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Chapter Menu
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.
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)
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.
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.)
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
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
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
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.
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.)
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.)
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.)
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
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.
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
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
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.
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.
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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