Chapter 1
The Economic Way of Thinking
Section 1
Scarcity: The Basic Economic Problem
What is Scarcity?
 As humans we always want more no matter how much
they already have.
 Wants- desires that can be satisfied by consuming a
good or service
 Wants also are not considered necessities (cell phone,
car, special kind of food, certain type of clothes, etc.)
 Needs-The basic necessities of life for survival
(food, water, clothing, shelter)
What is Scarcity?
 Wants are unlimited but on the other hand resources are
limited and this is what scarcity is because there are not
enough resources to match human wants
 Economics is a social science designed to understand and
explain scarcity and how people choose to use scarce
resources to satisfy their wants and needs.
 Economics involves the following 3 principles:
 1. examining how people choose to use scarce resources
 2. organizing, analyzing, and interpreting data about those
behaviors
 3. developing theories and economic that explain how the
economy works and to predict what might happen in the future.
Wants
 People have wants and have many choices to deal with these wants
 These wants are based off needs as well as desires
 Food is a need but wanting certain types of foods can be a want
 Type of clothes a person wears is classified as a want
Scarcity
 Wants are unlimited but resources are scarce so choices have to be made
on how best to use these resources so they will last
 Goods are a physical object you may purchase or Services are work done
for a person by another person.
 Scarcity affects the choices of the Consumer or the person buying the
good or service as well as the Producer or the person making the goods or
providing the services.
Scarcity Leads to Three Economic
Questions
 Anytime you have to decide whether an object is worth the money to
purchase something you are experiencing scarcity
 The 1st fundamental question of economics:
 What will be produced?
 A lot of times this is determined by the natural resources that are available
to that particular area.
 Some countries allow the producers and consumers to decide what is to be
produced while in other countries the people have little say in this process
the Government decides for them
 This question not only asks what to produce but also is very key in stating
how much of something to produce
Scarcity Leads to Three Economic
Questions
 The 2nd fundamental question is:
 How will it be produced?
 In order to answer this question a society must use scarce resources in the
most efficient way to satisfy a societies wants.
 This is dependent on the resources available to that region and varies
based off of their resources
Scarcity Leads to Three Economic
Questions
 The 3rd fundamental question is:
 For whom will it be produced?
 How much should people get and how should their share be delivered to
them?
 Should everyone’s share be equal?
 Should a person’s share be determined based on how much he or she is
willing to pay or work for it?
 After a society determines the answers to the above questions they then
need to figure out a way to distribute the goods to the people.
The Factors of Production
 In order to understand the first 2 basic questions (what to produce and how to
produce it) you must first identify the factors of production the economic
resources needed to produce goods and services
 The factors of production are divided into 4 broad categories:
 Land – Natural resources on or under the ground that are used to produce
goods and services.
 Labor – All the human time, effort, and talent that go into the making of
products
 Capital – All the resources made and used by people to produce and distribute
goods and services. ALL of the producers physical resources are considered
capital.
 Entrepreneurship – The combination of vision, skill, ingenuity, and willingness to
take risks that is needed to create and run new businesses.
Section 2
Economic Choice Today:
Opportunity Cost
Making Choices
 Choices are key in Economics and incentives (or benefits from the choices)
encourage people to act in certain ways.
 (Grades, money, praise, etc.)
 Utility (benefit or satisfaction gained from the use of a good or service) is
also key in choices people make
 These factors cause us to economize or make decisions based on what you
believe is the best combination of costs and benefits.
Making Choices
 Motivation for choices is very important because the power of choice is
what powers an economy to become successful
 In other words you weigh the costs against the benefits and decided which
is the better option
 A key term in economics is the phrase “There is No Such Thing as a Free
Lunch” everything in life costs something be it time, money, or anything else
that you may value.
 If you choose to go to dinner instead of studying you will fill the need of
hunger but you will cost yourself the ability to make a better grade on your
test.
Trade-Offs and Opportunity Cost
 Trade – Offs is where you trade off 1 object to have better gains in another
object.
 1 example would be if you chose to workout early in the morning you will trade
off the ability to sleep in for the opportunity to better yourself through exercise in
the morning.
 Opportunity Cost is another option where the value of the next best
alternative over another option.
 The cost of this is for example, if you have a job making good money but choose
to quit that job to go back to school the opportunity cost would be the income
you lose in order to go back to school.
 Or basically what you gave up to get what you wanted.
Analyzing Choices
 When you have these options your choices are considered a cost-benefit
analysis where you examine each choice and weigh your options to
ensure you make the proper decision.
 This is the most important tool for businesses and individuals as it molds
whether you make wise or poor decisions economically
 The easiest way to deal with this is to setup a chart to weigh out the pro’s
and con’s of your choices and then decide on the best option based on
those answers.
Analyzing Choices
 When you deal with this you also have to look at marginal cost (the cost of
using 1 more unit of good or service) or marginal benefit ( the benefit or
satisfaction of using 1 more good or service)
 The analysis of marginal cost and marginal benefit is central to the study of
economics as it explains the decisions of producers and consumers.
Section 3
Analyzing Production Possibilities
Graphing the Possibilities
 In order to better understand the possibilities of economic choices Economists
have created economic models (simplified representations of complex
economic activities.)
 A Production Possibilities Curve (PPC) is a graph used to illustrate the impact of
scarcity on an economy
 A PPC has the following assumptions:
 1. Resources are fixed – you got what you got no way to create more of natural
resources
 2. All resources are fully employed – Do not waste resources
 3. Only 2 things can be produced – this makes the graph easier and more accurate
and you can see the full realm of variables on it.
 4. Technology is fixed – there are no technological breakthroughs on production
everything is based off of same scale.
What We Learn from PPC’s
 Efficiency and underutilization are 2 key concepts that can be learned
from a PPC.
 Efficiency (or getting the most production out of something) is very
important and allows businesses to be the most productive and most
profitable
 Underutilization or overutilization would be in-efficient and would make the
business look for ways to adjust their production to meet the needs of the
consumer better.
PPC Graph
What We Learn from PPC’s
 The Shape of the graph also teaches us the law of increasing opportunity
costs when you shift from one product to another more resources are
needed to increase the production the 2nd product thus creating more
opportunity cost to rise.
Changing Production Possibilities
 The PPC illustrates a countries production possibilities but as time passes
countries generally generate new possibilities of production and you show
this by creating another curve outward of the original curve
 The ability to produce more shows a curve to the right a decrease in
possibility of production is shown by a curve to the left
Section 4
The Economist’s Toolbox
Working With Data
 Economics is everything we already know expressed in a language we
don’t understand is a saying some like to say about economics
 Economists use statistics to predict information since there is no way to poll
every person on every topic
 They take this date and create models and charts in order to better predict
information about varying economic topics.
 Charts and tables display information in rows and columns
 Graphs (visual representation of numerical representations) the most
common are line graphs, bar graphs, and pie graphs.
Microeconomics and
Macroeconomics
 Micro (small) economics means it focuses on small portions of economics
which include price, costs, profit, competition, and the behavior of
consumers and producers
 Micro study of the individual consumer
 Macro (large) economics means the “big picture” of economics. Macro
would be more of the study of a nation as a whole or the world as a whole.
 Macro study of the whole consumer sector
Positive Economics and
Normative Economics
 Positive economics is another way to study economics it is basically the
study of economics how it is not how it should be
 Positive uses the Scientific Method to observe data, hypothesize, test, refine, and
continue testing.
 Normative economics is a study of how economic behavior should be not
how it actually is
 Normative is more based on value judgments and is based more on the
economists personal feelings of how an item will effect society.
Adam Smith
 In 1776 Adam Smith wrote An Inquiry into the Nature and Causes of the
Wealth of Nations
 He argued that a nation could become wealthier through free trade as
opposed to mercantilism (where the government controlled trade with it’s
colonies)
 He said that people would naturally look for ways to better themselves
through this practice
 This in turn makes an “invisible hand” guide the economy as people work to
better what they currently have and both the buyer and seller better
themselves
 Because of this he became the father of Modern Economics