E CONOMICS Chapter One

C HAPTER O NE 1. Scarcity and the Science of Economics 2. Basic Economic Concepts 3. Economic Choices and Decision Making

1.1 S CARCITY AND THE S CIENCE OF E CONOMICS

B ELL WORK : O N A SEPARATE SHEET OF P APER, DEFINE CHAPTER ONE, SECTION ONE VOCABULARY IN YOUR E CONOMICS T EXTBOOK.

E CONOMICS : A LABAMA C OURSE OF S TUDY 1. Explain the role of scarcity in answering the basic economic questions of what, how, how much, and for whom to produce.

1.1 O BJECTIVES : 1. Identify the four key elements of economics 2. Explain the fundamental economic problem. 3. Examine the three basic economic questions every society must decide. 4. Identify the four factors of production.

1.1 S CARCITY AND THE S CIENCE OF E CONOMICS Four Key Elements of Economics Scarcity TINSTAAFL Three Basic Questions Four Factors of Production Production

F OUR K EY E LEMENTS OF E CONOMICS study of how people try to satisfy what appears to be seemingly and unlimited and competing wants through the careful use of relatively scarce resources

F OUR K EY E LEMENTS OF E CONOMICS Description Economists simply tell what is happening. They use Gross Domestic Product (GDP). The dollar value of all final goods and services, and structures produced within a country’s borders in a 12-month period Most comprehensive measure of a country’s total output Key measure of an economy’s health

F OUR K EY E LEMENTS OF E CONOMICS Analysis Economists must discover why and how things happen. Analysis helps economists understand the problems and will later help economists offer solutions.

F OUR K EY E LEMENTS OF E CONOMICS Explanation Economists must communicate their discoveries to the general public. This helps the citizens understand the seriousness and complexities of economic issues.

F OUR K EY E LEMENTS OF E CONOMICS Prediction Economists must decide what they think will happen. This helps the citizens of a country make decisions to determine what policies are best for the nation.

S CARCITY Scarcity : The fundamental economic problem Condition that results from society not having enough resources to produce all the things people would like to have.

S CARCITY We all have needs: basic requirements for survival. We all have wants: way of expressing a need. Example: Need food, want pizza

TINSTAAFL Everything has a cost. Production costs Opportunity costs : costs of the next best alternative use of money, time, or resources when one choice is made rather than another

T HREE B ASIC Q UESTIONS Because of scarcity, society must answer three questions: WHAT to produce We can’t have everything we want, so we must choose what we want most! HOW to produce A lot of equipment and a few workers A lot of workers and few pieces of equipment FOR WHOM to produce

F OUR F ACTORS OF P RODUCTION Land “natural resources not created by humans” Resources are fixed and in limited supply Capital Tools, equipment, machinery, and factories used in the production of goods and services Also called capital goods Financial capital: money used to buy the tools and equipment used in production

F OUR F ACTORS OF P RODUCTION Labor People with their efforts, abilities, and skills Includes all people except entrepreneurs Entrepreneurs Innovative people who take risks to do something new with existing resources Driving force of the economy

P RODUCTION Combination of the land, capital, labor, and entrepreneurs The process of creating goods and services

1.2 B ASIC E CONOMIC C ONCEPTS

E CONOMICS : A LABAMA C OURSE OF S TUDY 1. Explain the role of scarcity in answering the basic economic questions of what, how, how much, and for whom to produce.

1.2 B ASIC E CONOMIC C ONCEPTS Objectives : 1. Explain the relationship among scarcity, value, utility, and wealth. 2. Understand the circular flow of economic activity.

1.2 B ASIC E CONOMIC C ONCEPTS Economic Products Value and Wealth Circular Flow of the Economy Economic Growth Economic Interdependence

E CONOMIC P RODUCTS They are goods and services that are useful, relatively scarce, and transferable to others. A good is an item that is economically useful or satisfies an economic want. Consumer goods are the final products. Capital goods are produced to be used in the creation of other goods or services. Durable goods are goods used regularly and last longer than three years. Nondurable goods are goods that lasts less than three years when used regularly.

E CONOMIC P RODUCTS A service is a work that is performed for someone. The difference between a good and service is that a service is intangible or cannot be touched. Consumers use goods and services to satisfy their wants and needs.

V ALUE AND W EALTH Value is the worth of a good or service. Scarcity is required for value. The paradox of value is the situation in which some non-necessities have more value than some necessities.

V ALUE AND W EALTH Utility is also required for value. Utility is the capacity to be useful and provide satisfaction. Utility is not measurable and may differ between individuals.

V ALUE AND W EALTH Scarcity and utility are the solutions to the paradox of value. Wealth is the accumulation of products (not services) that are tangible, scarce, useful, and transferable from one person to another.

C IRCULAR F LOW OF THE E CONOMY A market is a location or other mechanism that allows buyers and sellers to exchange a certain economic product. The factor market is the market where productive resources (Ex: labor) are bought and sold. The factor market is where people earn their incomes. The product market is the market where producers sell their goods and services to consumers. The product market is where people use their income.

E CONOMIC G ROWTH Economic growth is the increase in a nation’s total output of goods and services to consumers. Productivity is the most important factor in economic growth.

E CONOMIC G ROWTH Productivity is the measure of the amount of output produced by a given amount of inputs in a specific period of time. It increases with efficient use of scarce resources.

E CONOMIC G ROWTH Division of labor and specialization also increase production. Division of labor is work arranged so that individuals do fewer tasks than before. (Ex: an assembly line)

E CONOMIC G ROWTH FYI: The assembly line cut the time need to build a car from a day and a half to 90 minutes. It cut the price of the car by 50%

E CONOMIC G ROWTH Specialization is a situation in which a factor of production performs tasks that it can do relatively more efficiently than others. Human capital adds to productivity.

E CONOMIC G ROWTH Human capital is the sum of the skills, abilities, health, and motivation of people. Investments in human and physical capital increases productivity. ( Ex: education; See figure 1.4 on page 16 )

E CONOMIC I NTERDEPENDENCE Countries rely on one another to provide goods and services. (ex: oil) If one area is unable to perform its part, it effects other areas. (ex: drought creates famine)

1.3 E CONOMIC C HOICES AND DECISION M AKING

E CONOMICS : A LABAMA C OURSE OF S TUDY 1. Explain the role of scarcity in answering the basic economic questions of what, how, how much, and for whom to produce.

1.3 E CONOMIC C HOICES AND DECISION MAKING Objectives : 1. Analyze trade-offs and opportunity costs. 2. Explain decision-making strategies.

1.3 E CONOMIC C HOICES AND DECISION MAKING Trade-offs PPF Free Enterprise Economy

T RADE -O FFS Trade-offs are alternative choices. An opportunity cost is the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. TINSTAAFL!

PPF The Production Possibilities Frontier (PPF) is a diagram that shows different combinations of goods and/or services an economy can produce when all resources are fully employed. (guns and butter) See figure1.6.

PPF A PPF shows the trade- offs, opportunity costs, and economic growth between two goods and/or services. Using a PPF helps economists make cost- benefit analysis.

PPF Cost-benefit analysis is a way of thinking about a problem that compares the costs of an action to the benefits received.

F REE E NTERPRISE E CONOMY The free enterprise economy is a system in which consumers and privately owned businesses, rather than the government, makes the majority of the WHAT, HOW, and FOR WHOM decisions.

F REE E NTERPRISE E CONOMY It also promotes citizens’ standard of living. The standard of living is the quality of life based on the possession of the necessities and luxuries that make life easier.