What Is Economics? CHAPTER 1 1.1 The Economic Problem 1.2 Economic Theory 1.3 Opportunity Cost and Choice

1.1 The Economic Problem Learning Objectives LO1 Recognize the economic problem, and explain why it makes choice necessary. LO2 Identify productive resources, and list examples. LO3 Define goods and services, and explain why they are scarce. CHAPTER 1

Key Terms scarcity productive resources economics human resources labor entrepreneur natural resources capital goods good service CHAPTER 1

Economic Choices The economic problem Economics defined Scarcity is the condition facing all societies because there are not enough productive resources to satisfy people’s wants. Productive resources are the inputs used to produce the goods and services that people want. Economics defined Economics studies how people use their scarce resources to satisfy their unlimited wants. CHAPTER 1

Productive Resources Human resources Natural resources Capital resources CHAPTER 1

Human Resources Human resources is the broad category of human efforts, both physical and mental, used to produce goods and services. Labor is the physical and mental effort used to produce goods and services. An entrepreneur tries to earn a profit by developing a new product or finding a better way to produce an existing one. CHAPTER 1

Natural Resources Natural resources are so-called “gifts of nature” used to produce goods and services Examples are land, forests, minerals, oil reserves, bodies of water, and animals. CHAPTER 1

Capital Resources Capital goods include all human creations used to produce goods and services Examples are factories, trucks, and machines CHAPTER 1

Goods and Services A good is tangible—something you can see, feel, and touch; it requires scarce resources to produce and satisfies human wants. A service is intangible—not physical—yet uses scarce resources to satisfy human wants. CHAPTER 1

No Free Lunch All goods involve a cost to someone, and draw scarce resources away from the production of other goods. A good or service is scarce if the amount people desire exceeds the amount available at a zero price. CHAPTER 1

CONTEMPORARY ECONOMICS 11/15/2018 1.2 Economic Theory Learning Objectives LO1 Explain the goal of economic theory. LO2 Understand the role of marginal analysis in making economic choices. LO3 Explain how market participants interact. CHAPTER 1 CHAPTER 1

Key Terms economic theory marginal microeconomics macroeconomics markets CHAPTER 1

The Goal of Economic Theory An economic theory is a simplification of economic reality used to make predictions about the real world CHAPTER 1

Economic Theory Simplify the problem Simplifying assumptions Rational self-interest Everybody uses theories Economists tell stories Normative vs. positive statements CHAPTER 1

Marginal Analysis Compare marginal cost with marginal benefit Choice requires time and information Microeconomics and macroeconomics CHAPTER 1

Market Participants Four types of market participants Households Firms Governments The rest of the world CHAPTER 1

Markets Markets are the means by which buyers and sellers carry out exchange. Product markets Resource markets Labor market CHAPTER 1

A Circular-Flow Model A circular-flow model describes the flow of resources, products, income, and revenue among economic decision makers. CHAPTER 1

Circular-Flow Model Figure 1.1 CHAPTER 1

1.3 Opportunity Cost and Choice CONTEMPORARY ECONOMICS 11/15/2018 1.3 Opportunity Cost and Choice Learning Objectives LO1 Define opportunity cost. LO2 Evaluate guidelines for making choices. LO3 Analyze the opportunity cost of attending college. CHAPTER 1 CHAPTER 1

Key Terms opportunity cost sunk cost CHAPTER 1

Opportunity Cost The opportunity cost of an item or activity is the value of the best alternative you must pass up. CHAPTER 1

Opportunity Cost Nothing better to do? Estimate opportunity cost Opportunity cost varies CHAPTER 1

Choose Among Alternatives Calculate opportunity cost Consider your time Ignore sunk cost Sunk cost is a cost you have already incurred and cannot recover. CHAPTER 1

The Opportunity Cost of College Forgone earnings Direct costs of college Other college costs Other-things-constant assumption CHAPTER 1