Basic Problems in
Economics
Economics
The study of how individuals,
families, businesses, and
societies use limited
resources to fulfill their
unlimited wants.
Wants vs. Needs
A
need is anything that you need to
survive- Basic survival- Seven things
 A want- anything else- a nonnecessity
 People have unlimited wants but
limited resources
 People have to make choices
Choices
 Choices-
how are you going to divide
your resources?
 Businesses do the same thing- what
to produce, how to produce, for
whom to produce
 People must make choices because of
the problem of scarcity
Problem of Scarcity
People have to make choices because
everything that exist is scarce
 Scarcity is the most basic problem in
economics
 Scarcity is that something that you need
or want is not readily available
 Different from a shortage- you can get
more just out temporarily
 Scarcity always exist

Factors of Production
We use the factors of production to make products or
services
 Factors of production are how we are going to use these
resources to make a product or service
– 1. Land- natural resources
– 2. Labor- workers- human resources- make goodstouch- services are actions
– 3. Capital- when you use goods and services to
create another good or service
 Combined LLC- more valuable- Diamonds
 Capital also increases productivity- produce more
things
– 4. Entrepreneurship- start a new business a person is
called an entrepreneur
– 5. Technology- new factor- changes every thing

Trade offs

Trade Offs- sacrificing one good or service to
purchase or produce another
– If you buy a DVD, you are exchanging your money for the
right to own the DVD



Opportunity cost- value of the next best alternative
given up for the alternative that was chosen
Time is a scarce resource and when you give it, you
are making a trade-off; and when you study, you
are giving up other certain things (ex. Going to the
mall…talking to friends)
Any time that you make a tradeoff, you lose…you
lose the next best alternative
– Ex. National level Congress votes $220 Billion for new
roads, or it could have been used for higher education
Production Possibilities Curve
Production Possibilities Curve- graph
showing the maximum combinations of
goods and services that can be produced
from a fixed amount of resources in a
given amount of time.
 Used when you produce more than one
type of product.
 Involves trade-offs
 The Classic example:

– Trade off between military defense and
civilian goods (guns and butter)
Production Possibilities Curve
What is the best
balance between
military spending
and domestic
programs? What
kind of situations
might arise that
would cause you
to change your
answer?
Continued on next slide.
Economic Models
Microeconomics- small- households
 Macroeconomics- large- The US
 Economy- activity that affects production,
distribution, and the use of goods and
services
 Theories are called economic models

– They show visual representation of consumers,
businesses, and other economic behavior
– 1.
Create a model
– 2.
Hypothesis
– 3.
Test
– 4.
Apply
Economic Models


Figure 1.10
Economic Models
Graph A is an example of a model, and Graph B is
a test of that model.
Schools of Economic Thought
Different views- Where you live affects the
outcomes
 Values will affect the outcome
 Not in terms of good or bad

– short term and long term outcomes