ECONOMICSChapter One

CHAPTER ONE

1. Scarcity and the Science of Economics

2. Basic Economic Concepts3. Economic Choices and Decision

Making

1.1 SCARCITY AND THE SCIENCE OF ECONOMICS

BELL WORK:ON A SEPARATE

SHEET OF PAPER, DEFINE CHAPTER

ONE, SECTION ONE VOCABULARY IN

YOUR ECONOMICS TEXTBOOK.

ECONOMICS:ALABAMA COURSE OF STUDY

1. Explain the role of scarcity in answering the basic economic questions of what, how, how much, and for whom to produce.

1.1 OBJECTIVES:

1. Identify the four key elements of economics2. 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 SCARCITY AND THE SCIENCE OF ECONOMICS Four Key Elements of Economics Scarcity TINSTAAFL Three Basic Questions Four Factors of Production Production

FOUR KEY ELEMENTS OF ECONOMICS

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

FOUR KEY ELEMENTS OF ECONOMICS

DescriptionEconomists 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

FOUR KEY ELEMENTS OF ECONOMICS

AnalysisEconomists must discover why and how

things happen.Analysis helps economists understand the

problems and will later help economists offer solutions.

FOUR KEY ELEMENTS OF ECONOMICS

ExplanationEconomists must

communicate their discoveries to the general public.

This helps the citizens understand the seriousness and complexities of economic issues.

FOUR KEY ELEMENTS OF ECONOMICS

PredictionEconomists 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.

SCARCITY Scarcity: The

fundamental economic problem

Condition that results from society not having enough resources to produce all the things people would like to have.

SCARCITY

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 costsOpportunity costs:

costs of the next best alternative use of money, time, or resources when one choice is made rather than another

THREE BASIC QUESTIONS

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

FOUR FACTORS OF PRODUCTION 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

FOUR FACTORS OF PRODUCTION

LaborPeople with their efforts, abilities, and skills Includes all people except entrepreneurs

Entrepreneurs Innovative people who take risks to do

something new with existing resourcesDriving force of the economy

Figure 1.2Figure 1.2Figure 1.2

PRODUCTION

Combination of the land, capital, labor, and entrepreneurs

The process of creating goods and services

1.2 BASIC ECONOMIC CONCEPTS

ECONOMICS:ALABAMA COURSE OF STUDY

1. Explain the role of scarcity in answering the basic economic questions of what, how, how much, and for whom to produce.

1.2 BASIC ECONOMIC CONCEPTS

Objectives:1. Explain the relationship among scarcity, value,

utility, and wealth.2. Understand the circular flow of economic

activity.

1.2 BASIC ECONOMIC CONCEPTS Economic Products Value and Wealth Circular Flow of

the Economy Economic Growth Economic

Interdependence

ECONOMIC PRODUCTS 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.

ECONOMIC PRODUCTS 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.

VALUE AND WEALTH

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.

VALUE AND WEALTH

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.

VALUE AND WEALTH 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.

CIRCULAR FLOW OF THE ECONOMY

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.

ECONOMIC GROWTH

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.

ECONOMIC GROWTH

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.

ECONOMIC GROWTH

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)

ECONOMIC GROWTH

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%

ECONOMIC GROWTH

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.

ECONOMIC GROWTH

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)

ECONOMIC INTERDEPENDENCE

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 ECONOMIC CHOICES AND DECISION MAKING

ECONOMICS:ALABAMA COURSE OF STUDY

1. Explain the role of scarcity in answering the basic economic questions of what, how, how much, and for whom to produce.

1.3 ECONOMIC CHOICES AND DECISION MAKING

Objectives:1. Analyze trade-offs and

opportunity costs.2. Explain decision-

making strategies.

1.3 ECONOMIC CHOICES AND DECISION MAKING Trade-offs  PPF Free Enterprise

Economy

TRADE-OFFS

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.

FREE ENTERPRISE ECONOMY

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.

FREE ENTERPRISE ECONOMY

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.