Chapter 1
What is Economics?
Section 1-1: The Basic Problem in
Economics


What is economics?
 The study of how people satisfy their unlimited
wants and needs with limited resources (people
have to make choices)
Wants vs. Needs:
 Wants are anything other than what is needed for
basic survival

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New car, video games, or a stereo system
Needs are things required for basic survival

Food, clothing, and shelter

Economic Choices
 Choices are a result of unlimited wants in a world
of limited resources (scarcity exists)

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
Spending and production decisions involve choices
Choices compete with each other
 going to dinner vs. going to the movies
 choices: 1. Eat steak and no movie, 2. Eat a burger
and go to a budget movie, 3. Eat at home and see a
new release
Societies and businesses face choices about how
to utilize their resources in the production of
goods and services.

Scarcity
 All resources are limited.

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
Income, time, natural resources
People compete for limited resources
Scarcity- not being able to have all of the goods
and services one wants- an item is scarce even if
the store shelves are full-that is why we pay for
things (different from shortages)
cont.

Scarcity always exists because of competing
alternative uses for resources. (Why can’t
everyone have a big house?)

Factors of Production (p.6 figure 1.3)
 Resources used to produce goods and servicesland, labor, capital, and entrepreneurship
 Land: natural resources and surface land and
water

Land, water, fish, animals, forests, mineral deposits
cont.

Labor: the work people do-human effort both
physical and mental



results in economic goods and services
Goods are tangible objects that satisfy people’s wants or
needs
 Ex. Clothes, food, cars, etc.
Services are actions that can satisfy people’s wants or
needs
 Ex. Seeing a doctor, watching a baseball game,
getting my oil changed
cont.


Capital: manufactured goods used to make other
goods and services
 Ex. Machines, buildings, and tools used to
assemble automobiles
 Capital increases productivity- the amount of
output that results from a given level of inputs
Entrepreneurship: the ability to start a new business
or create new products
 About 30% of new business enterprises fail
 Of the 70% that survive, only a few become
successful
cont.

Technology: (sometimes considered the 5th F.O.P) the
use of science to develop new products and
production needs
Section 1-2: Trade-Offs


Trade offs: sacrificing one good or service to
purchase or produce another
 Trade-offs involve opportunity costs
Opportunity costs are the value of the next best
alternative given up for the alternative that was
chosen
 There is no “free lunch”- everything has a cost
because you could be doing something else with
your time ex. Working, studying, sleeping,
watching TV (all have value)

Production Possibilities Curve
 The production possibilities curve shows the
maximum combination of goods and services that
can be produced from a given amount of
resources.


Ex. Military spending vs. domestic programs (trade off
because of opportunity cost- we can’t have all of bothresources are scarce) (p. 16)
Using a production possibilities curve, a producer
can decide how to use resources.
Section 1-3: What do Economists Do?


Two parts of economics
 Microeconomics: the branch of economic theory
that deals with behavior and decision making by
small units-individuals and firms
 Macroeconomics: the branch of economic theory
that deals with the economy as a whole and
decision making by large units (ex. Governments)
Economy: activity that affects the production and
distribution of goods and services in a society

Economic Models
 Economic models are used to predict behavior in
the real world
 Models:



some factors remain constant
shows basic factors, not every detail
Models may not always be accurate due to the inability
to predict human behavior.

Schools of Economic Thought
 Economists are influenced by personal opinions,
beliefs, and the government under which they live
 This leads to different economic theories
 Different schools of thought can have an impact
on laws and government policies.
 Judgements about economic policies depend on a
person’s values
 Values are beliefs or characteristics that a person
or group considers important
 Economists inform us to the possible short and
long term outcomes of policies.