Chapter Introduction
Section 1: The Basic Problem
in Economics
Section 2: Trade-Offs
Section 3: What Do
Economists Do?
Visual Summary
Scarcity is the basic economic
problem that requires people to
make choices about how to use
limited resources.
Have you ever wanted to buy
something or to participate in an
activity, but you couldn’t because
you didn’t have enough income or
time? How do scarce resources
like time and income affect you
and everyone around you? In this
chapter, read to learn about what
economics is and how it is part of
your daily life.
Section Preview
In this section, you will learn that the driving
forces behind economics are scarcity and
choices.
Can you give an example of the
difference between a want and a
need?
A. Yes
B. No
A. A
B. B
0%
B
A
0%
Wants, Needs, and Choices
The basic problem in economics is how
to satisfy unlimited wants with limited
resources.
Wants, Needs, and Choices (cont.)
• Economics is the study of how
individuals, families, businesses, and
societies use limited resources to fulfill
their unlimited wants.
• Economics is divided into two parts:
– Microeconomics
– Macroeconomics
Wants, Needs, and Choices (cont.)
• To economists, anything other than what
people need for basic survival is a want.
• How societies make choices about the
utilization of their resources is the focus
of economics.
Which need does not fall under basic
survival?
A. Clothes
B. Automobiles
C. Food
D. Shelter
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
The Problem of Scarcity
Scarcity exists because people’s
incomes and time are limited.
The Problem of Scarcity (cont.)
• Choices arise because everything that
exists is limited. At the same time, people
have competing uses for the available
resources resulting in scarcity.
• Shortages are temporary, whereas scarcity
is permanent.
Scarcity exists because of which
limited resources?
A. Time and wants
B. Wants and needs
C. Money and time
D. Money and needs
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
The Factors of Production
Scarce resources require choices
about uses of the factors of
production: land, labor, capital, and
entrepreneurship.
The Factors of Production (cont.)
• When economists talk about scarce
resources, they are referring to the factors
of production:
– Land includes all natural resources like
water, mineral deposits, gifts of nature.
– Labor is the work people do to produce
goods and services.
– Capital, when combined with land and
labor, increases the value of all three
factors and increases productivity.
The Factors of Production (cont.)
– Entrepreneurship is individuals taking
risks to start new businesses.
– Technology (sometimes added to the
list of factors of production) uses science
to more efficiently use land, labor and
capital.
• How much of each of these factors of
production an individual has determines
his or her wealth.
View: U.S. Household Income Distribution
The tools used to make a new car
would fall under which factor of
production?
A. Land
B. Labor
C. Capital
D. Entrepreneurship
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Section Preview
In this section, you will learn about the
relationship between trade-offs and
opportunity costs, and how a production
possibilities curve can help people make
informed economic choices.
Have you ever made a decision that
had far-reaching consequences?
A. Yes
B. No
A. A
B. B
0%
B
A
0%
Trade-Offs
Economic decisions always involve
trade-offs that have costs.
Trade-Offs (cont.)
• The economic choices people make
involve trade-offs.
• The cost of a trade-off is what you give up
in order to get or do something else.
• Economists call the value of the next best
alternative or trade-off, opportunity cost.
View: What’s the Difference Between a
Trade-Off and an Opportunity Cost?
Which of the following considers
opportunity costs every day?
A. Individual
B. Non-profit organization
C. Nations
D. Businesses
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Production Possibilities Curve
A production possibilities curve shows
the maximum combinations of goods
and services that can be produced with
a given amount of resources.
Production Possibilities Curve (cont.)
• A production possibilities curve can help
determine how much of each item to
produce, thus revealing the trade-offs and
opportunity costs involved in each decision.
View: A Production Possibilities Curve
View: Production Possibilities—Guns vs. Butter
A production possibilities curve can
help nations, businesses, and
individuals decide how best to use
their resources.
A. True
B. False
A. A
B. B
0%
B
A
0%
Section Preview
In this section, you’ll learn about how
economists use models to explain and
predict economic behavior, and that
economists may not always agree on which
model or theory is the best one.
Do you have a preconceived notion
about economists?
A. Yes
B. No
A. A
B. B
0%
B
A
0%
Economic Models
Economists construct models to
investigate the way that economic
systems work.
Economic Models (cont.)
• Economists study the ways individuals,
businesses and nations use their limited
resources.
• Economy refers to all activity in a nation
that together affects the production,
distribution and use of goods and services.
• In studying a specific part of the economy,
economists will formulate an economic
model, which helps explain and predict
economic behavior in the real world.
Economic Models (cont.)
• Economists test these economic models,
and the solutions that result from these
tests often become the basis for actual
decisions by private businesses or
government agencies.
• Economic models show a visual
representation of how consumers and
businesspeople react to changes in the
world around them.
Economic Models (cont.)
• Economists assume that some factors
remain constant in order to focus on the
basic factors needed to analyze the
problem at hand.
• An economist can test his theory, or
model, in the same way that other
scientists test a hypothesis.
View: Economic Models
In your opinion, does studying a model
provide enough information compared
to an actual representation?
A. It provides more than
enough information.
B
A
C. It doesn’t provide enough
information.
A. A
B. B
0%C. 0%
C
0%
C
B. It provides just enough
information.
Schools of Economic Thought
Competing economic theories are
supported by economists from
different schools of thought.
Schools of Economic Thought (cont.)
• Personal opinions and the government
under which an economist lives both
shape how he or she views the world.
• Over the years, economists have stressed
the importance of both a laissez-faire
(hands-off) government and a government
that intervenes in the economy.
Schools of Economic Thought (cont.)
• Learning about economics will help you
predict what may happen if certain events
occur or certain policies are followed.
• Whether you think the results are good or
bad will be based on your values.
• Values are beliefs or characteristics that a
person or group considers important.
Do you feel that it is possible for
economists to maintain an objective
view of the economy?
A. Always
B. Sometimes
0%
C
A
0%
B
C. Never
A. A
B. B
C.0%C
Scarcity exists because people’s income
and time are limited. Consumers seek a
balance between satisfying their needs and
wants and allocating their time and income.
Economic decisions always involve tradeoffs that have costs. Whenever you make an
economic choice, you are sacrificing other
goods or services that you may have
purchased with your limited resources.
Economists use economic models to
investigate the ways in which economic
systems work.
Economic Concepts
Transparencies
Transparency 1
Scarcity
Transparency 2
Opportunity Costs &
Trade-Offs
Transparency 3
Productivity
Select a transparency to view.
economics: the study of how people
make choices about ways to use
limited resources to fulfill their wants
microeconomics: the branch of
economic theory that deals with
behavior and decision making by
small units such as individuals and
firms
macroeconomics: the branch of
economic theory dealing with the
economy as a whole and decision
making by large units such as
governments
scarcity: basic economic problem
that results from a combination of
limited resources and unlimited wants
factors of production: resources of
land, labor, capital, and
entrepreneurship used to produce
goods and services
land: natural resources and surface
land and water
labor: human effort directed toward
producing goods and services
goods: tangible objects that can
satisfy people’s wants or needs
services: actions that can satisfy
people’s wants or needs
capital: previously manufactured
goods used to make other goods and
services
productivity: the amount of output
(goods and services) that results from
a given level of inputs (land, labor,
capital, and entrepreneurship)
entrepreneurship: when individuals
take risks to develop new products
and start new businesses in order to
make profits
technology: the use of science to
develop new products and new
methods for producing and
distributing goods and services
trade-off: sacrificing one good or
service to purchase or produce
another
opportunity cost: value of the next
best alternative given up for the
alternative that was chosen
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 period
of time
economy: the production and
distribution of goods and services in a
society
economic model: a theory or
simplified representation that helps
explain and predict economic
behavior in the real world
hypothesis: an assumption involving
two or more variables that must be
tested for validity
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