Chapter 1
What is Economics?
SECTION 1
Economics
 Definition: the study of choices that people make to
satisfy their needs and wants
 ECONOMIST: a person who studies economic choices
Types of Economics
 Microeconomics: study of the choices made by economic
actors such as household, companies, and individual
markets.
 Even though Micro- does mean small, microeconomics can
focus on large participants in the economy. For example,
microeconomics can refer to Exxon Mobil Corporation and
Microsoft.
 Macroeconomics: the study of the behavior of an entire
economic system
 This is where the topics of inflation and unemployment are
discussed
Decision Makers
 Consumers: people who buy things
 That Whataburger you ate makes you a consumer of
Whataburger
 That Iphone you own makes you a consumer of Apple.
 That Nike shirt you are wearing makes you a consumer of
Nike.
 Producers: people who make things that satisfy
consumer needs
 Whataburger produced that cheeseburger you ate.
 Apple produced the Iphone that you bought.
 Nike produced that shirt you are wearing.
Products
 Two kinds of products: GOODS and SERVICES
 Goods: physical items that consumers can purchase
 Examples: Food, clothing, cars, video games
 Services: actions or activities that are performed for a
fee
 Examples: lawyers, plumbers, car maintenance
Resources and Factors of
Production
 RESOURCE: anything that people use to make or obtain
what they need or want
 Resources that can be used to produce goods and services
are called FACTORS OF PRODUCTION.
FACTORS OF PRODUCTION
Factor 1: Land
• Land means all natural resources on or under the ground
— includes water, forests, wildlife, mineral deposits
Factor 2: Labor
• Labor is all the human time, effort, talent used to make products
— physical and mental effort used to make a good or provide a service
Factor 3: Capital
• Capital is a producer’s physical resources
— includes tools, machines, offices, stores, roads, vehicles
— sometimes called physical capital or real capital
• Workers invest in human capital — knowledge and skills
— workers with more human capital are more productive
Factor 4: Entrepreneurship
• Entrepreneurship — vision, skill, ingenuity, willingness to take risks
• Entrepreneurs anticipate consumer wants, satisfy these in new ways
— develop new products, methods of production, marketing or distributing
— risk time, energy, creativity, money to make a profit
SECTION 2
Scarcity-KEY CONCEPT
 The combination of limited economic resources and
unlimited wants results in SCARCITY. (not having enough
but needing a lot more)
 What kind of items do you think are capable of being
scarce?
 Why do things get scarce?
Basic Economic Questions
Question 1: What Will Be Produced?
• Societies must decide on mix of goods to produce
— depends in part on their natural resources
 Some countries allow producers and consumers to decide
 In other countries, governments decide
 Must also decide how much to produce; choice depends on societies’ wants
Question 2: How Will It Be Produced?
• Decisions on production methods involve using resources efficiently
— decisions influenced by a society’s natural resources
 Societies adopt different approaches
— with unskilled labor force, might use labor-intensive methods
— with skilled labor force, might use capital-intensive methods
Question 3: For Whom Will It Be Produced?
• How goods and services are distributed involves two questions
— how should each person’s share be determined?
— how will goods and services be delivered to people?
Productivity
 Definition: Level of output that results from a given
level of input.
 Amount of work done based on how hard you worked
during a period of time.
 EFFICIENCY: use of the smallest amount of resources to
produce the greatest amount of output.
 DIVISION OF LABOR: assigning a small number of tasks to
each worker
 SPECIALIZATION: the focus on one activity.
SECTION 3
OPPORTUNITY COSTS
 TRADE-OFF: sacrificing one’s resources for an
opportunity instead of spending or using the resources
on another
 OPPORTUNITY COST: the value of the alternative
selection that was sacrificed for the trade-off
 You have $10. You are hungry, but you also want to go
see a movie. Whatever you choose to spend money on is
your TRADE OFF. What you chose not to spend money on
is your opportunity cost. If you eat, you can’t see a
movie. If you go see a movie, you can’t go eat.
Production Possibility Curve
 Shows all of the
possible combinations
of two goods or
services that can be
produced within a
stated time with a
certain amount of
available resources.
 In the example on
the left, boats and
trucks use the same
resources, so it
shows the different
combinations of
how much you can
produce using the
same resources.
SECTION 4
EXCHANGE
 EXCHANGE: producers and consumers agree to provide one
type of item in return for another
 BARTER: exchange of one set of goods for another
 Trade you apples for oranges
 MONEY: standardized means of exchange
 Three functions of money are
 Standardize item that generally traded for goods or services
 MEASURE OF VALUE that allows producers and consumers to
determine worth
 STORE OF VALUE that can be saved and used to purchase items at
a later date
 CREDIT: allows consumers to use items and pay them off over
time without completing payment at moment of purchase
Value
 VALUE: price or importance to a person
 What kinds of things are valuable to certain people?
 What kinds of things are invaluable to certain people?
 UTILITY: usefulness to a person
 What kinds of things are useful to people? What things are
useless to people?
 NEED: something that is necessary to live
 WANT: something that is not a necessity
 What do you think is more valuable and utilized to person in
the USA? Water or Diamonds
 Does the same thing apply to a tribe in Africa?
Interdependence
 SELF-SUFFICIENCY: when a society can fulfill all of their
needs without outside assistance
 INTERDEPENDENCE: reliance among economic actors
END OF CHAPTER 1