What is Economics? Chapter 1

Economics Is taking something that is common sense and making it difficult.

Section 1-1: The Basic Problem in Economics What is economics? The study of how people satisfy their unlimited wants and needs with limited resources (people have to make choices)

Wants are anything other than what is needed for basic survival Wants vs. Needs: Wants are anything other than what is needed for basic survival New car, video games, or a stereo system Needs are things required for basic survival Food, clothing, and shelter

CHAPTER 1 What Is Economics? Consider CHAPTER 1 What Is Economics? How much money do you have with you at this moment? Why do most people know this answer instantly? Why are you reading this book right now rather than doing something else? Why is there no sense crying over spilt milk? In what way are people who pound on vending machines relying on a theory?

LESSON 1-1 The Economic Problem Objectives LESSON 1-1 The Economic Problem Recognize the economic problem, and explain why it makes choice necessary. Answer the three basic economic questions. Identify and give examples of the Factors of Production.

LESSON 1-1 The Economic Problem Key Terms LESSON 1-1 The Economic Problem scarcity productive resources economics human resources labor entrepreneur natural resources capital goods good service

Economic Choices Choices are a result of unlimited wants in a world of limited resources (scarcity exists) Spending and production decisions involve choices Choices compete with each other going to dinner vs. going to the movies choices: 1. Eat steak and no movie, 2. Eat a burger and go to a budget movie, 3. Eat at home and see a new release Societies and businesses face choices about how to utilize their resources in the production of goods and services.

All resources are limited. People compete for limited resources Scarcity All resources are limited. Income, time, natural resources People compete for limited resources Scarcity- not being able to have all of the goods and services one wants- an item is scarce even if the store shelves are full-that is why we pay for things (different from shortages) cont.

Scarcity always exists because of competing alternative uses for resources. (Why can’t everyone have a big house?)

Economic Choices Discussion: Why do you think scarcity is an issue with the rich as well as the poor?

Three Basic Questions What must we produce? How should we produce it? For whom should we produce?

Discussion Questions How might the economic decisions of a mountainous island society differ from those of a mountainous landlocked society? Can you think of countries that chose to focus on military production rather than take care of its people? Why doesn't Saudi Arabia concentrate on building ships?

Factors of Production (p.6 figure 1.3) Resources used to produce goods and services- land, labor, capital, and entrepreneurship Land: natural resources and surface land and water Land, water, fish, animals, forests, mineral deposits cont.

Labor: the work people do-human effort both physical and mental results in economic goods and services Goods are tangible objects that satisfy people’s wants or needs Ex. Clothes, food, cars, etc. Services are actions that can satisfy people’s wants or needs Ex. Seeing a doctor, watching a baseball game, getting my oil changed cont.

No Free Lunch All goods involve a cost to someone, and draw scarce resources away from the production on other goods. A good or service is scarce if the amount people desire exceeds the amount available at a zero price.

Capital: manufactured goods used to make other goods and services Ex. Machines, buildings, and tools used to assemble automobiles Capital increases productivity- the amount of output that results from a given level of inputs Entrepreneurship: the ability to start a new business or create new products About 30% of new business enterprises fail Of the 70% that survive, only a few become successful cont.

ROOM 8 ECONOMICS The Scope of Economics Economics deals with the description of economic activity. Analysis looks at the “why” and “how” of economic activity. Economist communicating knowledge. Prediction used to advise us of future activity. LESSON 1-1

Technology: (sometimes considered the 5th F. O Technology: (sometimes considered the 5th F.O.P) the use of science to develop new products and production needs

Discussion Question What makes economics a social science? Economics is a study of human behavior because it looks at the decisions we make and how we react to those decisions.

Section 1-2: Trade-Offs Trade offs: sacrificing one good or service to purchase or produce another Trade-offs involve opportunity costs Opportunity costs are the value of the next best alternative given up for the alternative that was chosen There is no “free lunch”- everything has a cost because you could be doing something else with your time ex. Working, studying, sleeping, watching TV (all have value)

Production Possibilities Curve The production possibilities curve shows the maximum combination of goods and services that can be produced from a given amount of resources. Ex. Military spending vs. domestic programs (trade off because of opportunity cost- we can’t have all of both-resources are scarce) (p. 16) Using a production possibilities curve, a producer can decide how to use resources.

Section 1-3: What do Economists Do? Two parts of economics Microeconomics: the branch of economic theory that deals with behavior and decision making by small units-individuals and firms Macroeconomics: the branch of economic theory that deals with the economy as a whole and decision making by large units (ex. Governments) Economy: activity that affects the production and distribution of goods and services in a society

Economic models are used to predict behavior in the real world Models: some factors remain constant shows basic factors, not every detail Models may not always be accurate due to the inability to predict human behavior.

Schools of Economic Thought Economists are influenced by personal opinions, beliefs, and the government under which they live This leads to different economic theories Different schools of thought can have an impact on laws and government policies. Judgements about economic policies depend on a person’s values Values are beliefs or characteristics that a person or group considers important Economists inform us to the possible short and long term outcomes of policies.

Key Term Matching Scarcity Capital Need Want Economics Labor Production Entrepreneur Financial capital Gross Domestic Product (GDP) Factors of production Land Not enough resources to meet needs and wants. The study of how people decide to use scarce resources. A basic requirement for survival. A way of expressing a need. Refers to gifts of nature. Tools, equipment, and factories used in production of goods and services. People with all their efforts and skills. A risk-taker in search of profit. The process of creating goods and services. The dollar value of all final goods and services.

Key Term Matching 1. Not enough resources to meet needs and wants. 5. The study of how people decide to use scarce resources. 3. A basic requirement for survival. 4. A way of expressing a need. 12. Refers to gifts of nature. 2. Tools, equipment, and factories used in production of goods and services. 6. People with all their efforts and skills. 8. A risk-taker in search of profit. 7. The process of creating goods and services. 10. The dollar value of all final goods and services. Scarcity Capital Need Want Economics Labor Production Entrepreneur Financial capital Gross Domestic Product (GDP) Factors of production Land

Assessment Questions These are manufactured goods needed to produce other goods and services. Capital Goods

Assessment Questions The dollar value of all final goods and services and the most comprehensive measure of a country’s total production output. Gross Domestic Production or GDP

Assessment Questions 3. The money used to buy the tools and equipment needed for production is known as Financial Capital