Chapter Introduction
Section 1: Scarcity and the
Science of
Economics
Section 2: Basic Economic
Concepts
Section 3: Economic
Choices and
Decision Making
Visual Summary
Congratulations on being
selected to head up the prom
committee! Now you must
decide on location, music, and
refreshments. What factors do
you need to consider when
making your choices? In groups
of four, determine your budget
and identify possible locations,
music providers, and food. Read
Chapter 1 to learn how your
prom selections, like all
economic decisions, require you
to make choices about how to
best use limited resources.
Scarcity is the basic
economic problem that
requires people to make
careful choices about how to
use limited resources.
Section Preview
In this section, you will learn why scarcity is the
basic economic problem that faces every society
and why scarcity requires us to make choices.
Content Vocabulary
• scarcity
• factors of production
• labor
• economics • land
• entrepreneur
• need
• capital
• want
• capital good
• gross
domestic
product
(GDP)
Academic Vocabulary
• resource
• comprehensive
If the only pizza restaurant in the area
produced 40 pizzas a night and usually
sold out quickly, would you be willing
to pay more to guarantee that you would
get a pizza?
B. Possibly
A
C. Definitely not
B
A. A
B. B
C.0%C
0%
0%
C
A. Definitely
The Fundamental Economic Problem
Societies do not have
enough productive resources
to satisfy everyone’s wants
and needs.
The Fundamental Economic Problem
(cont.)
• The fundamental economic problem facing
all societies is that of scarcity.
• Few people are satisfied with the things
they have.
• Society does not have enough resources
to produce all the things people would like.
Scarcity
The Fundamental Economic Problem
(cont.)
• The study of how scarcity affects most
decisions we make is economics.
• Economists talk about people’s needs and
wants. A need is necessary for survival.
• A want is something we would like but not
necessary for survival.
The Fundamental Economic Problem
(cont.)
• Everything we do has a cost, due to limited
resources.
• TINSTAAFL—There is no such thing as a
free lunch.
Which do you purchase more often?
A. Things you want
B. Things you need
A. A
B. B
0%
B
A
0%
Three Basic Questions
Scarcity forces every society
to answer the basic questions
of WHAT, HOW, and FOR
WHOM to produce.
Three Basic Questions (cont.)
• We live in a world of scarce resources.
Scarcity means that three questions
should be answered.
– What to produce
– How to produce
– For whom to produce
What is the best way to increase
production of a good or service?
A. Hire more employees
B. Purchase more equipment
B
A
A. A
B. B
C
0%C. 0%
0%
C
C. Replace management
The Factors of Production
Four factors of production—
land, capital, labor, and
entrepreneurs—must be
present to produce goods and
services.
The Factors of Production (cont.)
• All four factors of production are
required to produce goods and services.
– Land
– Capital (sometimes called capital goods)
– Labor
– Entrepreneurs
The Factors of Production
The Global Economy & YOU
Which of these do you think is the
most important factor of production?
A. Land
B. Capital
C
A
0%
A. A
B. B
0% C 0%
C.
B
C. Entrepreneurs
The Scope of Economics
Economics analyzes how
societies satisfy wants
through careful use of
relatively scarce resources.
The Scope of Economics (cont.)
• Economics is a social science—it deals
with the behavior of individuals as they
satisfy unlimited and competing wants
through careful use of scarce resources.
The Scope of Economics (cont.)
• Four key elements to the study of
economics
– Description
• Gross domestic product (GDP) is a key
measure of a nation’s economic output.
– Analysis
– Explanation
– Prediction
Which of the following does
economics describe?
A. Jobs
A
0%
0%
D
D. All of the above
C
C. Government spending
A. A
B. B
C. C
D. 0%D
0%
B
B. Taxes
Section Preview
In this section, you will learn about some key
economic terms and concepts.
Content Vocabulary
• good
• consumer
good
• paradox of
value
• utility
• durable good
• wealth
• nondurable
good
• market
• service
• value
• factor market
• productivity
• human capital
• division of labor
• specialization
• economic
interdependence
• product market
• economic growth
Academic Vocabulary
• transferable
• accumulation
• mechanism
Do you think of “big business” or
large corporations when you hear the
word economics?
A. Always
B. Sometimes
C. Never
0%
A
A. A
B. B
C.
0% C 0%
B
C
Goods, Services, and Consumers
Economic products are goods
or services that are useful,
relatively scarce, and
transferable.
Goods, Services, and Consumers (cont.)
• Economics is concerned with economic
products—goods and services that satisfy
our wants and needs. They command a
price because they are scare and useful.
Goods, Services, and Consumers (cont.)
• There are different economic products that
consumers use.
– A good is a useful, tangible item.
• Capital goods are manufactured goods used
to produce other goods and services.
– Consumer good
– Durable good
Goods, Services, and Consumers (cont.)
– Nondurable good
– Service is a work performed for
someone.
Which do you consume or indulge in
more often?
A. Goods
B. Services
A. A
B. B
0%
A
0%
B
Value, Utility, and Wealth
The value of a good or service
depends on its scarcity and
utility.
Value, Utility, and Wealth (cont.)
• In economics, value refers to worth that
can be expressed in dollars and cents.
• Adam Smith, a Scottish social philosopher,
came up with the term paradox of value
in 1776.
Value, Utility, and Wealth (cont.)
• Scarcity by itself does not fully explain how
value is determined.
• For a good or service to have value, it
must also have utility, which varies by
person.
Value, Utility, and Wealth (cont.)
• A nation’s wealth is comprised of all
tangible goods.
• This, however, does not mean that
services are not useful or valuable.
Which of the following has the most
value and utility to your family?
A. Automobile
B. Kitchen appliances
C
A
0%
A. A
B. B
0% C 0%
C.
B
C. Television
The Circular Flow of Economic Activity
The economic activity in
markets connects individuals
and businesses.
The Circular Flow of Economic Activity
(cont.)
• The circular flow of economic activity
generates wealth.
• The market is the key to this circular flow.
• Individuals earn their incomes in factor
markets.
The Circular Flow of Economic Activity
The Circular Flow of Economic Activity
(cont.)
• After individuals earn their incomes in
factor markets, they spend it in product
markets.
• Businesses then use this money to
produce more goods and services.
• This cycle of economic activity repeats.
In which market does your school
engage?
A. Cyberspace
B. Local
C. National
D. All of the above
0%
A
A. A
B. B
C. 0%
C
0%
D. D
B
C
0%
D
Productivity and Economic Growth
A nation’s economic growth is
due to several factors.
Productivity and Economic Growth (cont.)
• When the circular flow becomes larger,
with more factors of production, goods,
and services flowing in one direction and
more payments in the opposite direction,
there is economic growth.
– Productivity is the most important
factor contributing to economic growth.
Productivity and Economic Growth (cont.)
• Ways to increase productivity
– Invest in human capital such as
education, training, and health-care
– Division of labor and specialization
Profiles in Economics:
Adam Smith
Effect of Education
on Income
Productivity and Economic Growth (cont.)
• The U.S. economy has a remarkable
degree of economic interdependence.
As a result, events in one part of the world
may have a dramatic impact here.
Which investment we make today will
generate higher returns in the future?
A. Education
B. Health-care
0%
C
A
C. Technology
B
A. A
B. B
C.
C
0%
0%
Section Preview
In this section, you will learn that you face tradeoffs and opportunity costs whenever you make an
economic decision.
Content Vocabulary
• trade-off
• opportunity
cost
• production
possibilities
frontier
• economic
model
• cost-benefit
analysis
• free enterprise
economy
Academic Vocabulary
• alternative
• assumption
• standard of
living
Are you a good decision maker?
A. Always
B. Sometimes
C. Never
C
B
A
0%
A. A
B. B
0% C 0%
C.
Trade-Offs and Opportunity Cost
Economic choices
involve trade-offs and
the careful evaluation
of opportunity costs.
Trade-Offs and Opportunity Cost (cont.)
• There are alternatives and costs to
everything we do.
• Every decision has trade-offs.
Jesse’s Decision-Making Grid
Trade-Offs and Opportunity Cost (cont.)
• Similarly, each decision has an
opportunity cost.
– Even time has an opportunity cost.
Is using a decision-making grid one
way to analyze an economic problem?
A. True
B. False
A. A
B. B
0%
A
0%
B
Production Possibilities
Economies face trade-offs
when deciding what goods
and services to produce.
Production Possibilities (cont.)
• Economists use the production
possibilities frontier to illustrate
opportunity cost.
Production Possibilities Frontier
Production Possibilities (cont.)
• This diagram takes into account various
factors.
– Identifying possible alternatives
– Fully employed resources
– The cost of idle resources
Production Possibilities (cont.)
– Opportunity cost
– Economic growth
Opportunity Cost
Economic Growth
Does the production possibilities
frontier show the minimum
combinations of goods and services
that can be produced?
A. Always
A
0%
C
C. Never
A. A
B. B
C.0% C 0%
B
B. Sometimes
Thinking Like an Economist
Economists use a strategy
called cost-benefit analysis to
evaluate choices.
Thinking Like an Economist (cont.)
• Economists are concerned with helping
people make the best choices.
Thinking Like an Economist (cont.)
• Economists use two strategies:
– Building models
• An economic model is a simplified
equation, graph, or figure based on
assumptions.
– Cost–benefit analysis
• Investing in projects that give the highest
return per dollar spent
Which of the following qualifications
is not necessary for a career in
economics?
A. Strong computer and
quantitative skills
C
0%
A
C. Ability to write reports
based on complex
research
A. A
B. B
0% C 0%
C.
B
B. Master’s degree
The Road Ahead
The study of economics helps
people become better
citizens.
The Road Ahead (cont.)
• Through studying economics
– We get a better understanding of the
workings of a free enterprise economy.
– Our standard of living is based on
supply and demand, pricing, productivity,
property rights, inflation, and economic
growth, among other factors.
The Road Ahead (cont.)
– We become better decision makers in
our personal lives and in the voting
booth.
• Most of our political problems have important
economic aspects.
– Economics helps us understand the
complex world around us by providing a
framework for analysis.
Do you ever hear political candidates
debate economic issues?
A. Always
B. Sometimes
C. Never
0%
A
A. A
B. B
0% C 0%
C.
B
C
Scarcity Because of
scarcity, society needs
to decide how to
distribute limited
resources to satisfy
seemingly unlimited
wants and needs.
Factors of Production Four factors of production are
required to produce the things we would like to have.
Trade-offs and Opportunity Costs All economic
decisions require us to make choices among
alternatives. Trade-offs are all the available
alternatives. The opportunity cost is the next-best
alternative we give up.
Adam Smith (1723–1790)
• introduced the idea that the
division of labor led to the
great prosperity of Britain
• defined the wealth of a
nation as the sum of the
goods produced by its
people
Economic Concepts
Transparencies
Transparency 1
Scarcity
Transparency 2
Opportunity Cost &
Trade-Offs
Transparency 3
Productivity
Select a transparency to view.
scarcity
fundamental economic problem of
meeting people’s virtually unlimited
wants with scarce resources
economics
social science dealing with the study
of how people satisfy seemingly
unlimited and competing wants with
the careful use of scarce resources
need
basic requirement for survival,
including food, clothing, and shelter
want
something we would like to have but
is not necessary for survival
factors of production
productive resources that make up
the four categories of land, capital,
labor, and entrepreneurs
land
natural resources or other “gifts of
nature” not created by human effort
capital
tools, equipment, and factories used
in the production of goods and
services
capital goods
tools, equipment, and factories used
in the production of goods and
services
labor
people with all their efforts, abilities
and skills
entrepreneur
risk-taking individual in search of
profits
gross domestic product (GDP)
dollar value of all final goods,
services, and structures produced
within a country’s borders during a
one-year period
resource
any available means for economic or
political development
comprehensive
covering many or all areas
good
tangible economic product that is
useful, relatively scarce, and
transferable to others
consumer good
good intended for final use by
consumers rather than businesses
durable good
a good that lasts for at least three
years when used regularly
nondurable good
a good that wears out or lasts for
fewer than three years when used
regularly
service
work or labor performed for someone
value
monetary worth of a good or service
as determined by the market
paradox of value
apparent contradiction between the
high monetary value of a
nonessential item and the low value
of an essential item
utility
ability or capacity of a good or service
to be useful and give satisfaction to
someone
wealth
sum of tangible economic goods that
are scarce, useful, and transferable
from one person to another
market
meeting place or mechanism that
allows buyers and sellers to come
together
factor market
market where the factors of
production are bought and sold
product market
market where goods and services are
bought and sold
economic growth
increase in a nation’s total output of
goods and services over time
productivity
measure of the amount of output
produced with a given amount of
productive factors
human capital
sum of people’s skills, abilities,
health, knowledge and motivation
division of labor
division of work into a number of
separate tasks to be performed by
different workers
specialization
assignment of tasks to the workers,
factories, regions, or nations that can
perform them more efficiently
economic interdependence
mutual dependency of one person’s,
firm’s, or region’s economic activities
on another’s
transferable
able to be moved from one person or
place to another
accumulation
gradual collection of goods
mechanism
process
trade-off
alternative that is available whenever
a choice is to be made
opportunity cost
cost of the next-best alternative use
of money, time, or resources when
making a choice
production possibilities frontier
diagram representing the maximum
combinations of goods and/or services
an economy can produce when all
productive resources are fully employed
economic model
simplified version of a complex
concept or behavior expressed in the
form of an equation, graph, or
illustration
cost-benefit analysis
way of thinking about a choice that
compares the cost of an action to its
benefits
free enterprise economy
market economy in which privately
owned businesses have the freedom
to operate for a profit with limited
government intervention
standard of living
quality of life based on ownership of
necessities and luxuries that make life
easier
alternative
the second of two choices
assumption
something taken for granted
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