Economics Part II

All businesses have costs.

1. Fixed costs – costs that are the same no matter how many units of a good are produced. Such as

a) Mortgage payments

b) Property taxes

2. Variable costs -

Expenses that change with the number of products that are produced.

These expenses will increase as production grows and will decrease as production decreases.

a) wages – If you have more people working, you can make more products, but your expenses for wages will also go up.

If you reduce the number of people you have working, production goes down and so do your expenses for wages.

b) Raw materials

The more items you produce, the more raw materials you will need and the more expenses you will have for raw materials.

3. Total costs

variable costsFixed +

4. Average total cost – the total cost divided by the quantity produced.

Example: If the total cost of making bicycle helmets is $1,500 and 50 are produced, the average total cost is $30 per helmet.

5. Marginal costs -

The extra, or additional cost of producing one additional unit of output.

Example: If the total cost to produce 30 bicycle helmets is $1,500 and $1,550 to produce 31 helmets, the additional cost to produce one more is $50.

IV. Revenue

Businesses measure two key measures of revenue to decide what amount of output will produce the greatest profits.

1. Revenue – number of units sold times the price per unit.

If you sold 10 helmets for $35, the revenue would be $350.

X $35 = $350

Revenue

2. Marginal Revenue – the change in total revenue – the extra revenue – that results from selling one more unit of output.

V. Economic models:

The economy includes all the activity in a nation that together affect production, distribution and the use of goods and services.

Economic models are simplified representations of the real world based on economic theories.

VI. Cost- Benefit Analysis is an economic model used to compare marginal costs and marginal benefits of a decision.

VII. Producing Goods and Services

A. Economic output includes goods and services.

B. Four factors of production:

1. Natural Resourcesa. soil

b. water

c. forests

d. Raw materials/minerals

2. Human resourcesa. skills

b. knowledge

c. energy

d. Physical capabilities

3. Capital

a. moneyb. machineryc. factoriesd. equipment

e. trucks

f. tools

4. Management

a. Owners of sole proprietorships

b. partners

c. Corporate managers

Entrepreneurs

Individuals who start new businesses, introduce new products, and improve management techniques.

C. Gross Domestic Product

1. The Gross Domestic Product (GDP) is a measure of the size of the economy.

It is the total value, in dollars of all final goods and services produced in the country during a single year.

2. GDP does not count intermediate goods, which are components of final goods.

It also does not count the sale of used goods, which do not represent new production.

3. GDP is expressed in terms of money.

This enables us to compare the relative worth of goods and services, which is more meaningful than simply numbers of products.

4. To compute GDP, identify all goods and services produced and their average prices.

Multiply the number produced of each item by its average price.

Then add up everything.

5. If the new GDP is higher than the previous one, then the economy is expanding.

If it is lower, the economy is declining.

Economists study GDP figures regularly to analyze business cycle patterns.

6. Standard of living is the quality of life based on the possession of necessities and luxuries that make life easier.

When GDP grows faster than the population, there are more goods and services, on average, for us to enjoy.

7. GDP does not measure society’s overall well-being.

Other things- such as :

Reduction in crime and drug abuse or

Greater equality of opportunity

Can make a country better off without raising the GDP.

8. It also does not account for the improvements in product quality.