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

2. 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.
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3. Key Terms scarcity productive resources economics human resources
labor
entrepreneur
natural resources
capital goods
good
service
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4. 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.
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5. Productive Resources Human resources Natural resources
Capital resources
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6. 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.
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7. 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.
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8. Capital Resources
Capital goods include all human creations used to produce goods and services
Examples are factories, trucks, and machines
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9. 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.
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10. 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.
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11. 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.
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12. Key Terms economic theory marginal microeconomics macroeconomics
markets
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13. The Goal of Economic Theory
An economic theory is a simplification of economic reality used to make predictions about the real world
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14. Economic Theory Simplify the problem Simplifying assumptions
Rational self-interest
Everybody uses theories
Economists tell stories
Normative vs. positive statements
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15. Marginal Analysis Compare marginal cost with marginal benefit
Choice requires time and information
Microeconomics and macroeconomics
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16. Market Participants Four types of market participants Households Firms
Governments
The rest of the world
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17. Markets
Markets are the means by which buyers and sellers carry out exchange.
Product markets
Resource markets
Labor market
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18. A Circular-Flow Model
A circular-flow model describes the flow of resources, products, income, and revenue among economic decision makers.
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19. Circular-Flow Model
Figure 1.1
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20. 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.
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21. Key Terms
opportunity cost
sunk cost
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22. Opportunity Cost
The opportunity cost of an item or activity is the value of the best alternative you must pass up.
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23. Opportunity Cost Nothing better to do? Estimate opportunity cost
Opportunity cost varies
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24. Choose Among Alternatives
Calculate opportunity cost
Consider your time
Ignore sunk cost
Sunk cost is a cost you have already incurred and cannot recover.
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25. The Opportunity Cost of College
Forgone earnings
Direct costs of college
Other college costs
Other-things-constant assumption
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