Chapter 1

Section 1

 We witness scarcity with each year’s “hot” new toy.
Inspired by hunter President Teddy Roosevelt,
Americans coveted the teddy bear in 1906.
Cabbage Patch dolls were big during the 1980s, as were Tickle Me Elmo’s in 1996. By 1999 Game
Boy’s Pokémon was the rage with a 10-cent trading card. The most-prized first-edition pocket monsters were in such short supply that they commanded from $8 to $182.

 Scarcity – the condition where unlimited human wants face limited resources
 Economics – the study of how people try to satisfy wants through the use of limited resources
 Need – is a basic requirement for survival and includes food, clothing and shelter
 Want – is way of expressing a need
 Factors of Production – are resources necessary to produce what people want or need
 Land – refers to the “gifts of nature” or natural resources not created by humans

 Capital – the tools, equipment, machinery, and factories used in the production of goods and services
 Financial Capital – the money used to buy the tools and equipment used in production
 Labor – People with all their efforts, abilities, and skills
 Entrepreneur
– a risk taker in search of profits who does something new with existing resources
 Production – or the process of creating goods and services
 Gross Domestic Product (GDP) – the dollar value of all final goods and services, and structures produced within a country’s border In a 12 month period

 Scarcity is the fundamental problem facing all societies
 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.
 A Need is a basic requirement for survival and includes food, clothing and shelter
 Because Resources are limited everything has a cost even when it seems like we are getting something for free
 Someone has to pay for production costs, so “There Is No Such
Thing As A Free Lunch” ( TINSTAAFL ).

 Three Basic Questions
 1. What must we produce?
Society must choose based on its need
 2. How should we produce it? Society must choose based on its resources
 Mass production or that require a lot of equipment or an operation that only takes a few workers
 3. For whom should we produce? Society must choose based on its population and other available markets.

 Factors of production are resources necessary to produce what people want or need.
 Factors of Production – Land, Labor, Capital, and Entrepreneurs

 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
 Capital goods are the tools, money, equipment, machinery, and factories and Financial capital is the money needed to produce the capital goods
 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
 This occurs when all factors are present

 Economics is considered what's called a Social Science because it deals with the behavior of people as they deal with this basic issue of unlimited wants competing with limited resources
 The four key elements of economics are: description, analysis, explanation, and prediction
 Economics deals with the description of economic activity —
Gross Domestic Product, unemployment rate, government spending, tax rates, etc.; description is important because we need to know what the world around us looks like
 GDP is a key measure of the nation’s economic health
 Analysis looks at the “why” and “how” of economic activity— why prices go up and down, for example, or how taxes affect savings .

 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

 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 2

 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

 Economic Product – goods and services that are useful, relatively scarce, and transferable to others
 Good – An item that is economically useful or satisfies an economic want
 Consumer Good – An item intended for final use by individuals
 Capital Goods – A manufactured item used to produce other goods and services
 Service – Work that is performed for someone
 Value – A worth that can be expressed in dollars and cents
 Paradox of Value – The situation in which some nonnecessities have a much higher value than some necessities
 Utility - The capacity to be useful and provide satisfaction

 Wealth – The accumulation of those economic products that are tangible, scarce, useful, and transferable from one person to another
 Market
– A location or other mechanism that allows buyers and sellers to exchange a certain economic product
 Factor Markets – A market where productive resources are bought and sold
 Product Markets – A market where producers sell their goods and services to consumers
 Economic Growth
– The increase in a nation’s total output of goods and services over time

 Productivity – A measure of the amount of output produced by a given amount of inputs in a specific period of time
 Division of Labor – Work arranged so that individual workers do fewer tasks than before
 Specialization Situation in which a factor of production performs tasks that it can do relatively more efficiently than others
 Human Capital – The sum of the skills, abilities, health, and motivation of people
 Economic Interdependence – Reliance on one another to provide the goods and services that people consume

 Adam Smith
1723 –1790
 Pg.18

 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
 Consumer good are intended for final use by individuals
 Capital goods are goods used to produce other goods
 A durable good is a good that lasts three years or more when used on a regular basis and include both capital and consumer goods
 Robot welders and automobiles
 A nondurable good doesn’t last for three years when used on a regular basis
 Food, writing paper, and most clothing items
 Services are work performed for someone and are intangible
 Haircuts, home repairs, and forms of entertainment etc.
 A Consumer is a person
 Consumers use goods and services to satisfy wants and needs

 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
 Paradox of Value at first puzzled economists (necessities and values) it occurs when some necessities have little monetary value whereas some non-necessities have a large monetary value
 Water and Diamonds
 Utility is a good’s or service’s capacity to provide satisfaction, which varies with the needs and wants of each person
 Diamonds and Water
 Wealth is the accumulation of goods that are tangible, scarce, useful, and transferable to another person. Wealth does not include services, only goods
 A nations wealth is not limited to items that are expressed in dollars and cents
 In Adam Smith’s Wealth of a Nation he was referring specifically to the ability and skills of a nations people as the source of its wealth

 A Key feature of the circular flow is the market
 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

 Economic Growth occurs when a nation’s total output of goods and services increases over time
 A number of factors are responsible for economic growth, but productivity is the most important
 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)
 Ex of division of labor would be an assembly line

 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
 Example of economic interdependence: A country that produces sugar cane goes through bad weather resulting in a low yield causing prices to go up
 Economic interdependence does not limit a nation’s growth and usually reduces the efficiency of production

Section 3

 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.

 trade-offs Alternative choices
 opportunity cost The cost of the next best alternative use of money, time, or resources when one choice is made rather than another
 production possibilities frontier A diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed
 cost-benefit analysis A way of thinking about a problem that compares the costs of an action to the benefits received
 free enterprise economy System in which consumers and privately owned businesses, rather than the government, make the majority of the WHAT, HOW, and FOR WHOM decisions
 standard of living The quality of life based on possessions that make life easier

 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

 Doing Nothing Has Its Own Opportunity Costs

Not Investing as a young adult has its problems!!!!!
 John is 18 years old. He gets an after school job and opens a Roth IRA . He saves
$5,000 per year in it and continues doing this until he turns 70 years old. He is perfectly average, invests in low-cost index funds, dollar cost averages, reinvests his dividends, and earns the same return the market has for the past century or two - roughly 10% pretax and inflation. As a result, he ends up with a little more than $7,000,000 in wealth.
 Adam is also 18 years old. He gets an after school job but doesn't save anything. He waits until he is 30 years old, at which point, he opens a series of retirement accounts and saves $5,000 per year. He's only $60,000 in total contributions behind John, and still has 40 years to go before he turns 70, so he figures it isn't too bad. When he reaches retirement, though, he has only $2,200,000. That $60,000 shortfall turned into a
$4,800,000 canyon.
 In fact, by starting at 30, Adam would have to save a whopping $16,000 per year as John continued to save just $5,000 per year simply to break even with John. The opportunity cost of blowing his income as a young adult had enormous consequences later in life.
That is okay, if Adam thought through those choices and decided that is what he wanted .
Most people don't. That is the problem.

 What are some opportunity costs that you may have?

 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

 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

 Building simple models helps economists analyze or describe actual economic situations
 A model is a simplified theory or a simplified picture of what something is like or how something works
 Circular Flow Diagram or Production Possibilities Frontier
Model
 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
 Test Coffee first!!

 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 will provide a working knowledge of property rights, competition, supply and demand, the price system, and the economic incentives that make the American economy function
 All of which has a bearing on our standard of living
 The study of economics helps us to become better decision makers
 Most of today’s political problems have economic impacts: How important is it that we balance the federal budget? How can we keep inflation in check? What methods can we use to strengthen our economy?
 The world of economics is complex and dynamic, as is our society