Chapter One

Key Terms scarcity utility economics wealth need market want factor market factors of production product market land economic growth capital productivity financial capital division of labor labor specialization entrepreneur human capital production economic interdependence Gross Domestic Product (GDP) trade-off opportunity cost economic product production possibilities frontier good cost-benefit analysis consumer good free enterprise economy capital good standard of living service value paradox of value

What is Economics???? The study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the use of scarce resources.

Section 1: Scarcity and Science of Economics Main Idea: scarcity forces us to make choices. We can’t have everything we want, so we are forced to chose what we want most. Objectives: Explain the fundamental economic problem Examine the three basic economic questions every society must decide. *Key Terms: scarcity, need, want, factors of production, land, capital, financial capital, labor, entrepreneur, production, Gross Domestic Product (GDP).

The Economic Problem Most people want more than they already have. Scarcity: the condition that results from society not have enough resources to produce all the things people would like to have.

NEEDS AND WANTS A need is the BASIC requirement for survival and includes: food, clothing and shelter. a want is a way of expressing a need. EX. A person may “want” a pizza to satisfy their need for food. There Is No Such Thing As A Free Lunch (TINSTAAFL) Everything we do has a cost! EX. “buy one, get one free” – someone had to pay the farmer, the truck driver delivering the food, the chef preparing the food, and the server serving the food.

THREE QUESTIONS: WHAT to produce? HOW to produce? FOR WHOM to produce? *By asking these questions, we make decisions about the ways our limited resources will be used.

Factors of Production Resources required to produce products we would like to have. Land “Gifts of Nature”; natural resources not created by humans Examples: fertile land, forests, mineral deposits, energy LIMITED resources  scarcity Capital Tools, equipment, machinery, and factories used in production of goods and services Financial Capital –money used to buy the tools/equipment Examples: bulldozer, oven in a bakery, cash registers Labor People with their efforts, abilities, and skills. Singled out because of their special role in the economy

Entrepreneurs Innovators, responsible for economic change Driving force in economy Land + Capital + Labor + Entrepreneurs= PRODUCTION Hi! I’m a Mac! And I’m a PC.

Gross Domestic Product The dollar value of all final goods and services produced within a country’s borders in one year Most common, comprehensive measure of economic performance in a country’ Includes things like consumption, investment, government spending, and exports/imports “Per Capita” GDP= “per person”

Section 2: Basic Economic Concepts Main Idea: an economic product is a good or service that is useful, relatively scarce and exchangeable. Consumers use goods and services to satisfy their wants and needs.

Goods vs. Services Work that is performed for someone Goods – tangible economic product Consumer Goods Intended for final use by consumers (toys, shoes, cars) Capital Goods Goods which are used in the production of other goods and services (cash registers, computers in schools etc.) Services Work that is performed for someone Doctors, lawn mowers, barbers etc.

Good or Service? Skateboards Waiter at a restaurant Snow cones Dentist Lawyer Television Teachers

Circular Flow of Economics Open your book to pg. 15 Figure 1.3 show how markets serve as the main link between consumers and business. Factor Market Markets where productive resources are bought and sold Where individuals earn their income Ex. you “sell” your work/time to an employer Figure 1.3 on page 15: The money circulates on the outside, illustrating payments for goods, services and the factors of production.

Circular Flow of Economics Product Markets Where individuals spend the income they receive in Factor Markets Money we receive from businesses in factor market eventually returns to them in the product market Example…

Division of Labor & Specialization Work is arranged so individual workers do fewer tasks than before. Workers become more proficient in one step of a process rather than the entire process Assembly Lines Henry Ford

Effect of Education on Income High school graduates earn $9,738 more per year on average than those who don’t complete high school. Getting a bachelor’s degree earns you $26,686 more per year on average than just a high school diploma.

Section 3: Economic Choices and Decision Making Main Idea: Trade-offs are present whenever choices are made. Objectives: Analyze trade-offs and opportunity costs Explain the decision-making strategies

Trade-offs and Opportunity Cost Trade-Offs: alternatives that must be given up when one is chosen rather than another. Ex. Figure 1.5 on pg.20 : a decision making grid is a good way to list and then evaluate alternatives when decision must be made. Opportunity Cost: cost of the next best alternative use of money, time, or resources when one choice is made rather than another. *You should always consider trade-offs and be willing to accept the opportunity cost when making decisions.

Production Possibilities Frontier A diagram representing various combinations of goods/services an economy can produce when all resources are being used.

Production Possibilities Frontier Points A, B, and C represent an economy at full production (on the curve) Point X represents production where an economy is not fully utilizing all of its resources (inside curve)  idle resources Point Y represents production which is outside of an economy’s ability to produce (outside curve)

Economic Growth The PPF curve shifts outward. Points which used to be outside the curve (impossible production) will now be on or inside the curve and represent realistic production.

Free Enterprise Economy A market economy in which competition is allowed to flourish with a minimum of government interference. Five Important characteristics: Economic freedom Voluntary exchange Private property rights Profit motive Competition

Adam Smith Each person selfishly doing what is best for themselves Born in Scotland Met and worked with Voltaire and Benjamin Franklin “The Father of Modern economics” Wrote The Wealth of Nations Division of labor & specialization increase production and will lead to greater “wealth of nations” Each person selfishly doing what is best for themselves economically will lead promote the economy overall Competition= crucial to economic success Free competitive market; minimal government intervention Laissez-faire economic doctrine