Chapter 1
What is Economics
Basic Problem in Economics

What is Economics
Study of how individuals, families, business, and
societies us limited resources to fulfill unlimited wants
 In a simple form its balancing needs versus wants.


What is a Need


Anything needed for basic survival.
What is a Want

Everything else.
The Economic Problem

Choice
In a perfect world everybody could get anything they
want.
 Limited availability of resources, however forces
people, businesses, and governments to make choices.

Ex. Deciding whether to pay bills with your paycheck or go
out.
 Ex. Deciding whether to spend more tax money invading
countries or fixing health care

The Economic Problem

Scarcity
The need to make choices arises because everything
that exists is limited. Although some more than others.
 Generally speaking, the more scarce something is, the
more people want it, thus the more it costs.


Ex. Oil, diamonds, etc…
Basically, people do not and cannot have enough time,
money, and other resources to satisfy their every want
 Even the rich and wealthy face scarcity due to the lack
of time to do everything with their money that they
want to.

Factors of Production

In Economics, scarce resources are known as
the factors of production.


Good


Resources needed to produce goods and services.
Tangible items that people buy
Service

Activities done for others for a fee.
Factors of Production

Land
 Any natural resource present without human
intervention
 Includes surface land, water, animals, forests, minerals,
oil

Labor
 Work (human resource) people do.
 Anyone who works to produce a good or service
Factors of Production

Capital



Manufactured goods used to make other goods and services.
 Ex. Machines used to build a car are capital. The car itself
is a manufactured good
Increasing and improving capital increases productivity.
 The amount to produce greater quantities of goods and
services in better and faster ways,
Entrepreneurship


The ability of individuals to start up a business
To introduce new products and processes
Assignment



1). Describe a situation in which a capital good
has improved your personal productivity.
2). Is air a scarce resource? Yes or no. Why or
why not?
3). List the 4 factors of production and give me
two example of each that were not mentioned in
class.
Trade-Offs


Exchanging one good or service for another is
called as trade-off.
Individuals, families, businesses, and societies are
forced to make trade-offs every time they use
resources one way and not another
Opportunity Costs


The result of the trade-off is what you give up
in order to get or do something else.
Opportunity costs is the value or the next best
alternative that had to be given up for the
chosen action.

Ex. When you decide to study Economics for an
hour, you are giving up any other activities you could
have done during that hour. The value of that given
up activity is the opportunity.
Production Possibility Curve



Like people, companies and governments must make
trade-offs as well.
Economists use PPC’s to the show the maximum
combinations of goods and services that can be
produced from a fixed amount of resources in a given
period of time.
These graphs help companies determine how much of
an item to produce and reveling the trade-offs and
opportunity costs involved in each decision.
•Classic
Example—
military
spending vs.
domestic
programs
(“guns or
butter”)
•Using a
production
possibilities
curve, a
producer
can decide
how to use
resources.
PPC Graphs