Chapter 1 What Is Economics?

Chapter 1 What Is Economics?
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SECTION 1 Scarcity and the Science of Economics
CHAPTER INTRODUCTION SECTION 1 Scarcity and the Science of Economics SECTION 2 Basic Economic Concepts SECTION 3 Economic Choices and Decision Making CHAPTER SUMMARY CHAPTER ASSESSMENT Contents

Chapter Objectives Section 1: Scarcity and the Science of Economics
Explain the fundamental economic problem.  Examine the three basic economic questions every society must decide. Chapter Introduction 2

Chapter Objectives Section 2: Basic Economic Concepts
Explain the relationship among scarcity, value, utility, and wealth.  Understand the circular flow of economic activity. Chapter Introduction 3

Chapter Objectives Section 3: Economic Choices and Decision Making
Analyze trade-offs and opportunity costs.  Explain decision-making strategies. Chapter Introduction 4

Study Guide (cont.) Key Terms scarcity  labor  entrepreneur 
production  Gross Domestic Product (GDP) economics  need  want  factors of production  land  capital  financial capital  Section 1-2

Study Guide (cont.) Objectives Applying Economic Concepts
After studying this section, you will be able to:  Explain the fundamental economic problem.  Examine the three basic economic questions every society must decide.  Applying Economic Concepts Scarcity Why is scarcity the basic economic problem that everyone faces? Section 1-3

Introduction Do you think the study of economics is worth your time and effort?  According to a Harris poll, a huge percentage of Americans think it is.  They must know what economists know—that a basic understanding of economics can help make sense of the world around us. Click the mouse button or press the Space Bar to display the information. Section 1-4

The Fundamental Economic Problem
Scarcity is the condition where unlimited human wants face limited resources.  Economics is the study of how people satisfy wants with scarce resources.  Needs are required for survival; wants are desired for satisfaction.  Someone has to pay for production costs, so There Is No Such Thing As A Free Lunch (TINSTAAFL). Click the mouse button or press the Space Bar to display the information. Section 1-5

Click the mouse button or press the Space Bar to display the answer.
Discussion Question Why do you think scarcity is an issue with the rich as well as the poor? It is a human trait that few people, regardless of their economic status, are satisfied with what they have. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1

Three Basic Questions What must we produce? Society must choose based on its need.  How should we produce it? Society must choose based on its resources.  Figure 1.1 For whom should we produce? Society must choose based on its population and other available markets. Click the mouse button or press the Space Bar to display the information. Section 1-9

Discussion Question How might the economic decisions of a mountainous island society differ from those of a mountainous landlocked society? An island society has water resources to consider and likely a more limited population. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1

The Factors of Production
Factors of production are resources necessary to produce what people want or need.  Land is the society’s limited natural resources—landforms, minerals, vegetation, animal life, and climate.  Capital is the means by which something is produced such as money, tools, equipment, machinery, and factories. Click the mouse button or press the Space Bar to display the information. Section 1-13

The Factors of Production (cont.)
Labor is the workers who apply their efforts, abilities, and skills to production.  Entrepreneurs are risk-takers who combine the land, labor, and capital into new products.  Production is creating goods and services—the result of land, capital, labor, and entrepreneurs. Click the mouse button or press the Space Bar to display the information. Section 1-13

The Factors of Production (cont.)
Click the mouse button or press the Space Bar to display the information. Section 1-14

Discussion Question Why are entrepreneurs an economy’s driving force? Their abilities to start new businesses and introduce new products may re-energize a sluggish economy or strengthen a successful economy. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1

The Scope of Economics Economics deals with the description of economic activity—Gross Domestic Product, unemployment rate, government spending, tax rates, etc.  Analysis looks at the “why” and “how” of economic activity—why prices go up and down, for example, or how taxes affect savings. Click the mouse button or press the Space Bar to display the information. Section 1-20

The Scope of Economics (cont.)
Explanation refers to how economists communicate knowledge of the economy and its activities to the society’s population.  Prediction refers to how yesterday’s and today’s economic activities advise us of potential future activity. Click the mouse button or press the Space Bar to display the information. Section 1-20

Discussion Question What makes economics a social science? Economics is a study of human behavior because it looks at the decisions people make and how they react to those decisions. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1

Section Assessment Main Idea Using your notes from the graphic organizer activity on page 5, explain why a society must face the choices about WHAT, HOW, and FOR WHOM to produce. Choices must be made as long as wants are greater than the resources available. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 1

Section Assessment (cont.) Describe the fundamental economic problem. Scarcity, the condition that results from society not having enough resources to produce all the things people want, is the fundamental economic problem. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 2

Section Assessment (cont.) List the three basic economic questions every society must answer. Every society must ask what to produce, how to produce, and for whom to produce. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 3

Section Assessment (cont.) Describe the factors of production. The factors of production are land, capital, labor, and entrepreneurs. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 4

Section Assessment (cont.) List the four key elements of economics. The four key elements of economics are description, analysis, explanation, and prediction. Click the mouse button or press the Space Bar to display the answer. Section 1-Assessment 5

Section Assessment (cont.)
Synthesizing Information Give an example of a supposedly “free” item that you see every day. Explain why the item is not really free by stating who or what actually pays for it. Section 1-Assessment 7

Click the mouse button to return to the Contents slide.
End of Section 1

Study Guide Main Idea An economic product is a good or service that is useful, relatively scarce, and exchangeable.  Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 12 of your textbook. Section 2-1

Study Guide (cont.) Key Terms economic product  market 
factor market  product market  economic growth  productivity  division of labor  specialization  human capital  economic interdependence good  consumer good  capital good  service  value  paradox of value  utility  wealth  Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 12 of your textbook. Section 2-2

Click the Speaker button to listen to the Cover Story.
Study Guide (cont.) Objectives After studying this section, you will be able to:  Explain the relationship among scarcity, value, utility, and wealth.  Understand the circular flow of economic activity.  Applying Economic Concepts Specialization How does specialization increase production? Click the Speaker button to listen to the Cover Story. Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 12 of your textbook. Section 2-3

Introduction Economics, like any other social science, has its own vocabulary.  To understand economics, a review of some key terms is necessary.  Fortunately, most economic terms are widely used, and many will already be familiar to you. Click the mouse button or press the Space Bar to display the information. Section 2-4

Did You Know? The 20 percent of the world’s people who live in the wealthiest nations consume 86 percent of the world’s goods and services. The 20 percent who live in the poorest nations consume just 1.3 percent. Click the mouse button or press the Space Bar to display the information. Section 2-4

Goods, Services, and Consumers
Goods are items that are economically useful or satisfy an economic want. They are tangible and can be classified as consumer/capital and durable/ nondurable.  Services are work performed for someone and are intangible.  Consumers use goods and services to satisfy wants and needs. Click the mouse button or press the Space Bar to display the information. Section 2-5

Discussion Question Why do you think the United States has been called a “society of consumption”? Answers will vary. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment 1

Value, Utility, and Wealth
Value is worth expressed in dollars and cents. Scarcity by itself is not enough to create value. For something to have value, it must also have utility.  Utility is a good’s or service’s capacity to provide satisfaction, which varies with the needs and wants of each person.  Wealth is the accumulation of goods that are tangible, scarce, useful, and transferable to another person. Wealth does not include services. Click the mouse button or press the Space Bar to display the information. Section 2-9

Discussion Question Why might a wealthy society not have as much economic staying power as another wealthy society with a highly skilled labor force? Answers will vary. Students may indicate that wealth is usually based on limited natural resources, whereas labor can produce more goods and services. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment 1

The Circular Flow of Economic Activity
Markets are locations/mechanisms for buyers and sellers to trade. They are classified as local, regional, national, global, and cyberspace.  A factor market is where people earn their incomes. Factor markets center on the four factors of production: land, capital, labor, and entrepreneurs.  A product market is where people use their income to buy from producers. Product markets center on goods and services. Click the mouse button or press the Space Bar to display the information. Section 2-13

The Circular Flow of Economic Activity (cont.)
Figure 1.3 Click the mouse button or press the Space Bar to display the information. Section 2-14

Discussion Question How are landlords a part of a factor market? They provide land or property (a factor of production) to consumers in exchange for rent money, which is the landlords’ source of income. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment 1

Productivity and Economic Growth
Productivity is a measure of the amount of output produced by the amount of inputs within a certain time. Productivity increases with efficient use of scarce resources.  Specialization and division of labor may improve productivity because they lead to more proficiency (and greater economic interdependence). Click the mouse button or press the Space Bar to display the information. Section 2-17

Productivity and Economic Growth
Investing in human capital improves productivity because when people’s skills, abilities, health, and motivation advance, productivity increases.  Economic growth depends on high productivity. Yet, an economy’s productivity may be affected by its interdependence—reliance on others and their reliance on us to provide goods and services. Click the mouse button or press the Space Bar to display the information. Section 2-17

Discussion Question How may economic interdependence be a strength of an economy? A weakness? Answers will vary. Students may indicate that the economy may gain larger, more diverse markets, leading to greater income and productivity. But the economic problems of those additional markets (customers or suppliers) may adversely affect the economy’s production output or customer base. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment 1

Section Assessment (cont.) Discuss the relationship among scarcity, value, utility, and wealth. Answers will vary. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment 2

Section Assessment (cont.) Describe the circular flow of economic activity. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment 3

Section Assessment (cont.) Explain why productivity is important to economic growth. When productivity goes up, more output is produced with the same amount of inputs in the same amount of time. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment 4

Section Assessment (cont.) Making Comparisons What is the difference between a durable good and a nondurable good? A durable good lasts three or more years when used on a regular basis. A nondurable good lasts for less than three years. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment 5

Section Assessment (cont.) Drawing Conclusions In what way do businesses and households both supply and demand in the circular flow model? Businesses supply goods while demanding resources; households supply labor and income while demanding goods. Click the mouse button or press the Space Bar to display the answer. Section 2-Assessment6

End of Section 2

Study Guide Main Idea Trade-offs are present whenever choices are made.  Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 19 of your textbook. Section 3-1

Study Guide (cont.) Key Terms trade-off  opportunity cost 
production possibilities frontier  cost-benefit analysis  free enterprise economy  standard of living Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 19 of your textbook. Section 3-2

Click the Speaker button to listen to the Cover Story.
Study Guide (cont.) Objectives After studying this section, you will be able to:  Analyze trade-offs and opportunity costs.  Explain decision-making strategies.  Applying Economic Concepts Opportunity Costs How are your decisions measured in terms of opportunity costs? Click the Speaker button to listen to the Cover Story. Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 19 of your textbook. Section 3-3

Introduction The process of making a choice is not always easy. 
Because resources are scarce, consumers need to make wise choices.  To become a good decision maker, you need to know how to identify the problem and then analyze your alternatives.  Finally, you have to make your choice in a way that carefully considers the costs and benefits of each possibility. Click the mouse button or press the Space Bar to display the information. Section 3-4

Did You Know? Economists reward their greatest for breakthrough discoveries. The 1999 Nobel Prize for Economics went to Robert A. Mundell, a Canadian economist at New York’s Columbia University, for his career-long work in international currency exchange rates, vital in today’s global marketplace. The prize is worth a million dollars in U.S. currency. Click the mouse button or press the Space Bar to display the information. Section 3-4

Trade-Offs and Opportunity Cost
Trade-offs are the alternative choices people face in making an economic decision. A decision-making grid lists the advantages and disadvantages of each choice.  Opportunity cost is the cost of the next best alternative among a person’s choices. The opportunity cost is the money, time, or resources a person gives up, or sacrifices, to make his final choice. Click the mouse button or press the Space Bar to display the information. Section 3-5

Trade-Offs and Opportunity Cost (cont.)
Figure 1.5 Click the mouse button or press the Space Bar to display the information. Section 3-6

Discussion Question Why do you think economists believe opportunity cost is an important factor to consider in addition to monetary cost? The money, time, or resources given up when one choice is made rather than another are just as important as the monetary cost of the choice that was made. Click the mouse button or press the Space Bar to display the answer. Section 3-Assessment 1

Production Possibilities
The production possibilities frontier diagram illustrates the concept of opportunity cost. It shows the combinations of goods and/or services that can be produced when all productive resources are used. The line on the graph represents the full potential—the frontier—when the economy employs all of these productive resources.  Identifying possible alternatives allows an economy to examine how it can best put its limited resources into production. Click the mouse button or press the Space Bar to display the information. Section 3-9

Production Possibilities (cont.)
Considering different ways to fully employ its resources allows an economy to analyze the combination of goods and services that leads to maximum output.  An economy pays a high cost if any of it resources are idle. It cannot produce on its frontier and it will fail to reach its full production potential.  Economic growth made possible by more resources, a larger labor force, or increased productivity causes a new frontier for the economy. Click the mouse button or press the Space Bar to display the information. Section 3-9

Figure 1.6 The Production Possibilities Frontier Click the mouse button or press the Space Bar to display the information. Section 3-10

Figure 1.6 The Production Possibilities Frontier Click the mouse button or press the Space Bar to display the information. Section 3-17

Discussion Question How might economic growth stimulate greater production possibilities? Answers will vary. Students may indicate that with a larger labor force, more goods and services are created; newly discovered natural resources open up new products and services. Click the mouse button or press the Space Bar to display the answer. Section 3-Assessment 1

Thinking Like an Economist
Building simple models helps economists analyze or describe actual economic situations.  Cost-benefit analysis helps economists evaluate alternatives by looking at each choice’s cost and benefit.  Taking small, incremental steps in implementing an economic decision helps economists test whether the estimated cost of the decision was correct. Click the mouse button or press the Space Bar to display the information. Section 3-19

The Road Ahead Studying economics will help us know how the economy works on a daily basis.  It helps us understand a free enterprise economy, where people and privately owned businesses rather than the government make the majority of the economic decisions.  The study of economics helps us to become better decision makers.  The world of economics is complex and dynamic, as is our society. Click the mouse button or press the Space Bar to display the information. Section 3-24

Section Assessment (cont.) Describe the relationship between trade-offs and opportunity costs. All economic decisions involve trade-offs. The opportunity cost of a choice is the cost of the next best use of money, time, or resources. Click the mouse button or press the Space Bar to display the answer. Section 3-Assessment 2

Section Assessment (cont.) List the decision-making strategies that economists use. Economists use the circular flow diagram, production possibilities frontier, and cost-benefit analysis. Click the mouse button or press the Space Bar to display the answer. Section 3-Assessment 3

Section Assessment (cont.) Explain why the study of economics is important to the American free enterprise system. Economic issues are an important part of many political campaigns. An understanding of the issues will help a citizen decide how to vote in an election. Click the mouse button or press the Space Bar to display the answer. Section 3-Assessment 4

Section Assessment (cont.) Making Generalizations Study the decision-making grid on page 20 of your textbook. Explain the advantages of using such a grid to evaluate alternatives. Such a grid helps organize and explain the various choices when decision making. Click the mouse button or press the Space Bar to display the answer. Section 3-Assessment 6

Section Close How might the production possibilities frontier change if new technology were applied to the production of guns but not to the production of butter? Section 3-Assessment 7

End of Section 3

Section 1: Scarcity and the Science of Economics
The basic economic problem of scarcity is due to the combination of people’s seemingly unlimited wants and relatively scarce resources.  In a world of scarce resources, There Is No Such Thing As A Free Lunch (TINSTAAFL).  Because of scarcity, society has to decide WHAT, HOW, and FOR WHOM to produce.  Land, capital, labor, and entrepreneurs are the four factors of production required to produce the things that people use. Click the mouse button or press the Space Bar to display the information. Chapter Summary 1

Section 1: Scarcity and the Science of Economics (cont.)
Entrepreneurs are risk-taking individuals who go into business in order to make a profit; they organize the other factors of production.  The scope of economics deals with description, analysis, explanation, and prediction. Click the mouse button or press the Space Bar to display the information. Chapter Summary 2

Section 2: Basic Economic Concepts
Consumers use goods and services to satisfy their wants and needs.  Something has value when it has utility and is relatively scarce.  Wealth consists of products that are scarce, useful, and transferable to others, but wealth does not include services, which are intangible.  Markets link individuals and businesses in the circular flow of economic activity; the factors of production are traded in factor markets; goods and services are traded in the product markets. Click the mouse button or press the Space Bar to display the information. Chapter Summary 3

Section 2: Basic Economic Concepts (cont.)
Productivity and investments in human capital help economic growth; investments in human capital are among the most profitable of all investments.  Increases in specialization and division of labor cause more economic interdependence. Click the mouse button or press the Space Bar to display the information. Chapter Summary 4

Section 3: Economic Choices and Decision Making
The opportunity cost of doing something is the next best alternative, or trade-off, that you give up.  A decision-making grid can be used to help evaluate alternatives.  A production possibilities frontier shows the various possible combinations of output that can be produced when all resources are fully employed; production inside the frontier occurs when some resources are idle or are not being used to their maximum capability. Click the mouse button or press the Space Bar to display the information. Chapter Summary 5

Section 3: Economic Choices and Decision Making (cont.)
When economic growth takes place, the production possibilities frontier shifts outward, showing that more products are produced than before.  The economic way of thinking involves simplification with model building, cost-benefit analysis to evaluate alternatives, and incremental decision making.  The study of economics will make you a better decision maker and will help you to understand the world around you; however, the study of economics will not tell you which decisions to make. Click the mouse button or press the Space Bar to display the information. Chapter Summary 6

Section 3: Economic Choices and Decision Making (cont.)
The study of economics helps people understand how a free enterprise economy makes the WHAT, HOW, and FOR WHOM decisions. Chapter Summary 7

End of Chapter Summary

Chapter 1 What Is Economics?

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