Splash Screen Section 1-4 Economic Choices Economics is the study of how we make decisions in a...

Economic Choices• Economics is the study of how we make

decisions in a world where resources are limited.

• It is sometimes called the science of decision making.

• Needs are things we need for survival, such as food, clothing, and shelter.

• Wants are things we would like to have.

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(pages 406–408)(pages 406–408)

Economic Choices (cont.)

• The fundamental economic problem is scarcity–we do not have enough resources to produce all the things we would like to have.

• Because of scarcity, we must make choices among alternatives.


(pages 406–408)(pages 406–408)


• Society must decide what to produce with its limited resources.

• For example, society may have to choose whether to produce goods for defense or services for poor people.

• Society must decide how to produce.

• For example, should we accept more pollution from factories in exchange for greater output of products?


(pages 406–408)(pages 406–408)


• Society must decide for whom to produce.

• Who will receive the goods and services?

• In the United States, most goods and services are distributed through the price system.


(pages 406–408)(pages 406–408)

Using Economic Models• The economy includes all the activity

in a nation that together affects the production, distribution, and use of goods and services.

(pages 408–409)(pages 408–409)

Using Economic Models (cont.)

• To study a part of the economy, economists use economic models.

• These are simplified representations of the real world, based on economic theories.

• Businesses and governments often base decisions on solutions that emerge from testing economic models.


(pages 408–409)(pages 408–409)


• Models are based on assumptions.

• The quality of the model’s results can be no better than the assumptions on which it is based.


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• Economists use models to better understand the past or present and to predict the future.

• If predictions based on a model turn out to be wrong, economists revise the model.


(pages 408–409)(pages 408–409)

Checking for Understanding (cont.)

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Identify What is the basic economic problem that makes choices necessary?

The basic economic problem is scarcity.

Trade-Offs• Economic decision making requires that we

take into account all the costs and all the benefits of an action.

• Economic choices involve trade-offs, or exchanging one thing for the use of another.

• For example, when you buy a product, you exchange money for the right to own that product rather than something else you could buy for the same price.


(pages 410–413)(pages 410–413)

Trade-Offs (cont.)

• People, businesses, and societies make trade-offs every time they choose to use their resources in one way and not in another.

• More money for education may mean less money to spend on medical research or national defense.


(pages 410–413)(pages 410–413)

Trade-Offs (cont.)

• Opportunity cost is what you cannot buy or do when you choose to do or buy one thing rather than another.

• It is the next best alternative that you had to give up for the choice you made.


(pages 410–413)(pages 410–413)

Trade-Offs (cont.)

• Opportunity cost includes more than just money.

• It also includes the discomforts and inconveniences linked to the choice made.

• For example, the opportunity cost of cleaning the house includes not only the price of cleaning products, but also the time you spent cleaning instead of doing something else, like listening to music.


(pages 410–413)(pages 410–413)

Trade-Offs (cont.)

• All businesses have fixed and variable costs.

• Fixed costs are expenses that are the same no matter how many units of a good are produced.

• Variable costs are expenses that change with the number of products produced.

• If a business produces more, variable costs like raw materials and wages will increase.


(pages 410–413)(pages 410–413)

Trade-Offs (cont.)

• Fixed costs plus variable costs equal total costs.

• To find average total cost, divide total cost by the quantity produced.

• Marginal cost is the extra cost of producing one additional unit of output.

• If it costs an extra $50 to produce one more bicycle helmet, the marginal cost is $50.


(pages 410–413)(pages 410–413)

Trade-Offs (cont.)

• Businesses measure total revenue and marginal revenue to decide what amount of output will produce the greatest profits.

• Total revenue equals the number of units sold times the average price per unit.

• Marginal revenue is the change in total revenue that results from selling one more unit of output.


(pages 410–413)(pages 410–413)

Trade-Offs (cont.)

• We usually do something because we expect to achieve some benefit.

• Marginal benefit is the additional benefit associated with an action.


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Cost-Benefit Analysis• Cost-benefit analysis is an economic model

used to compare marginal costs and marginal benefits of a decision.

• You should choose an action when the benefits are greater than the costs.

• If costs outweigh benefits, you should reject the option.


(pages 413–414)(pages 413–414)

Cost-Benefit Analysis (cont.)

• Suppose you are a farmer trying to decide how many acres to plant.

• The graph on page 413 of your textbook shows a cost-benefit analysis for this decision.

• You will plant the most productive land first. • The extra benefits decline as you plant less

productive land.

• The graph shows that after 15 acres, the extra costs outweigh the extra benefits of planting more acres.


(pages 413–414)(pages 413–414)


• The result of this analysis tells you to plant no more than 15 acres.

• You could do a similar analysis to determine what to produce.

• For example, you could compare the results of planting crops other than wheat.

• The crop that produces the greatest marginal benefit is the one you should plant.


(pages 413–414)(pages 413–414)


• You could use this method to decide for whom to produce.

• You could compare the costs and benefits of selling your wheat nearby or 100 miles away.

• You would choose to distribute your product wherever the marginal benefit was greatest.


(pages 413–414)(pages 413–414)

Checking for Understanding

__ 1. the additional or extra opportunity cost associated with an action

__ 2. economic model that compares the marginal costs and marginal benefits of a decision

__ 3. the cost of the next best alternative use of time and money when choosing to do one thing rather than another

__ 4. the additional or extra benefit associated with an action

__ 5. the alternative you face if you decide to do one thing rather than another

A. trade-off

B. opportunity cost

C. marginal cost

D. marginal benefit

E. cost-benefit analysis

Define Match the terms on the right with their definitions on the left.

E

B

C

D

A

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Understanding Your Role in the Economy• The United States has a market economy.

• Most economic decisions are not made by the government, but by individuals looking out for their own and their families’ self-interests.


(pages 416–418)(pages 416–418)

Understanding Your Role in the Economy (cont.)

• A market economy is participatory.

• The choices you make as a consumer affect the products that businesses make and the prices they receive for their products.

• Likewise, the products offered and their prices affect the choices you make.


(pages 416–418)(pages 416–418)


• A market economy is based on capitalism, a system in which citizens own most of the means of production.

• It is also based on free enterprise–businesses compete for profit with a minimum of government interference.


(pages 416–418)(pages 416–418)


• Keeping informed means reading news stories, listening to news reports, and gathering information about economic activities of businesses and government.

(pages 416–418)(pages 416–418)


• Incentives are rewards offered to try to persuade people to take certain economic actions.

• Price is one incentive.

• Others are bonuses for salespeople and low credit rates for consumers.

• Knowing how incentives work will help you make wise choices.


(pages 416–418)(pages 416–418)


• One role of government in the economy is to help maintain competitive markets.

• Another role is to provide services, such as education and national defense, that the private sector does not provide.


(pages 416–418)(pages 416–418)


• Competition forces businesses to use society’s resources efficiently to produce goods and services people prefer and to produce quality products at low costs.

• Low production costs keep prices low for consumers.


(pages 416–418)(pages 416–418)


• Government can use incentives to encourage people and businesses to take certain actions.

• For example, offering scholarships encourages more people to get higher education.

• Government can also discourage certain actions.

• For example, tax laws can punish companies that cause pollution.


(pages 416–418)(pages 416–418)


Fumes from motor vehicles contribute to air pollution. What could the government do to encourage actions that would reduce this source of pollution?


(pages 416–418)(pages 416–418)

Government could increase the tax on gasoline. It could impose an extra tax on “gas-guzzling” vehicles. It could make laws that require carmakers to produce more fuel-efficient cars. The federal or state government could withhold funding from local governments where air pollution exceeds an acceptable standard. This would encourage the local governments to find ways to encourage people to drive less, such as by improving the public transportation system or adding carpool lanes.


(pages 416–418)(pages 416–418)

Making Wise Choices• Rational choice is choosing the alternative that

has the greatest value from among comparable-quality products.

• You make a rational choice when you buy the goods and services that you believe will best satisfy your wants for the lowest possible cost.


(pages 418–419)(pages 418–419)

Making Wise Choices (cont.)

• Wise consumers will not all make the same choices.

• A rational choice is one that generates the greatest perceived value for any given expenditure.

• Wise decision making by individuals also benefits society by making the best use of scarce resources.

• Being fully informed is the best way to make the best economic as well as political decisions.


(pages 418–419)(pages 418–419)


How is good consumer decision making similar to good political decision making?

To make the best possible choices when you vote, you must be informed about candidates and issues. The same is true when you cast your dollar “votes” for goods and services. Being fully informed is the best way to make the best choices.

Making Wise Choices (cont.)

(pages 418–419)(pages 418–419)

Checking for Understanding

__ 1. choosing the alternative that has the greatest value from among comparable-quality products

__ 2. system in which individuals own the factors of production and make economic decisions through free interaction

__ 3. a system in which private citizens own most, if not all, of the means of production and decide how to use them within legislated limits

A. market economy

B. capitalism

C. free enterprise

D. incentive

E. rational choice


A

B

E


Checking for Understanding (cont.)

__ 4. reward offered to try to persuade people to take certain economic actions

__ 5. economic system in which individuals and businesses are allowed to compete for profit with a minimum of government interference

A. market economy

B. capitalism

C. free enterprise

D. incentive

E. rational choice


C

D


Section 1: The Fundamental Economic Problem• The fundamental economic problem is

scarcity.

• Economists define needs as those things that are necessary for survival.



Section 2: Making Economic Decisions

• Individuals face trade-offs among alternatives.

• The opportunity cost of an economic decision is the alternative given up when one course of action is chosen over another.

• Cost-benefit analysis is a process that involves comparing the costs of a course of action to its benefits.


Section 3: Being an Economically Smart Citizen• In a market economy, people and businesses act

in their own best interests to answer the WHAT, HOW, and FOR WHOM questions.

• The economic system of the United States is based on capitalism and free enterprise.

• The study of economics helps people make informed decisions.


Reviewing Key Terms

__ 1. a basic requirement for survival

__ 2. term for a market economy in which the productive resources are privately owned

__ 3. study of how people satisfy seemingly unlimited and competing wants with the careful use of scarce resources

__ 4. problem that results from a combination of limited resources and unlimited wants

__ 5. alternatives that must be given up when one choice is made rather than another

A. capitalism

B. economics

C. economic model

D. incentive

E. need

F. opportunity cost

G. rational choice

H. scarcity

I. trade-offs

J. want

A

B

E


H

I


Reviewing Key Terms (cont.)

__ 6. the cost of the next best alternative use of money, time, or resources when one choice is made rather than another

__ 7. choosing the alternative that has the greatest value from among comparable-quality products

__ 8. a reward offered to try to persuade people to take certain economic actions

G

D

F


A. capitalism

B. economics

C. economic model

D. incentive

E. need

F. opportunity cost

G. rational choice

H. scarcity

I. trade-offs

J. want


__ 9. a representation that describes how the economy works or is expected to perform

__ 10. good or service that makes life more comfortable but is not required for survival

J

C


Reviewing Key Terms (cont.)

A. capitalism

B. economics

C. economic model

D. incentive

E. need

F. opportunity cost

G. rational choice

H. scarcity

I. trade-offs

J. want


Reviewing Main Ideas

What are the three basic economic questions?

The questions are what to produce, how to produce, and for whom to produce.


Reviewing Main Ideas (cont.)

Why is an economic model useful?

It describes how an economy works or is expected to perform.



What do economists call exchanging one good or service for another?

It is called a trade-off.



When we make an economic choice, we expect to gain something from it. What do economists call this gain?

Economists call this gain the marginal benefit.



Why can our economy be defined as a participatory economy?

It is participatory because our choices will reflect what goods and services are produced.


Critical Thinking

Categorizing Information Your friend says, “I need some new clothes.” Under what conditions would this be expressing a need? A want?

It would be a need if the clothes were absolutely necessary for survival. It would be a want if it were a simple desire for more clothes.


Critical Thinking (cont.)

Drawing Inferences Nick is planning on attending college. The tuition is $10,000 per year. Assuming Nick goes to college for four years, is the opportunity cost of his attending college $40,000? Why or why not?

The opportunity cost is what Nick forfeits to attend college. Suppose Nick would work full-time if he did not go to college earning $18,000 a year. This $18,000 is the annual opportunity cost of his attending college.


Analyzing Visuals

Read the figure on page 408 of your textbook. Select a specific good. Then list the three economic choices that were made to produce the good.

Possible answer: What to Produce: BootsHow: Acquire resources and build factoriesFor Whom: Those who live in cold climates or work outdoors

Directions: Choose the best answer to the following question.Scarcity results from

F trade-offs and opportunity costs.

G limited wants and limited resources.

H limited resources and seemingly unlimited wants.

J the cost of the next best alternative use of resources.

Test-Taking Tip As you read the stem of the multiple choice question, try to anticipate the answer before you look at the choices. If your answer is one of the choices, it is probably correct.



In what way is a market economy based on free enterprise?

Businesses are allowed to compete for profit with minimum governmental interference.

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Explore online information about the topics introduced in this chapter.

Click on the Connect button to launch your browser and go to the Civics Today: Citizenship, Economics, & You Web site. At this site, you will find interactive activities, current events information, and Web sites correlated with the chapters and units in the textbook. When you finish exploring, exit the browser program to return to this presentation. If you experience difficulty connecting to the Web site, manually launch your Web browser and go to http://civ.glencoe.com

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Charts

Choices All Societies Face

Cost-Benefit Analysis

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Today, we can gather a great many facts and figures. Presenting the facts and figures in organized ways makes them more understandable. A circle graph, sometimes called a pie chart, organizes data visually. Its circular shape represents a whole amount. The wedge-shaped sectors inside the circle represent particular parts of the whole. Reading circle graphs can help you see relationships and make comparisons.

Reading a Circle Graph

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Why Learn This Skill?

Learning the Skill

To read a circle graph, follow these steps:

• Examine the title of the graph. The title tells you what the graph is about, or the kind of information the graph displays.

• Look at the sectors dividing the circle into parts. The size of each sector tells you its portion of the whole.



• Examine the labels for each sector. The name of a sector tells you the category of information it represents. The sector labels usually give mathematical data, or statistics, as well. The data may be shown as percentages or perhaps actual amounts.



• Study the sizes of the sectors. See how they relate to the whole. See how the size of each sector compares with the sizes of other sectors.

Learning the Skill

Practicing the Skill

On a separate sheet of paper, answer the following questions about the circle graph on page 415 of your textbook.


1. What kind of information does the graph illustrate?The graph illustrates the personal consumer spending in the U.S. in 2000.

Eight sectors are included.


2. How many sectors are included?




3. What category takes up the largest sector?Housing and household items take up the largest sector.

The largest sector is one-fourth of the whole.

4. How does the largest sector compare with the whole?


5. How does the amount spent on recreation compare with the amount spent on education?

Four times as much is spent on recreation as on education.

Education represents the smallest amount of consumer spending.

6. What category represents the smallest amount of consumer spending?


Mathematics The area of economics that uses mathematical models to analyze, interpret, and predict economic behavior is known as econometrics.

There are several freedoms in free enterprise–the freedom to work where a person wants, the freedom to start one’s own business, the freedom to acquire property, the freedom to choose what goods to buy and sell, and even the freedom to fail. Sometimes people fail in their business efforts because other people have the freedom to spend their money as they choose.

Luxuries such as concert tickets often become necessities in the eyes of consumers. How do consumers satisfy their seemingly unlimited wants?


They satisfy their wants by making choices.

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