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Chapter Introduction

Section 1: Scarcity and the Science of Economics

Section 2: Basic Economic Concepts

Section 3: Economic Choices and Decision Making

Visual Summary

Chapter Intro 1

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.

Chapter Intro 2

Scarcity is the basic economic problem that requires people to make careful choices about how to use limited resources.

Chapter Intro-End

Section 1-Preview

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.

Section 1-Key Terms

Content Vocabulary

• scarcity

• economics

• need

• want

• factors of production

• land

• capital

• capital good

Academic Vocabulary

• resource • comprehensive

• labor

• entrepreneur

• gross domestic product (GDP)

A. A

B. B

C. C

Section 1

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?

A. Definitely

B. Possibly

C. Definitely not 0% 0%0%

Section 1

The Fundamental Economic Problem

Societies do not have enough productive resources to satisfy everyone’s wants and needs.

Section 1

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

Section 1

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.

Section 1

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.

A. A

B. B

Section 1

Which do you purchase more often?

A. Things you want

B. Things you need

A B

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Section 1

Three Basic Questions

Scarcity forces every society to answer the basic questions of WHAT, HOW, and FOR WHOM to produce.

Section 1

• 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

Three Basic Questions (cont.)

A. A

B. B

C. C

Section 1

What is the best way to increase production of a good or service?

A. Hire more employees

B. Purchase more equipment

C. Replace management

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Section 1

The Factors of Production

Four factors of production—land, capital, labor, and entrepreneurs—must be present to produce goods and services.

Section 1

• All four factors of production are required to produce goods and services.

– Land

– Capital (sometimes called capital goods)

– Labor

– Entrepreneurs

The Factors of Production (cont.)

The Factors of Production

The Global Economy & YOU

A. A

B. B

C. C

Section 1

Which of these do you think is the most important factor of production?

A. Land

B. Capital

C. Entrepreneurs

A B C

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Section 1

The Scope of Economics

Economics analyzes how societies satisfy wants through careful use of relatively scarce resources.

Section 1

• 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.)

Section 1

• Four key elements to the study of economics

– Description

The Scope of Economics (cont.)

• Gross domestic product (GDP) is a key measure of a nation’s economic output.

– Analysis

– Explanation

– Prediction

A. A

B. B

C. C

D. D

Section 1

Which of the following does economics describe?

A. Jobs

B. Taxes

C. Government spending

D. All of the above

A B C D

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Section 1-End

Section 2-Preview

Section Preview

In this section, you will learn about some key economic terms and concepts.

Section 2-Key Terms

Content Vocabulary

• good

• consumer good

• durable good

• nondurable good

• service

• value

• paradox of value

• utility

• wealth

• market

• factor market

• product market

• economic growth

• productivity

• human capital

• division of labor

• specialization

• economic interdependence

Section 2-Key Terms

Academic Vocabulary

• transferable

• accumulation

• mechanism

A. A

B. B

C. C

Section 2

Do you think of “big business” or large corporations when you hear the word economics?

A. Always

B. Sometimes

C. Never

A B C

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Section 2

Goods, Services, and Consumers

Economic products are goods or services that are useful, relatively scarce, and transferable.

Section 2

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.

Section 2

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

Section 2

Goods, Services, and Consumers (cont.)

– Nondurable good

– Service is a work performed for someone.

A. A

B. B

Section 2

Which do you consume or indulge in more often?

A. Goods

B. Services

A B

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Section 2

Value, Utility, and Wealth

The value of a good or service depends on its scarcity and utility.

Section 2

• 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.)

Section 2

• 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.)

Section 2

• A nation’s wealth is comprised of all tangible goods.

• This, however, does not mean that services are not useful or valuable.

Value, Utility, and Wealth (cont.)

A. A

B. B

C. C

Section 2

Which of the following has the most value and utility to your family?

A. Automobile

B. Kitchen appliances

C. Television

A B C

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Section 2

The Circular Flow of Economic Activity

The economic activity in markets connects individuals and businesses.

Section 2

• 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(cont.)

The Circular Flow of Economic Activity

Section 2

• 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.

The Circular Flow of Economic Activity(cont.)

A. A

B. B

C. C

D. D

Section 2

A B C D

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In which market does your school engage?

A. Cyberspace

B. Local

C. National

D. All of the above

Section 2

Productivity and Economic Growth

A nation’s economic growth is due to several factors.

Section 2

• 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.)

Section 2

• Ways to increase productivity

– Invest in human capital such as education, training, and health-care

– Division of labor and specialization

Productivity and Economic Growth (cont.)

Effect of Educationon Income

Profiles in Economics:Adam Smith

Section 2

• 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.

Productivity and Economic Growth (cont.)

A. A

B. B

C. C

Section 2

Which investment we make today will generate higher returns in the future?

A. Education

B. Health-care

C. Technology

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Section 2-End

Section 3-Preview

Section Preview

In this section, you will learn that you face trade-offs and opportunity costs whenever you make an economic decision.

Section 3-Key Terms

Content Vocabulary

• trade-off

• opportunitycost

• production possibilities frontier

• economic model

• cost-benefit analysis

• free enterprise economy

Academic Vocabulary

• alternative • assumption

• standard of living

A. A

B. B

C. C

Section 3

Are you a good decision maker?

A. Always

B. Sometimes

C. Never

A B C

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Section 3

Trade-Offs and Opportunity Cost

Economic choices involve trade-offs and the careful evaluation of opportunity costs.

Section 3

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

Section 3

Trade-Offs and Opportunity Cost (cont.)

• Similarly, each decision has an opportunity cost.

– Even time has an opportunity cost.

A. A

B. B

Section 3

Is using a decision-making grid one way to analyze an economic problem?

A. True

B. False

A B

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Section 3

Production Possibilities

Economies face trade-offs when deciding what goods and services to produce.

Section 3

• Economists use the production possibilities frontier to illustrate opportunity cost.

Production Possibilities (cont.)

Production Possibilities Frontier

Section 3

• This diagram takes into account various factors.

– Identifying possible alternatives

– Fully employed resources

– The cost of idle resources

Production Possibilities (cont.)

Section 3

– Opportunity cost

– Economic growth

Production Possibilities (cont.)

Opportunity Cost

Economic Growth

A. A

B. B

C. C

Section 3

Does the production possibilities frontier show the minimum combinations of goods and services that can be produced?

A. Always

B. Sometimes

C. Never0% 0%0%

Section 3

Thinking Like an Economist

Economists use a strategy called cost-benefit analysis to evaluate choices.

Section 3

• Economists are concerned with helping people make the best choices.

Thinking Like an Economist (cont.)

Section 3

• Economists use two strategies:

– Building models

Thinking Like an Economist (cont.)

• 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

A. A

B. B

C. C

Section 3

Which of the following qualifications is not necessary for a career in economics?

A. Strong computer and quantitative skills

B. Master’s degree

C. Ability to write reports based on complex research A B C

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Section 3

The Road Ahead

The study of economics helps people become better citizens.

Section 3

• 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.)

Section 3

– We become better decision makers in our personal lives and in the voting booth.

• Most of our political problems have important economic aspects.

The Road Ahead (cont.)

– Economics helps us understand the complex world around us by providing a framework for analysis.

A. A

B. B

C. C

Section 3

Do you ever hear political candidates debate economic issues?

A. Always

B. Sometimes

C. Never

A B C

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Section 3-End

Scarcity Because of scarcity, society needs to decide how to distribute limited resources to satisfy seemingly unlimited wants and needs.

VS 1

VS 2

Factors of Production Four factors of production are required to produce the things we would like to have.

VS 3

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.

VS-End

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Figure 6

Figure 7

Figure 8

Figure 9

Profile

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

Concept Trans Menu

Economic Concepts Transparencies

Transparency 1 Scarcity

Transparency 2 Opportunity Cost & Trade-Offs

Transparency 3 Productivity

Select a transparency to view.

Concepts Trans 1

Concepts Trans 2

Concepts Trans 3

DFS Trans 1

DFS Trans 2

DFS Trans 3

Vocab1

scarcity

fundamental economic problem of meeting people’s virtually unlimited wants with scarce resources

Vocab2

economics

social science dealing with the study of how people satisfy seemingly unlimited and competing wants with the careful use of scarce resources

Vocab3

need

basic requirement for survival, including food, clothing, and shelter

Vocab4

want

something we would like to have but is not necessary for survival

Vocab5

factors of production

productive resources that make up the four categories of land, capital, labor, and entrepreneurs

Vocab6

land

natural resources or other “gifts of nature” not created by human effort

Vocab7

capital

tools, equipment, and factories used in the production of goods and services

Vocab8

capital goods

tools, equipment, and factories used in the production of goods and services

Vocab9

labor

people with all their efforts, abilities and skills

Vocab10

entrepreneur

risk-taking individual in search of profits

Vocab11

gross domestic product (GDP)

dollar value of all final goods, services, and structures produced within a country’s borders during a one-year period

Vocab12

resource

any available means for economic or political development

Vocab13

comprehensive

covering many or all areas

Vocab14

good

tangible economic product that is useful, relatively scarce, and transferable to others

Vocab15

consumer good

good intended for final use by consumers rather than businesses

Vocab16

durable good

a good that lasts for at least three years when used regularly

Vocab17

nondurable good

a good that wears out or lasts for fewer than three years when used regularly

Vocab18

service

work or labor performed for someone

Vocab19

value

monetary worth of a good or service as determined by the market

Vocab20

paradox of value

apparent contradiction between the high monetary value of a nonessential item and the low value of an essential item

Vocab21

utility

ability or capacity of a good or service to be useful and give satisfaction to someone

Vocab22

wealth

sum of tangible economic goods that are scarce, useful, and transferable from one person to another

Vocab23

market

meeting place or mechanism that allows buyers and sellers to come together

Vocab24

factor market

market where the factors of production are bought and sold

Vocab25

product market

market where goods and services are bought and sold

Vocab26

economic growth

increase in a nation’s total output of goods and services over time

Vocab27

productivity

measure of the amount of output produced with a given amount of productive factors

Vocab28

human capital

sum of people’s skills, abilities, health, knowledge and motivation

Vocab29

division of labor

division of work into a number of separate tasks to be performed by different workers

Vocab30

specialization

assignment of tasks to the workers, factories, regions, or nations that can perform them more efficiently

Vocab31

economic interdependence

mutual dependency of one person’s, firm’s, or region’s economic activities on another’s

Vocab32

transferable

able to be moved from one person or place to another

Vocab33

accumulation

gradual collection of goods

Vocab34

mechanism

process

Vocab35

trade-off

alternative that is available whenever a choice is to be made

Vocab36

opportunity cost

cost of the next-best alternative use of money, time, or resources when making a choice

Vocab37

production possibilities frontier

diagram representing the maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed

Vocab38

economic model

simplified version of a complex concept or behavior expressed in the form of an equation, graph, or illustration

Vocab39

cost-benefit analysis

way of thinking about a choice that compares the cost of an action to its benefits

Vocab40

free enterprise economy

market economy in which privately owned businesses have the freedom to operate for a profit with limited government intervention

Vocab41

standard of living

quality of life based on ownership of necessities and luxuries that make life easier

Vocab42

alternative

the second of two choices

Vocab43

assumption

something taken for granted

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