CHAPTER ONE: WHAT IS ECONOMICS? SECTION ONE: SCARCITY AND THE SCIENCE OF ECONOMICS OBJECTIVES: FUNDAMENTAL ECONOMIC CONCEPTS SSEF1: THE STUDENT WILL EXPLAIN.

CHAPTER ONE: WHAT IS ECONOMICS?

SECTION ONE:

SCARCITY AND THE SCIENCE OF ECONOMICSOBJECTIVES: FUNDAMENTAL ECONOMIC CONCEPTS

SSEF1: THE STUDENT WILL EXPLAIN WHY LIMITED PRODUCTIVE RESOURCES AND UNLIMITED WANTS RESULT INSCARCITY, OPPORTUNITY COSTS, AND TRADE-OFFS FOR INDIVIDUALS, BUSINESSES, AND GOVERNMENTS.

A. DEFINE SCARCITY AS A BASIC CONDITION THAT EXISTS WHEN UNLIMITED WANTS EXCEED LIMITED PRODUCTIVE RESOURCES.

B. DEFINE AND GIVEN EXAMPLES OF PRODUCTIVE RESOURCES (E.G. LAND (NATURAL), LABOR (HUMAN), CAPITAL (CAPITAL GOODS),

ENTREPRENEURSHIP (RISKTAKERS).C. LIST A VARIETY OF STRATEGIES FOR ALLOCATING SCARCE

RESOURCES.

BASIC ECONOMIC PROBLEM(SG #1)

• SCARCITY OF RESOURCES, WHICH RESULTS FROM SOCIETY NOT HAVING ENOUGH RESOURCES TO PRODUCE ALL OF THE THINGS PEOPLE WOULD LIKE TO HAVE. SCARCITY IS THE CONDITION WHERE UNLIMITED HUMAN WANTS FACE LIMITED RESOURCES.

• ECONOMICS IS THE STUDY OF HOW PEOPLE SATISFY WANTS WITH SCARCE RESOURCES.

(SG#2)

• NEEDS ARE THE BASIC REQUIREMENT FOR SURVIVAL AND INCLUDES FOOD, SHELTER, AND CLOTHING; WANTS A WAY OF EXPRESSING A NEED AND ARE DESIRED FOR SATISFACTION.

• SCARCITY IS AN ISSUE WITH THE RICH AS WELL AS THE POOR BECAUSE IT IS A HUMAN TRAIT THAT FEW PEOPLE, REGARDLESS OF THEIR ECONOMIC STATUS, ARE SATISFIED WITH WHAT THEY HAVE.

(SG #3)

• THERE IS NO SUCH THING AS A FREE LUNCH (TINSTAAFL), THIS MEANS THAT MOST THINGS IN LIFE ARE NOT FREE BECAUSE SOMEONE HAS TO PAY FOR PRODUCTION COSTS.

(SG #4)

• ECONOMICS DESCRIBES ECONOMIC ACTIVITY AND THE ECONOMIC CONCEPTS CAN HELP PEOPLE FIND THE BEST WAYS TO MEET THEIR NEEDS AND WANTS WITH LIMITED RESOURCES. PEOPLE SHOULD UNDERSTAND ECONOMICS BECAUSE THE UNITED STATES IS A FREE SOCIETY, ALL OF ITS CITIZENS MAKE DECISIONS THAT AFFECT THE ECONOMY. IN ADDITION, THE CITIZENS NEED AN UNDERSTANDING OF ECONOMICS IN ORDER TO MAKE WISE DECISIONS.

THREE BASIC QUESTIONS(SG #5)

– WHAT MUST WE PRODUCE? SOCIETY MUST CHOSE BASED ON ITS NEEDS.

– HOW SHOULD WE PRODUCE? SOCIETY MUST CHOOSE BASED ON ITS RESOURCES.

– FOR WHOM SHOULD WE PRODUCE? SOCIETY MUST CHOOSE BASED ON ITS POPULATION AND OTHER AVAILABLE MARKETS.

HOW MIGHT THE ECONOMIC DECISIONS OF AMOUNTAINOUS ISLAND SOCIETY DIFFER FROM THOSE OF A MOUNTAINOUS LANDLOCKED SOCIETY? AN ISLAND SOCIETY HAS WATER RESOURCES TO CONSIDER AND LIKELY A MORE LIMITED POPULATION.

THE FACTORS OF PRODUCTIONFACTORS OF PRODUCTION ARE RESOURCES NECESSARY TO PRODUCE WHAT PEOPLE WANT OR NEED.(SG #6)

• LAND IS THE SOCIETY’S LIMITED NATURAL RESOURCES NOT CREATED BY HUMANS—LANDFORMS, MINERALS, VEGETATION, ANIMAL LIFE, AND CLIMATE.

• CAPITAL IS THE MEANS BY WHICH SOMETHING IS PRODUCED SUCH AS MONEY, TOOLS, EQUIPMENT, MACHINERY, AND FACTORIES USED IN PRODUCTION.

• LABOR IS THE WORKERS WHO APPLY THEIR EFFORTS, ABILITIES, AND SKILLS TO PRODUCTION.

• ENTREPRENEURS ARE RISK-TAKERS WHO COMBINE THE LAND, LABOR, AND CAPITAL INTO NEW PRODUCTS IN ORDER TO MAKE A PROFIT; ANYONE WHO DOES SOMETHING NEW WITH EXISTING RESOURCES; THEY ORGANIZE THE FACTORS OF PRODUCTION.

• ENTREPRENEURS ARE AN ECONOMY’S DRIVING FORCE BECAUSE OF THEIR ABILITIES TO START NEW BUSINESSES AND INTRODUCE NEW PRODUCTS MAY RE-ENERGIZE A SLUGGISH ECONOMY OR STRENGTHEN A SUCCESSFUL ECONOMY.

(SG #7)

• PRODUCTION IS CREATING GOODS AND SERVICES—THE RESULT OF LAND, CAPITAL, LABOR, AND ENTREPRENEURS.

THE SCOPE OF ECONOMICS(SG #8)

• ECONOMICS DEALS WITH THE DESCRIPTION OF ECONOMIC ACTIVITY—GROSS DOMESTIC PRODUCT, UNEMPLOYMENT RATE, GOVERNMENT SPENDING, TAX RATES, ETC.: KNOWING WHAT THE WORLD AROUND US LOOKS LIKE.

• ANALYSIS HELPS US TO DISCOVER (LOOK) AT THE “WHY” THINGS WORK AND “HOW” THINGS HAPPEN OF ECONOMIC ACTIVITY—WHY PRICES GO UP AND DOWN, FOR EXAMPLE, OR HOW TAXES AFFECT SAVINGS.

• EXPLANATION REFERS TO HOW ECONOMISTS COMMUNICATE KNOWLEDGE OF THE ECONOMY AND ITS ACTIVITIES TO THE SOCIETY’S POPULATION. FOR EXAMPLE, IF WE ALL HAVE A COMMON UNDERSTANDING OF THE WAY OUR ECONOMY WORKS SOME ECONOMIC PROBLEMS WILL BE MUCH EASIER TO ADDRESS OR EVEN FIX IN THE FUTURE.

THE SCOPE OF ECONOMICS• PREDICTION REFERS TO HOW YESTERDAY’S AND

TODAY’S ECONOMIC ACTIVITIES ADVISE US OF POTENTIAL FUTURE ACTIVITY. IT CAN HELP PREDICT WHAT MAY HAPPEN AS WELL AS THE LIKELY CONSEQUENCES OF DIFFERENT COURSES OF ACTION.

• ECONOMICS IS A SOCIAL SCIENCE BECAUSE IT IS THE STUDY OF HUMAN BEHAVIOR DUE TO IT LOOKING AT THE DECISIONS PEOPLE MAKE AND HOW THEY REACT TO THOSE DECISIONS.

IN THE DIAGRAM, WHAT SHOULD APPEAR IN PLACE OF THE QUESTION MARK?

For Whom to Produce

WHAT FACTOR OF PRODUCTION DO THESE IMAGES ILLUSTRATE?

A. LABOR C. CAPITALB. LAND D. ENTREPRENEURSHIP

ANS: B

WHAT FACTOR OF PRODUCTION DO THESE IMAGES ILLUSTRATE?A. LAND C. CAPITALB. LABOR D. ENTREPRENEURSHIP

ANS: C

WOULD AN ECONOMIST THINK THAT THE TEENAGER IN THE CARTOON IS EXPRESSING A NEED OR A WANT? EXPLAIN.

THE TEENAGER IS EXPRESSING A WANT, NOT A NEED. TO ECONOMISTS, NEEDS ARE THINGS REQUIRED TO SURVIVE, SUCH AS FOOD, CLOTHING, AND SHELTER. A WANT IS A WAY OF EXPRESSING A NEED.

SECTION 2: BASIC ECONOMIC CONCEPTS

• SCARCITY IN AN ECONOMIC SENSE—ONE CANNOT GET ENOUGH ECONOMIC PRODUCTS TO SATISFY INDIVIDUAL WANTS AND NEEDS.

• DIFFERENCE BETWEEN A CONSUMER GOOD AND CAPITAL GOOD

• CONSUMER GOOD IS INTENDED FOR FINAL USE BY INDIVIDUALS.

• CAPITAL GOOD IS USED TO PRODUCE OTHER GOODS AND SERVICES.

• DIFFERENCE BETWEEN A DURABLE GOOD AND NON-DURABLE GOOD—

• DURABLE GOOD IS ANY GOOD THAT LASTS OVER 3 OR MORE YEARS WHEN USED ON A REGULAR BASIS AND COULD BE USED OVER TIME.

• NON-DURABLE GOOD IS ANY GOOD THAT LASTS FOR LESS THAN 3 YEARS WHEN USED ON A REGULAR BASIS.

• A SERVICE IS WORK PERFORMED FOR SOMEONE.

• A CONSUMER IS A PERSON WHO USES GOODS AND SERVICES TO SATISFY WANTS AND NEEDS.

• VALUE REFERS TO WORTH THAT CAN BE EXPRESSED IN DOLLARS AND CENTS.

• THE PARADOX OF VALUE IS WHEN THE SITUATION IN WHICH SOME NECESSITIES (WATER) HAVE LITTLE MONETARY VALUE WHILE SOME NON-NECESSITIES (DIAMONDS) HAVE A MUCH HIGHER VALUE.

• IN ORDER FOR SOMETHING TO HAVE VALUE IS MUST HAVE UTILITY.

• WEALTH IS THE ACCUMULATION OF THOSE ECONOMIC PRODUCTS THAT ARE TANGIBLE, SCARCE, USEFUL, AND TRANSFERABLE.– REMEMBER: WEALTH IS USUALLY BASED ON

LIMITED NATURAL RESOURCES, WHEREAS LABOR CAN PRODUCE MORE GOODS AND SERVICES.

CIRCULAR FLOW OF ECONOMIC ACTIVITY

• PRODUCT MARKET—WHERE GOODS AND SERVICES ARE PURCHASED. INDIVIDUALS—PEOPLE LIVING IN HOUSEHOLDS—BUSINESSES—GOODS AND SERVICES ARE SOLD. FACTOR MARKET—DEVELOPMENT OF GOODS.

• THE WEALTH THAT AN ECONOMY GENERATES IS MADE POSSIBLE BY THE CIRCULAR FLOW OF ECONOMIC ACTIVITY. THE KEY FEATURE OF THIS CIRCULAR FLOW IS THE MARKET, A LOCATION OR MECHANISM THAT ALLOWS BUYERS AND SELLERS TO EXCHANGE A CERTAIN ECONOMIC PRODUCT.

• MARKETS ARE LOCATIONS (MECHANISMS) FOR BUYERS AND SELLERS TO TRADE. THEY ARE CLASSIFIED AS LOCAL, REGIONAL, NATIONAL, GLOBAL, AND CYBERSPACE.

• THE FLOW OF PAYMENTS IN AN ECONOMY IS A CIRCULAR FLOW.

• INDIVIDUALS—PEOPLE LIVING IN HOUSEHOLDS—WORK FOR BUSINESSES, RENT THEIR PROPERTY (OR THEIR CAPITAL) TO BUSINESSES, AND MANAGE AND OWN THE BUSINESSES.

• ALL THESE ACTIVITIES GENERATE INCOMES– FLOWS OF PAYMENTS FROM BUSINESSES.

• BUT HOUSEHOLDS THEN SPEND THEIR INCOMES– ON CONSUMPTION GOODS, TAXES PAID TO GOVERNMENTS (THAT THEN SPEND THE MONEY ON GOODS AND SERVICES), AND ON ASSETS LIKE STOCK CERTIFICATES AND BANK CDS THAT FLOW THROUGH THE FINANCIAL SECTOR AND ARE THEN USED TO BUY INVESTMENT AND OTHER GOODS. ALL THESE ARE EXPENDITURES.

FACTOR MARKETSIINDIVIDUALS EARN THEIR INCOMES IN FACTOR MARKETS,THE MARKETS WHERE PRODUCTIVE RESOURCES ARE BOUGHT AND SOLD. THIS IS WHERE ENTREPRENEURS HIRE LABOR FOR WAGES AND SALARIES, ACQUIRE LAND IN RETURN FOR RENT, AND BORROW MONEY FOR INTEREST.

A FACTOR MARKET IS WHERE PEOPLE EARN THEIR INCOMES. FACTOR MARKETS CENTER ON THE FOUR FACTORS OF PRODUCTION: LAND, CAPITAL, LABOR, AND ENTREPRENEURS.

NOTE: A TOY FACTORY IS A FACTOR MARKET BECAUSE EMPLOYERS BUY AND WORKERS SELL LABOR THERE.

NOTE: LANDLORDS ARE PART OF A FACTOR MARKET BECAUSE THEY PROVIDE LAND OR PROPERTY {A FACTOR OF PRODUCTION} TO CONSUMERS IN EXCHANGE FOR RENT MONEY, WHICH IS THE LANDLORD’S SOURCE OF INCOME.

PRODUCT MARKETSAFTER INDIVIDUALS RECEIVE THEIR INCOME FROM THERESOURCES THEY SELL, THEY SPEND IT IN PRODUCT MARKETS, WHERE PRODUCERS SELL THEIR GOODS AND SERVICES TO CONSUMERS. THE MONEY THATINDIVIDUALS RECEIVE FROM BUSINESSES IN THE FACTOR MARKETS RETURNS TO BUSINESSES IN THE PRODUCT MARKETS. BUSINESS USE THIS MONEY TO PRODUCE MORE GOODS AND SERVICES AND THE CYCLE, THROUGH ECONOMIC ACTIVITY REPEATS ITSELF.

A PRODUCT MARKET IS WHERE PEOPLE USE THEIR INCOME TO BUY FROM PRODUCERS. PRODUCT MARKETS CENTER ON GOODS AND SERVICES.

Businesses Individuals

Product Markets

Factor Markets

Land CapitalLabor

Entrepreneurs

• The circular flow diagram show the high degree of economic interdependence in our economy. In the diagram, the factors of production and the products made from them flow in one direction. The payments for the factors, which consumers spend on goods and services, flow in the opposite direction.

GoodsServices

Goo

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ervi

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GoodsServices

Bus

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sIn

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Payments for Resources

Income from resources

Consumer Spending

• IT IS USEFUL TO THINK OF THE ECONOMY AS BEING MADE UP OF SEVERAL DIFFERENT PARTS, OR SECTORS. THESE SECTORS RECEIVE VARIOUS COMPONENTS OF THE NATIONAL INCOME, AND THEY USE THIS INCOME TO PURCHASE THE TOTAL OUTPUT.

• SECTORS, ARE CRITICAL LINKS IN THE CIRCULAR FLOW OF ECONOMIC ACTIVITY.

• THE THREE SECTORS ARE CONSUMER, INVESTMENT (BUSINESS), AND GOVERNMENT.

• THE THREE SECTORS OF THE ECONOMY--- COMBINE IN PURCHASING THE NATION’S GDP.

• SECTORS ARE CRITICAL LINKS IN CIRCULAR FLOW.

• CONSUMER SECTORS- IT IS THE BASIC UNIT, THE HOUSEHOLD, IS MADE UP OF ALL PERSONS WHO OCCUPY A HOUSE, APARTMENT, ETC. THIS IS THE MOST IMPORTANT SECTOR.

• INVESTMENT/BUSINESS SECTORS- IT IS MADE UP OF PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS. IT IS THE PRODUCTIVE SECTOR RESPONSIBLE FOR BRINGING THE FACTORS OF PRODUCTION TOGETHER TO PRODUCE OUTPUT.

• GOVERNMENT SECTORS- INCLUDES ALL LOCAL, STATE, AND FEDERAL LEVELS OF GOVERNMENT, RECEIVES INCOME FROM SOURCES SUCH AS INDIRECT BUSINESS TAXES, CORPORATE INCOME TAXES, SOCIAL SECURITY CONTRIBUTIONS, AND PERSONAL INCOMES TAXES FROM THE CONSUMER SECTOR.

• PRODUCTIVITY—THE AMOUNT OF OUTPUT PRODUCED BY A GIVEN AMOUNT OF INPUTS IN A SPECIFIC PERIOD OF TIME. PRODUCTIVITY INCREASES WITH EFFICIENT USE OF SCARCE RESOURCES.

• IT IS IMPORTANT TO ECONOMIC GROWTH IN THAT ECONOMIC GROWTH OCCURS WHEN A NATION’S TOTAL OUTPUT OF GOODS AND SERVICES INCREASES OVER TIME.

• ECONOMIC GROWTH DEPENDS ON HIGH PRODUCTIVITY. YET, AN ECONOMY’S PRODUCTIVITY MAY BE AFFECTED BY ITS INTERDEPENDENCE—RELIANCE ON OTHERS AND THEIR RELIANCE ON US TO PROVIDE GOODS AND SERVICES.

• PRODUCTIVITY INCREASES WHENEVER MORE GOODS AND SERVICES ARE PRODUCED WITH THE SAME AMOUNT OF RESOURCES IN THE SAME PERIOD OF TIME.

DIVISION OF LABOR—WORK THAT IS DIVIDED UP SO THAT EACH WORKER DOES JUST A FEW JOBS RATHER THAN A LOT OF DIFFERENT JOBS.

SPECIALIZATION—TAKES PLACE WHEN WORKERS, ROBOTS, OR REGIONS OF THE COUNTRY PERFORM ONLY THOSE TASKS THAT THEY CAN DO BETTER AND MORE QUICKLY THAN OTHERS.

SPECIALIZATION AND DIVISION OF LABOR MAY IMPROVE PRODUCTIVITY BECAUSE THEY LEAD TO MORE PROFICIENCY AND GREATER ECONOMIC INTERDEPENDENCE.

SINCE SOME WORKERS DO FEWER TASKS AND OTHERS DO ONLY THOSE TASKS THAT THEY PERFORM MORE EFFICIENTLY, EVERYONE MUST RELY ON OTHERS TO PRODUCE WHOLE PRODUCTS THAT SATISFY NEEDS AND WANTS WHICH IS HOW DIVISION OF LABOR AND SPECIALIZATION HAVE MADE AMERICANS MORE ECONOMICALLY DEPENDENT.

• WHAT IS HUMAN CAPITAL?– IT IS ANOTHER IMPORTANT THING THAT

CONTRIBUTES TO PRODUCTIVITY. HUMAN CAPITAL IS THE TOTAL ABILITY AND EAGERNESS OF A GROUP OF PEOPLE TO DO THEIR JOB.

• INVESTING IN HUMAN CAPITAL– INVESTING IN HUMAN CAPITAL IMPROVES

PRODUCTIVITY BECAUSE WHEN PEOPLE’S SKILLS, ABILITIES, HEALTH, AND MOTIVATION ADVANCE, PRODUCTIVITY INCREASES. FOR INSTANCE, THE GOVERNMENT CAN HELP PROVIDE EDUCATION AND HEALTH CARE; BUSINESSES CAN PROVIDE TRAINING; INDIVIDUALS CAN FURTHER THEIR OWN EDUCATION.

NOTE: PRODUCTIVITY IS ALSO HELPED BY ECONOMIC INTERDEPENDENCE WHICH IS THE FACT THAT WE DEPEND ON ONE ANOTHER FOR GOODS AND SERVICES.

ECONOMIC INTERDEPENDENCE AS A STRENGTH WILL SHOW A LARGER, MORE DIVERSE MARKET WHICH WILL LEAD TO A GREATER INCOME AND PRODUCTIVITY.

ECONOMIC INTERDEPENDENCE AS A WEAKNESS WILL CAUSE PROBLEMS WITH THOSE ADDITIONAL MARKETS (CUSTOMERS OR SUPPLIERS) MAY ADVERSELY AFFECT THE ECONOMY’S PRODUCTION OUTPUT OR CUSTOMER BASE.

ALEX AND DYLAN MOW AND TRIM LAWNS. CURRENTLY, EACH MAN MOWS AND TRIMS A LAWN BY HIMSELF, BUT THE PROCESS TAKES A LONG TIME. THEY WOULD MOST LIKELY IMPROVE THEIR EFFICIENCY IF

A. ALEX AND DYLAN MOW A LAWN AND THEN TRIM IT TOGETHER.

B. ALEX MOWS A LAWN WHILE DYLAN TRIMS THE SAME LAWN. C. ALEX TRIMS DYLAN’S LAWN WHILE DYLAN TRIMS ALEX’S LAWN. D. ALEX AND DYLAN REDUCE THE NUMBER OF LAWNS THEY MOW AND TRIM.

ANS: B

USE THE CHART TO ANSWER THE QUESTION.

WHAT TYPE OF RESOURCE DOES THE DATA IN THE CHARTREPRESENT?

A. CAPITAL C. HUMANB. FINANCIAL D. NATURAL ANS. C

WORKERS CONCENTRATING THEIR EFFORTS ON A LIMITED NUMBER OF TASKS, THEREBY INCREASING PRODUCTIVITY IS CALLED A. ENTREPRENEURSHIP. C. SEQUESTRATION. B. HOMOGENIZATION. D. SPECIALIZATION.

DITCH DIGGERCOMPUTER PROGRAMMERINTERNATIONAL FINANCIER

ALL OF THESE ARE EXAMPLES OF A. SKILLED LABOR. C. UNSKILLED LABOR. B. HUMAN RESOURCES D. CAPITAL RESOURCES.

ANS. D

ANS. B

OVER 80% OF THE PEOPLE LIVING IN THE APAC DISTRICT IN UGANDA

ARE FARMERS. HOWEVER, PROFITS ARE MINIMAL DUE TO THE HIGH

COSTS OF FARMING WITH POOR TOOLS AND MANUAL LABOR. APAC

WOULD BENEFIT FROM A STIMULATION OF WHICH TYPE OF

RESOURCE?

A. CAPITAL C. MARKETING

B. HUMAN D. NATURAL

IF A GOVERNMENT WANTED TO IMPROVE THE PRODUCTIVITY OF

ITS HUMAN RESOURCES IT COULD

A. LOWER INTEREST RATES TO MAKE BORROWING MONEY

EASIER.

B. INVEST MORE MONEY IN DEVELOPING SOLAR AND WIND ENERGY.

C. COMMIT TO DRILLING FOR OIL IN PROTECTED WILDLIFE AREAS.

D. EXPAND FUNDING AND OPPORTUNITIES FOR VOCATIONAL TRAINING.

ANS. A

ANS. D

• THE RELATIONSHIP BETWEEN TRADE-OFFS AND OPPORTUNITY COST

– TRADE-OFFS ARE THE ALTERNATIVE CHOICES PEOPLE FACE IN MAKING AN ECONOMIC DECISION (THAT YOU GIVE UP). A DECISION-MAKING GRID LISTS THE ADVANTAGES AND DISADVANTAGES OF EACH CHOICE.

– OPPORTUNITY COST IS THE COST OF THE NEXT BEST ALTERNATIVE AMONG A PERSON’S CHOICES. THE OPPORTUNITY COST IS THE MONEY, TIME, OR RESOURCES A PERSON GIVES UP, OR SACRIFICES, TO MAKE HIS FINAL CHOICE.

• MANY ECONOMISTS BELIEVE OPPORTUNITY COST IS AN IMPORTANT FACTOR TO CONSIDER IN ADDITION TO MONETARY COST BECAUSE THE MONEY, TIME, OR RESOURCES GIVEN UP WHEN ONE CHOICE IS MADE RATHER THAN ANOTHER ARE JUST AS IMPORTANT AS THE MONETARY COST OF THE CHOICE THAT WAS MADE.

• EXAMPLE #2– CAMILLE’S OPPORTUNITY COST IS

MEASURED IN TIME LOST PRACTICING FOR THE PLAY.

• THE PRODUCTION POSSIBILITIES FRONTIER DIAGRAM ILLUSTRATES THE CONCEPT OF OPPORTUNITY COST.

– IT SHOWS THE COMBINATIONS OF GOODS AND/OR SERVICES THAT CAN BE PRODUCED WHEN ALL PRODUCTIVE RESOURCES ARE USED. THE LINE ON THE GRAPH RESPRSENTS FULL POTENTIAL—THE FRONTIER—WHEN THE ECONOMY EMPLOYS ALL OF THESE PRODUCTIVE RESOURCES.

– IDENTIFYING POSSIBLE ALTERNATIVES ALLOWS AN ECONOMY TO EXAMINE HOW IT CAN BEST PUT ITS LIMITED RESOURCES INTO PRODUCTION.

• CONSIDERING DIFFERENT WAYS TO FULLY EMPLOY ITS RESOURCES ALLOWS AN ECONOMY TO ANALYZE THE COMBINATION OF GOODS AND SERVICES THAT LEADS TO MAXIMUM OUTPUT.

• AN ECONOMY PAYS A HIGH COST IF ANY OF ITS RESOURCES ARE IDLE. IT CANNOT PRODUCE ON ITS FRONTIER AND IT WILL FAIL TO REACH ITS FULL PRODUCTION POTENTIAL.

• ECONOMIC GROWTH MADE POSSIBLE BY MORE RESOURCES, A LARGER LABOR FORCE, OR INCREASED PRODUCTIVITY CAUSES A NEW FRONTIER FOR THE ECONOMY.

• AN ECONOMIC GROWTH WOULD STIMULATE GREATER PRODUCTION POSSIBILITIES BECAUSE IT WOULD INDICATE A LARGER LABOR FORCE, MORE GOODS AND SERVICES ARE CREATED; NEWLY DISCOVERED NATURAL RESOURCES OPEN UP NEW PRODUCTS AND SERVICES.

THE GRAPH SHOWS HOW MANY BASKETBALLS AND HOW MANY WHOOPEE CUSHIONS CAN BE PRODUCED GIVEN A LIMITED SUPPLY OF RESOURCES. SUCH A GRAPH IS CALLED A. PRICE GRAPH. C. SUPPLY CURVE. B. DEMAND CURVE. D. PRODUCTION POSSIBILITIES

GRAPHANS. D

THE GRAPH IS A PRODUCTION POSSIBILITIES CHART. WHICH OF THE FOLLOWING MIGHT CAUSE THE LINE TO MOVE TO THE RIGHT? A. HIGHER LABOR COSTS B. AN INCREASE IN PRICESC. SHORTAGE OF REQUIRED RESOURCES D. IMPROVED TECHNOLOGY IN WHOOPEE CUSHION

PRODUCTION ANS. D

IN THE PRODUCTION POSSIBILITIES FRONTIER SHOWN IN THIS GRAPH, WHAT COULD CAUSE PRODUCTION TO MOVE FROM POINT B TO POINT D?A. A STRIKE BY INDUSTRY WORKERSB. INCREASED PRODUCTIVITYC. AN INCREASE IN BUTTER PRODUCTION WHILE GUN

PRODUCTION REMAINS THE SAMED. AN INCREASE IN GUN PRODUCTION WHILE BUTTER

PRODUCTION REMAINS THE SAME

ANS: B

IN THIS PRODUCTION POSSIBILITIES FRONTIER, WHAT COULD CAUSE PRODUCTION TO MOVE FROM POINT A TO POINT E?

A. FACTORIES THAT ARE AVAILABLE BUT IDLEB. INCREASED PRODUCTIVITYC. THE AVAILABILITY OF ADDITIONAL RESOURCESD. ECONOMIC GROWTH

ANS: A

IN THE TIME PERIOD COVERED BY THE PRODUCTION POSSIBILITIES CURVE, THE COMPANY DECIDES TO MAKE 3 GALLONS OF RED PAINT. HOW MANY GALLONS OF BLUE PAINT CAN THE COMPANY MAKE WITHTHE AVAILABLE TIME AND RESOURCES?A. 2 C. 6B. 4 D. 8

ANS: B

BUILDING SIMPLE MODELS HELPS

ECONOMISTS ANALYZE OR DESCRIBE

ACTUAL ECONOMIC SITUATIONS.

• ECONOMIC MODEL IS A SIMPLIFIED PICTURE OF WHAT SOMETHING IS LIKE OR HOW IT WORKS.

• ECONOMIC MODELS ARE USEFUL BECAUSE THEY REDUCE A SITUATION TO ITS BASIC ELEMENTS AND ALLOW ECONOMISTS TO FOCUS ON THOSE ELEMENTS.

• THE CIRCULAR FLOW DIAGRAM AND A PRODUCTION POSSIBILITIES FRONTIER ARE TWO EXAMPLES OF ECONOMIC MODELS.

• IF THE ECONOMIC MODELS TURNS OUT TO BE INCORRECT, THE MODEL IS REVISED OR DISCARDED.

• COST-BENEFIT ANALYSIS HELPS ECONOMISTS EVALUATE ALTERNATIVES BY LOOKING AT EACH CHOICE’S COST AND BENEFIT.

• TAKING SMALL, INCREMENTAL STEPS IN IMPLEMENTING AN ECONOMIC DECISION HELPS ECONOMISTS TEST WHETHER THE ESTIMATED COST OF THE DECISION WAS CORRECT.

– THE COST AND BENEFIT OF BUYING A BATTERY-OPERATED CD PLAYER IS…THERE IS A COST IN BUYING THE BATTERIES TO OPERATE THE CD PLAYER AND A BENEFIT IN LISTENING TO MUSIC WHEREEVER YOU GO.

• STUDYING ECONOMICS WILL HELP US KNOW HOW THE ECONOMY WORKS ON A DAILY BASIS. THE STUDY OF ECONOMICS HELPS US TO BECOME BETTER DECISION MAKERS (WHAT, HOW, AND FOR WHOM DECISIONS).

• IT HELPS US UNDERSTAND A FREE ENTERPRISE ECONOMY, WHERE PEOPLE AND PRIVATELY OWNED BUSINESSES RATHER THAN THE GOVERNMENT MAKE THE MAJORITY OF THE ECONOMIC DECISIONS.

– IN ADDITION, ECONOMICS LOOKS AT THE ROLES OF BUSINESS, LABOR, AND GOVERNMENT IN THE AMERICAN ECONOMY. THESE ROLES AFFECT AMERICANS’ STANDARD OF LIVING.

• IT PROVIDES AN UNDERSTANDING OF A NUMBER OF FACTORS THAT HAVE A BEARING ON OUR STANDARD OF LIVING, WHICH IS THE QUALITY OF LIFE BASED ON THE POSSESSION OF THE NECESSITIES AND LUXURIES THAT MAKE LIFE EASIER (MEANING HOW WELL PEOPLE LIVE BASED ON THE THINGS THEY OWN THAT MAKE LIFE EASIER).

– FOR EXAMPLE, A SUPERMARKET AFFECTS MY STANDARD OF LIVING BY OFFERING A VARIETY OF FOODS, AND A DEPARMENT STORE AFFECTS MY STANDARD OF LIVING BY OFFERING A VARIETY OF CLOTHING.

THIS CARTOONIST WOULD LIKE GOVERNMENT TOA. SET HIGHER ERGONOMIC STANDARDS FOR THE

WORKPLACE.B. INTERFERE WITH BUSINESS LESS.C. PROTECT BUSINESS MORE.D. PROVIDE MORE PUBLIC SERVICES.

ANS: B