Chapter 1
The Economic Problem
These slides supplement the
textbook, but should not
replace reading the textbook
What is the
Economic Problem?
Because we live in a world
of scarce resources, but
people have unlimited
wants and needs, how do
we meet their needs in
this world of scarcity?
2
What is a good?
A tangible item that is
used to satisfy wants
3
What is a service?
An intangible activity that
is used to satisfy wants
4
What is a
free good or service?
There is enough of a
good or service to go
around to everyone
who wants it for free
5
What is a Scarce
Good or Service?
There is not enough of
a good or service to
go around to everyone
who wants it for free
6
What is a resource?
Something that is
used to produce
goods and services
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Who gets when a
good is scarce?
Consumers who
have the money
and want it the most
8
What is a market?
A set of arrangements
through which buyers
and sellers carry out
exchange at mutually
agreeable terms
9
How do we solve the
allocation problem
in a free market?
Buyers and sellers
compete in the market
10
What assumption do
we make concerning
the market?
Economists only consider
market transactions.
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Who gets when a
good is scarce?
Consumers who
have the money
and want it the most
12
Who was
Adam Smith?
He wrote the Wealth of
Nations in 1776 – known
as the father of modern
day economics.
13
According to Adam
Smith, what is the
invisible hand?
Self interest will guide the
economy to produce
what we want and offer
us reasonable prices
14
What was the main
idea of the Wealth
of Nations by
Adam Smith 1776?
Everyone would benefit
from less government
and free trade
15
Is Self Interest a
greedy concept?
In a free market you get
what you want by
helping other people get
what they want.
16
What is the
Price Mechanism?
Prices:
• Convey information
• Give incentives
• Enables producers the
financial capital to satisfy
consumers wants and needs.
17
What assumption do
economists always
make?
When price changes
nothing else changes.
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What is
Normative Economics?
Opinions or value
judgments are made
19
What is
Positive Economics?
Explains cause and effect.
20
What are 2 common
pitfalls to avoid?
• Correlation with causation.
• Fallacy of composition.
21
What are the factors of
production (resources)?
• Land
• Labor
• Capital
• Entrepreneurship
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What is land?
Plots of ground and
other natural resources
used to produce goods
and services
23
What is labor?
The physical and mental
efforts of humans used to
produce goods and services
24
What is capital?
Buildings, equipment,
and human skills
used to produce
goods and services
25
What is human
capital?
The skills used to
work with capital
26
What does
money allow
you to do?
Make choices
27
What is
entrepreneurial ability?
Managerial and
organizational skills
combined with the
willingness to take risks
28
What are characteristics of
Entrepreneurs?
 has a dream
 overcomes obstacles
 delayed gratification
 is a risk taker
 strives to be unimportant
 understands the process of
duplication >
29
Why can the
entrepreneur have more
free time, make more
money, and have more
security than an
employee?
A business owner can
duplicate himself
30
How can you
duplicate yourself?
• employees
• rental property
• savings in a bank
• owning shares of stock
31
Why is Duplication
the flip side of debt?
Life is either an adding to
or a taking away,
growth is adding to, not
growing is taking away
32
What are two basic laws
of entrepreneurship?
 What ever you have you
will be given more, and
what you do not have will
be taken away
 Whatever you give away
you keep and whatever
you keep you lose
33
What is the first law
of wealth building?
Pay yourself first
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What is the name of the book
that explains the principles
of wealth building?
The Richest Man in Babylon,
1926, by George S. Clason
35
What is the name of
the book that
explores wealthy
characteristics?
The Millionaire Next Door,
1996, Stanley & Danko
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What does the term
“Equilibrium” mean?
A tendency toward
37
What is the Austrian
view of equilibrium?
Austrians believe that a
free market will seek full
employment
38
What is the
Keynesian view of
equilibrium?
The economy could tend
toward a less than full
employment equilbium
39
What is the Austrian
view of growth?
Sustainable growth
depends on savings,
exports, and investments
40
What is the Keynesian
view of growth?
• Demand management
• Large public sector
• Wealth redistribution
• Minimum wage laws
• National debt
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What about planning?
Austrians have a negative
view toward planning –
Keynesians embrace
planning policies
42
What is the
“rule of law”?
The willingness of a
people to submit
themselves to the law;
there is a respect and
adherence to the law
43
What is the
“rule of man”?
The practice of putting
oneself above the
law when one has
the power to do so
44
END