Congratulations on beingselected to head up the promcommittee! Now you mustdecide on location, music, andrefreshments. What factors doyou need to consider whenmaking your choices? In groupsof four, determine your budgetand identify possible locations,music providers, and food. ReadChapter 1 to learn how yourprom selections, like alleconomic decisions, require youto make choices about how tobest use limited resources.
Scarcity is the basiceconomic problem thatrequires people to makecareful choices about how touse limited resources.
Section PreviewIn this section, you will learn why scarcity is thebasic economic problem that faces every societyand why scarcity requires us to make choices.
Content Vocabulary• scarcity • factors of production • labor• economics • land • entrepreneur• need • capital • gross domestic• want • capital good product (GDP)Academic Vocabulary• resource • comprehensive
The Basic Economic Problem Societies do not have enough productive resources to satisfy everyone’s wants and needs. This is referred to as:
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
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.
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.
Three Basic Questions Scarcity forces every society to answer the basic questions of WHAT, HOW, and FOR WHOM to produce.
Three Basic Questions (cont.)• 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
The Factors of Production Four factors of production— land, capital, labor, and entrepreneurs—must be present to produce goods and services.
The Factors of Production (cont.)• All four factors of production are required to produce goods and services. – Land – Capital (sometimes called capital goods) – Labor – Entrepreneurs The Factors of Production The Global Economy & YOU
The Scope of Economics Economics analyzes how societies satisfy wants through careful use of relatively scarce resources.
The Scope of Economics (cont.)• 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.)• Four key elements to the study of economics – Description • Gross domestic product (GDP) is a key measure of a nation’s economic output. – Analysis – Explanation – Prediction
Section PreviewIn this section, you will learn about some keyeconomic terms and concepts.
Content Vocabulary• good • paradox of • productivity value• consumer • human capital good • utility • division of labor• durable good • wealth • specialization• nondurable • market good • economic • factor market interdependence• service • product market• value • economic growth
Goods, Services, and Consumers Economic products are goods or services that are useful, relatively scarce, and transferable.
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.
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
Goods, Services, and Consumers (cont.) – Nondurable good – Service is a work performed for someone.
Value, Utility, and Wealth The value of a good or service depends on its scarcity and utility.
Value, Utility, and Wealth (cont.)• 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.)• 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.)• A nation’s wealth is comprised of all tangible goods.• This, however, does not mean that services are not useful or valuable.
Which of the following has the mostvalue and utility to your family?A. AutomobileB. Kitchen appliancesC. Television A. A B. B 0% C. C 0% 0% A B C
The Circular Flow of Economic Activity The economic activity in markets connects individuals and businesses.
The Circular Flow of Economic Activity (cont.)• 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
The Circular Flow of Economic Activity (cont.)• 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.
Productivity and Economic Growth A nation’s economic growth is due to several factors.
Productivity and Economic Growth (cont.)• 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.)• Ways to increase productivity – Invest in human capital such as education, training, and health-care – Division of labor and specializationProfiles in Economics: Effect of EducationAdam Smith on Income
Productivity and Economic Growth (cont.)• 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.
Content Vocabulary• trade-off • economic • standard of model living• opportunity cost • cost-benefit analysis• production possibilities • free enterprise frontier economyAcademic Vocabulary• alternative • assumption
Trade-Offs and Opportunity Cost Economic choices involve trade-offs and the careful evaluation of opportunity costs.
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
Trade-Offs and Opportunity Cost (cont.)• Similarly, each decision has an opportunity cost. – Even time has an opportunity cost.
Production Possibilities Economies face trade-offs when deciding what goods and services to produce.
Production Possibilities (cont.)• Economists use the production possibilities frontier to illustrate opportunity cost. Production Possibilities Frontier
Production Possibilities (cont.)• This diagram takes into account various factors. – Identifying possible alternatives – Fully employed resources – The cost of idle resources
Thinking Like an Economist Economists use a strategy called cost-benefit analysis to evaluate choices.
Thinking Like an Economist (cont.)• Economists are concerned with helping people make the best choices.
Thinking Like an Economist (cont.)• Economists use two strategies: – Building models • 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
The Road Ahead The study of economics helps people become better citizens.
The Road Ahead (cont.)• 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.) – We become better decision makers in our personal lives and in the voting booth. • Most of our political problems have important economic aspects. – Economics helps us understand the complex world around us by providing a framework for analysis.