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Chapter 1What Is Economics?

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Contents

CHAPTER INTRODUCTION

SECTION 1 Scarcity and the ScienceScarcity and the Science of

Economics

SECTION 2 Basic Economic Concepts

SECTION 3 Economic Choices andEconomic Choices and Decision Making

CHAPTER SUMMARY

CHAPTER ASSESSMENTClick a hyperlink to go to the corresponding section.

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Chapter Introduction 1

Economics and YouThe study of economics will help you become a better decision maker–it helps you develop a way of thinking about how to make the best choices for you.

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and You.

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Section 1-4

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Introduction

• 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.

• Do you think the study of economics is worth your time and effort? ⇩

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Section 1-5

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The Fundamental Economic Problem

• Economics is the study of how people satisfy wants with scarce resources. ⇩

• Scarcity is the condition where unlimited human wants face limited 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).

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Section 1-9

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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.

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Section 1-13

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The Factors of Production

• Land is the society’s limited natural resources—landforms, minerals, vegetation, animal life, and climate. ⇩

• Factors of production are resources necessary to produce what people want or need. ⇩

• Capital is the means by which something is produced such as money, tools, equipment, machinery, and factories.

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Section 1-13

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• Entrepreneurs are risk-takers who combine the land, labor, and capital into new products. ⇩

• Labor is the workers who apply their efforts, abilities, and skills to production. ⇩

• Production is creating goods and services—the result of land, capital, labor, and entrepreneurs.

The Factors of Production (cont.)

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Section 1-14

The Factors of Production (cont.)

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Section 1-20

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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.

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Section 1-20

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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.

End of Section 1

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Section 2-4

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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.

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Section 2-5

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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.

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Section 2-9

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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.

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Section 2-13

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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.

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Section 2-14

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Figure 1.3

The Circular Flow of Economic Activity (cont.)

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Section 2-17

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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).

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Section 2-17

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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.

End of Section 2

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Section 3-4

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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.

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Section 3-4

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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.

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Section 3-5

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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.

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Section 3-6

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Figure 1.5

Trade-Offs and Opportunity Cost (cont.)

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Section 3-9

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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.

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Section 3-9

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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.

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Section 3-10

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Figure 1.6The Production Possibilities Frontier

Production Possibilities (cont.)

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Section 3-10

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Figure 1.6The Production Possibilities Frontier

Production Possibilities (cont.)

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Section 3-17

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Figure 1.6The Production Possibilities Frontier

Production Possibilities (cont.)

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Section 3-19

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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.

End of Section 3

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