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Section 1

Economic Choices

Economics is the study of how we make decisions in a world in which resources are limited as well as the study of how things are made, bought, sold, and used

Section 1

Economic Choices (cont.)

• Citizens must make economic choices every day.

• Needs and Wants:

– Needs are required, such as food and shelter

– Wants make life more comfortable and enjoyable, like vacations

– Choices occur because resources cannot meet all wants and needs.

Section 1

• Economics:

– Studies decisions made in a world of limited resources

– Studies how things are made, bought, sold, and used

Economic Choices (cont.)

Section 1

• Economic models include microeconomics and macroeconomics

– Microeconomics focuses on the small picture

– Macroeconomics focuses on the big picture

Economic Choices (cont.)

• United States functions on free enterprise capitalism

Section 1

The Problem of Scarcity

The limits on, or scarcity of, resources forces people to make careful economic choices.

Section 1

The Problem of Scarcity (cont.)

• A scarcity of resources forces people to make economic decisions.

• No country has enough resources to produce all necessary goods and services.

Choices All Societies Face

Section 1

• Countries have choices:

– What to produce must balance needs

– How to produce must balance problems and benefits

– For whom to produce and how to distribute

The Problem of Scarcity (cont.)

Section 2-Main Idea

Guide to Reading

Big Idea

An economic system is the way a society organizes the production and consumption of goods and services.

Section 2

Trade-Offs

Economic decision making requires us to understand all the costs and all the benefits of a choice.

Section 2

Trade-Offs (cont.)

• People must understand the costs and benefits of economic choices in order to best make those choices.

• A trade-off requires someone to decide to do one thing rather than another

– Individuals make trade-offs

– Trade-offs made on larger scales—families, businesses, societies

Section 2

• Opportunity cost is second best use of time or money after choosing one thing over another

– Includes money, time, inconveniences, and so on

Trade-Offs (cont.)

Section 2

Costs and Revenues

Economists have developed ways of measuring different types of costs and revenues.

Section 2

Costs and Revenues (cont.)

• There are ways to measure different types of costs and benefits.

• Types of Costs:

– Fixed costs—do not change, have to be paid

– Variable costs—change based on what is produced

Section 2

Costs and Revenues (cont.)

– Total costs—both fixed costs and variable costs

– Marginal cost—cost of producing one additional unit of output

Section 2

• Types of Revenue:

− Total revenue equals number of units sold multiplied by average price per unit

− Marginal revenue—revenue made by selling one extra unit of a product

Costs and Revenues (cont.)

Section 2

• Marginal benefit—an additional benefit associated with an action

• Cost-benefit analysis requires rational economic decision making

Costs and Revenues (cont.)

– Considers the benefits of making a choice over the costs

Cost-Benefit Analysis

A. A

B. B

Section 2

Do you think the benefits of your decisions usually outweigh the costs?

A. Yes

B. No

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VS 1

Economics

Economics is the study of how we make decisions in a world in which resources are limited. Microeconomics deals with decision making by small units such as individuals and firms. Macroeconomics deals with the economy as a whole and decision making by large units such as government.

VS 2

Making Economic Decisions

• What to produce

• How to produce

• For whom to produce

Individuals satisfy their unlimited wants in a world of limited resources by making choices.

The need to make choices arises because of scarcity, the basic problem in economics.

Every society must answer the three basic economic questions:

VS 2

Making Economic Decisions

Individuals are forced to make trade-offs every time they use their resources in one way and not in another.

The cost of making a trade-off is known as opportunity cost—the value of the next best alternative that has to be given up to do the action that is chosen.

VS 3

Costs and Revenue

Four important measures of cost are total cost, fixed cost, variable cost, and marginal cost.

A key measure of revenue is marginal revenue, which is the change in total revenue when one more unit of output is sold.

VS 4

Economic Systems

Every type of economic system must answer the three basic economic questions.

The United States has a free enterprise, or capitalist, economic system.

Figure 1

Figure 2

TIME Trans

DFS Trans 1

DFS Trans 2

Vocab1

needs 

requirements for survival, such as food, clothing, and shelter

Vocab2

wants 

things we would like to have, such as entertainment, vacations, and items that make life comfortable and enjoyable

Vocab3

economics 

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

Vocab4

microeconomics

the economic behavior and decision-making by individuals and small businesses

Vocab5

macroeconomics

economic behavior and decision-making by government or whole industries or societies

Vocab6

economic model 

simplified representation of the real world that economists develop to describe how the economy behaves and is expected to perform in the future

Vocab7

economic system

nation’s way of producing things its people want and need

Vocab8

resource 

the money, people, and materials available to accomplish a community’s goals; wealth

Vocab9

scarcity 

not having enough resources to produce all of the things we would like to have

Vocab10

rational 

reasonable

Vocab11

capable 

having ability or competence

Vocab12

generate 

to bring into existence

Vocab13

trade-off 

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

Vocab14

opportunity cost 

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

Vocab15

marginal cost 

the additional or extra opportunity cost associated with an action

Vocab16

marginal benefit 

the additional or extra benefit associated with an action

Vocab17

cost-benefit analysis 

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

Vocab18

previous 

coming before or prior

Vocab19

compute 

to determine or calculate

Vocab20

diminish 

to lessen or reduce

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