The Fundamental Economic Problem: Scarcity and Economic Choices

1. What is Economics?Chapter 18

2. ADD: The Fundamental Economic Problem is SCARCITY

3. Economic Choices: • Needs are things required for survival, such as food, clothing, and shelter; Wants are the things we would like to have • Economics is the study of how individuals and nations make decisions in a world where resources are limited

4. Economic Choices • In microeconomics economists explain how individual economic decisions are made; • macroeconomics they study decisions made by governments, industries, or societies • An economic model is a theory that tries to explain human economic behavior

5. Economic Choices • Every country has its own economic system or way of producing things people want or need (US is free enterprise capitalism)

6. The Problem of Scarcity • Resources are the things used in making goods and providing services; they include tools, natural resources, and human resources • Scarcityoccurs 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 ADD : UNLIMITED WANTS – LIMITED RESOURCES

7. The Problem of Scarcity • The four basic economic questions: • WHAT to produce • HOW to produce • HOW MUCH to produce • FOR WHOM to produce

8. Trade-offs & Opportunity Costs Because of scarcity, individuals have to made trade-offs- • A trade off is the alternative you face if you decide to do one thing rather than another • 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

9. 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) • Variable costs are expenses that change with the number of items produced; they increase as production grows (ex. Wages & raw materials)

10. Which is a fixed cost? Variable cost?

11. 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) What is the total costs? -$1,500 for the Month

12. 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 31st helmet? $50

13. 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 Total Revenue Example: 42 units x $2= $84

14. Costs and Revenues • Marginal revenue is the change in total revenue- the 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

15. Marginal Revenue Example MRT sells DVDs for $10 each MRT sells 100 DVDs a month What is their total revenue? ($1,000) If MRT sell three more DVDs, what is their marginal revenue? $30 ($1,030 new total revenue)

16. Costs and Revenues • Marginal benefit is the additional satisfaction or benefit received when one more unit is produced • Often the best decision is made by comparing marginal benefits against marginal costs; to do so economists use a cost-benefit analysis • If the costs outweigh the benefits, we should reject the option • Diminishing marginal benefit occurs when marginal benefit declines compared to the marginal costs