Chapter One
Key Terms
• scarcity
• economics
• need
• want
• factors of production
• land
• capital
• financial capital
• labor
• entrepreneur
• production
• Gross Domestic
Product (GDP)
• economic product
• good
• consumer good
• capital good
• service
• value
• paradox of value
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utility
wealth
market
factor market
product market
economic growth
productivity
division of labor
specialization
human capital
economic interdependence
trade-off
opportunity cost
production possibilities frontier
cost-benefit analysis
free enterprise economy
standard of living
What is Economics????
The study of how people try to satisfy what
appears to be seemingly unlimited and
competing wants through the use of scarce
resources.
Section 1: Scarcity and Science of Economics
• Main Idea: scarcity forces us to make choices. We
can’t have everything we want, so we are forced to
chose what we want most.
• Objectives:
 Explain the fundamental economic problem
 Examine the three basic economic questions every society
must decide.
*Key Terms: scarcity, need, want, factors of production,
land, capital, financial capital, labor, entrepreneur,
production, Gross Domestic Product (GDP).
The Economic Problem
• Most people want more than they already have.
• Scarcity: the condition that results from society
not have enough resources to produce all the
things people would like to have.
NEEDS AND WANTS
• A need is the BASIC requirement for survival and
includes: food, clothing and shelter.
• a want is a way of expressing a need.
 EX. A person may “want” a pizza to satisfy their need for
food.
• There Is No Such Thing As A Free Lunch
(TINSTAAFL)
 Everything we do has a cost!
 EX. “buy one, get one free” – someone had to pay the
farmer, the truck driver delivering the food, the chef
preparing the food, and the server serving the food.
THREE QUESTIONS:
WHAT to produce?
HOW to produce?
FOR WHOM to produce?
*By asking these questions, we make decisions
about the ways our limited resources will be
used.
Factors of Production
• Resources required to produce products we would like to
have.
• Land
 “Gifts of Nature”; natural resources not created by humans
 Examples: fertile land, forests, mineral deposits, energy
 LIMITED resources  scarcity
• Capital
 Tools, equipment, machinery, and factories used in production
of goods and services
 Financial Capital –money used to buy the tools/equipment
 Examples: bulldozer, oven in a bakery, cash registers
• Labor
 People with their efforts, abilities, and skills.
 Singled out because of their special role in the economy
Entrepreneurs
 Innovators, responsible for economic change
 Driving force in economy
Land + Capital + Labor +
Entrepreneurs= PRODUCTION
And I’m
a PC.
Hi! I’m
a Mac!
Gross Domestic Product
• The dollar value of all final goods and services produced
within a country’s borders in one year
• Most common, comprehensive measure of economic
performance in a country’
• Includes things like consumption, investment,
government spending, and exports/imports
• “Per Capita” GDP= “per person”
Section 2: Basic Economic
Concepts
• Main Idea: an economic product is a good or
service that is useful, relatively scarce and
exchangeable.
• Consumers use goods and services to satisfy
their wants and needs.
Goods vs. Services
• Goods – tangible economic product
• Consumer Goods
 Intended for final use by consumers (toys, shoes,
cars)
• Capital Goods
 Goods which are used in the production of other
goods and services (cash registers, computers in
schools etc.)
• Services
▫ Work that is performed for someone
 Doctors, lawn mowers, barbers etc.
Good or Service?
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Skateboards
Waiter at a restaurant
Snow cones
Dentist
Lawyer
Television
Teachers
Circular Flow of Economics
• Open your book to pg. 15
▫ Figure 1.3 show how markets serve as the main
link between consumers and business.
• Factor Market
▫ Markets where productive resources are bought
and sold
▫ Where individuals earn their income
▫ Ex. you “sell” your work/time to an employer
Circular Flow of Economics
• Product Markets
▫ Where individuals spend the income they receive
in Factor Markets
▫ Money we receive from businesses in factor
market eventually returns to them in the product
market
Example…
Division of Labor & Specialization
• Work is arranged so individual workers do fewer
tasks than before.
• Workers become more proficient in one step of a
process rather than the entire process
• Assembly Lines
• Henry Ford
Effect of Education on Income
• High school graduates earn $9,738 more per
year on average than those who don’t complete
high school.
• Getting a bachelor’s degree earns you $26,686
more per year on average than just a high school
diploma.
Section 3: Economic Choices and
Decision Making
• Main Idea: Trade-offs are present
whenever choices are made.
• Objectives:
 Analyze trade-offs and opportunity costs
 Explain the decision-making strategies
Trade-offs and Opportunity Cost
• Trade-Offs: alternatives that must be given up
when one is chosen rather than another.
 Ex. Figure 1.5 on pg.20 : a decision making grid is a
good way to list and then evaluate alternatives when
decision must be made.
• Opportunity Cost: cost of the next best
alternative use of money, time, or resources
when one choice is made rather than another.
*You
should always consider
trade-offs and be willing to
accept the opportunity cost
when making decisions.
Production Possibilities Frontier
A diagram representing various
combinations of
goods/services an economy
can produce when all
resources are being used.
Production Possibilities Frontier
• Points A, B, and C represent an economy at full production
(on the curve)
• Point X represents production where an economy is not fully
utilizing all of its resources (inside curve)  idle resources
• Point Y represents production which is outside of an
economy’s ability to produce (outside curve)
Economic Growth
• The PPF curve shifts outward. Points which
used to be outside the curve (impossible
production) will now be on or inside the
curve and represent realistic production.
Free Enterprise Economy
• A market economy in which competition is
allowed to flourish with a minimum of
government interference.
▫ Five Important characteristics:
1.
2.
3.
4.
5.
Economic freedom
Voluntary exchange
Private property rights
Profit motive
Competition
Adam Smith
Born in Scotland
Met and worked with Voltaire and Benjamin Franklin
“The Father of Modern economics”
Wrote The Wealth of Nations
Division of labor & specialization increase production
and will lead to greater “wealth of nations”
• Each person selfishly doing what is best for themselves
economically will lead promote the economy overall
• Competition= crucial to economic success
• Free competitive market; minimal government intervention
• Laissez-faire economic doctrine