Unit 1
Chapters 1 - 3
Chapter 1 – What is Economics?
 Society is structured around the idea that everybody has
needs and wants. Goods and services fulfill them.
 Needs – essential for survival i.e. food, shelter
 Wants – we desire, but not necessary i.e. IPhone, 60” HDTV
 Some items can be both a need and want i.e. Cowfish
 Goods – tangible/physical objects i.e. food, clothing,
electronics
 Services – actions/activities that one person performs for
another i.e. haircut, tax return, manicure, oil change
 Some things can provide both a good and service i.e. restaurant serves
you food (good), but also cooked (service) the food
What is Economics?
 Peoples needs and wants are unlimited
 Scarcity – fact that limited amounts of goods and services
are available to meet unlimited wants
 This is the Basic Economic Problem
 Economics – the study of how people seek to satisfy their
needs and wants by making choices
 Scarcity vs. Shortage
 Scarcity always exists i.e. gold
 Shortages are caused by suppliers not making more of a
good/service i.e. IPad
What is Economics?
 To satisfy needs and wants resources must be turned into
goods/services
 Entrepreneurs – people who decide how to combine resources
to create new goods and services
 Factors of Production – the resources individuals use to make
all goods/services
 Land – all natural resources i.e. oil, timber, water
 Labor – people/workers i.e. doctor, farmer, assembly line worker
 Capital - resources used to produce other goods and services
 Physical Capital – buildings, equipment, tools, computers, etc.
 Human Capital – knowledge and skills a worker gains through
education/experience
 Benefits of Capital – extra time, more knowledge, more productivity
Chapter 1.1 Questions
 What is the difference between goods and services?
 What does an entrepreneur do?
 Identify the factor of production represented by each of the following:
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A. fishing waters
B. an office building
C. clerks in a store
D. a tractor
E. a student in a cooking school
 Think of a good or service you consumed today. List at least five factors
of production used to produce that good/service.
 Opportunity Cost - Every time we choose to do something we
give up the opportunity to do something else.
 Determine Opportunity Cost
 The most desirable alternative given up as the result of a decision
 Usually the difference between cost of what you chose and cost of
what you didn’t choose
 Trade-off – giving up one benefit in order to gain another,
greater benefit.
 Individuals
 Businesses
 Government
 Thinking at the Margin – when you decide how much
more or less to do
 Ex. Sleeping in: get more sleep, but might miss the bus
 Cost/Benefit Analysis – comparing opportunity costs and
the benefits, what will be sacrificed vs. what will be gained
 Marginal Cost – the extra cost of adding one unit ex. One
more hour of sleep
 Marginal Benefit – the extra benefit of adding the same unit
 As long as the marginal benefits exceed the marginal cost it pays
to add more units.
Decision making at the Margin
Chapter 1.2 Questions
 Why do all economic decisions involve trade-offs?
 Why do many economic decisions involve thinking at the margin?
 Identify a possible opportunity cost for each of the following
choices:
 A. studying for a test on a Saturday afternoon
 B. using all the money you received for your birthday to pay for
downloading songs
 C. spending four hours playing a video game on a Tuesday night
 D. having four slices of pizza for lunch
Production Possibilities Curve
 How do you decide what and how much to produce?
 Production Possibilities Curve – a graph that shows
alternative ways to use an economy’s productive resources.
 Production Possibilities Frontier – a data line showing
the possible combinations of production of certain items
Production Possibilities Curve
Efficiency, Growth, and Cost
 A production possibilities frontier shows an economy working at
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its most efficient level
Efficiency – the use of resources in such a way as to maximize
the output of goods/services
Underutilization – the use of fewer resources than the
economy is capable of using
Growth/increases in factors of production and shift the
production possibilities frontier
There will always be opportunity costs when determining what
and how much to produce
Some resources are better suited to produce certain goods
Technology and Education increase efficiency
Efficiency, Growth & Cost
Chapter 1.3 Questions
 What is a production possibilities curve?
 What do economists’ mean by growth? What factors can produce
economic growth?
 Explain how each of the following circumstances is likely to affect
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a nation’s production possibilities frontier:
A. The opening of a new college of engineering
B. an earthquake in the nation’s chief farming region
C. a new type of chemical fertilizer
D. a shortage of oil