left or right Finding out a product is harmful will make people want

to buy less of it

Factors Affecting SupplyNumber of suppliers increases

As the number of suppliers increases, the availability of a good or service increases

More is produced, the supply curve moves to rightSuppliers leave the market

Supply curve moves to the leftFewer suppliers, prices go up Fewer choices, producers charge more

Cost of productionAs cost of production goes down, producers increase

supply As cost of production goes up producers decrease supply

The Economic Role of Prices Prices and the Economic Questions

What to produce?How to produce?For whom to produce?

Prices as Measures of ValueConsumers and producers use the prices to

value goods and servicesPrices as Signals

If consumers think an item is priced too high, they will not buy it.

Lack of demand sends a signal to the producer that the price is too high.

The reverse is also true for consumers