This chapter introduces key economic concepts such as scarcity, resources, and the difference between microeconomics and macroeconomics. It explains that scarcity exists because human wants are unlimited but resources are limited, forcing individuals and societies to make choices. Resources are categorized as land, labor, and capital. Entrepreneurs organize these resources to produce goods and services. Economics studies how people make choices to satisfy wants. Microeconomics examines individual decision-making units while macroeconomics looks at whole economies. Models are used to understand and predict economic behavior.

1. Chapter 1
Introducing the Economic
Way of Thinking
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1

2. In this chapter, you will
learn to solve these
economic puzzles:
Howwould you there the
Why you
Can can prove purchase
we explain is
relationship between the
more Coca-Cola when the
no person worth a
Super Bowl winner and
price increases?
trillion dollars?
changes in the stock market?
2

3. What is the
Economic Problem?
Providing for people’s
wants and needs in a
world of scarcity
* Return to previous slide while in slide show
3

4. What is meant by
Scarcity?
The condition in which
wants are forever greater
than the available supply of
time, goods, and resources
4

5. What does Scarcity
force us to do?
It forces us to
make choices
5

6. What are Resources?
The basic categories of
inputs used to produce
goods and services
6

7. What are the three
categories of Resources?
Land
Labor
Capital
7

8. What is a
Land Resource?
A shorthand expression
for any natural resource
provided by nature
8

9. What is Labor?
The mental and physical
capacity of workers to
produce goods and services
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10. What is Capital?
The physical plants,
machinery, and
equipment used to
produce other goods
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11. What is
Financial Capital?
The money used to
purchase capital
11

12. What is
Entrepreneurship?
The creative ability of
individuals to seek
profits by combining
resources to produce
innovative products
12

13. Labor
Labor
Land
Land Capital
Capital
Entrepreneurshiporganizes
Entrepreneurship organizes
resourcesto produce goods
resources to produce goods
andservices
and services
13

14. What is Economics?
The study of how society
chooses to allocate its
scarce resources to the
production of goods and
services in order to
satisfy unlimited wants
14

15. What is
Macroeconomics?
The branch of economics
that studies decision-
making for the
economy as a whole
15

16. What is
Microeconomics?
The branch of economics that
studies decision-making by
a single individual,
household, firm, industry, or
level of government
16

17. What is the
Scientific Method?
• Problem identification
• Model development
• Testing a theory
17

18. What is the purpose of
an Economic Model?
To forecast or predict
the results of various
changes in variables
18

19. Identify the problem
Identify the problem
Develop a model based
Develop a model based
on simplified assumptions
on simplified assumptions
Collect data and
Collect data and
test the model
test the model
19

20. What assumption is
always made when
testing a model?
Ceteris Paribus
20

21. What is
Ceteris Paribus?
A Latin phrase that means
that while certain variables
can change, “all other
things remain unchanged”
21

22. What is the difference
between Association
and Causation?
We cannot always assume
that when one event
follows another, the first
caused the second
22

23. What is
Positive Economics?
An analysis limited
to statements that
are verifiable
23

24. What is
Normative Economics?
An analysis based on
value judgement
24

25. Key Concepts
25

26. • What is the Economic Problem?
• What is meant by Scarcity?
• What are resources?
• What are the three categories of Resources?
• What is Entrepreneurship?
• What is Economics?
• What is Macroeconomics?
• What is Microeconomics?
26

27. • What is the Scientific Method?
• What assumption is always made when testin
• What is Ceteris Paribus?
• What is the purpose of model
building?
• What is Positive Economics?
• What is Normative Economics?
27

28. Summary
28

29. Scarcity is the fundamental
economic problem that human wants
exceed the availability to time,
goods, and resources. Individuals and
society therefore can never have
everything they desire.
29

30. Resources are factors of
production classified as land, labor,
and capital. Entrepreneurship is a
special type of labor. An
entrepreneur combines resources to
produce innovative products.
30

31. Economics is the study of how
individuals and society choose to
allocate scarce resources. In order to
satisfy unlimited wants. Faced with
unlimited wants and scarce resources,
we must make choices among
alternatives.
31

32. Society
Chooses
Resources
Scarcity
Unlimited
wants
32

33. Macroeconomics applies an
economy wide perspective that focuses
on such issues as inflation,
unemployment, and the growth rate of
the economy.
33

34. Microeconomics examines
individual decision-making units
within an economy. Microeconomics
studies such topics as a consumer’s
response to changes in the price of
coffee and the reasons for changes in
the market price of personal
computers.
34

35. Models are simplified descriptions
of reality used to understand and
predict economic events. An economic
model can be stated verbally or in a
table, graph, or equation. If the
evidence is not consistent with the
model, the model is rejected.
35

36. Microeconomics examines
individual decision-making units
within an economy.
Microeconomics studies such topics
as a consumer’s response to changes
in the price of coffee and the reasons
for changes in the market price of
personal computers.
36

37. Microeconomics examines
individual decision-making units
within an economy. Microeconomics
studies such topics as a consumer’s
response to changes in the price of
coffee and the reasons for changes in
the market price of personal
computers.
37

38. Collect data
and test
the model
Develop
a model based
on assumptions
Identify
the
problem 38

39. Ceteris paribus holds “all other
factors unchanged” that might affect a
particular relationship. If this
assumption is violated, a model
cannot be tested. Another reasoning
pitfall is to think association means
causation.
39

40. Use of positive versus normative
economic analysis is a major reason for
disagreement among economists.
Positive economics uses testable
statements. Often a positive argument is
expressed as an “if-the” statement.
Normative economics is based on value
judgments or opinions and uses words
such as good, bad, ought to, and ought
not to.
40

41. Chapter 1 Quiz
©2000 South-Western College Publishing 41

42. 1. Scarcity exists
a. when people consume beyond their
needs.
b. only in rich nations.
c. in all countries in the world.
d. only in poor nations.
C. No matter what economic system a
country has, it is always faced with the
problem of scarcity.
42

43. 2. Which of the following would eliminate
scarcity as an economic problem?
a. Moderation of people’s competitive
instincts.
b. Discovery of large new energy
reserves.
c. Resumption of steady productivity
growth.
d. None of the above because scarcity can
not be eliminated.
D. Because it is impossible to provide
everyone with everything they want,
we will always have scarcity.
43

44. 3. Which of the following is not a resource?
a. Land.
b. Labor.
c. Money.
d. Capital.
C. Money is not a resource because it has no
intrinsic value. Money that is used to make
an investment is called financial capital.
44

45. 4. Economics is the study of
a. how to make money.
b. how to operate a business.
c. people making choices because of the
problem of scarcity.
d. the government decision-making
process.
C. Economics is the study of how people must
decide among alternatives to meet their
wants and needs in this world of scarcity.
45

46. 5. Microeconomics approaches the study of
economics from the viewpoint of
a. individuals or specific markets.
b. the operation of the Federal Reserve.
c. economy wide effects
d. the national economy.
A. Microeconomics is the study of the
decision- making process for individuals,
business owners, and government.
46

47. 6. A review of the performance of the U.S.
economy during the 1990’s is primarily
the concern of
a. macroeconomics.
b. microeconomics.
c. both macroeconomics and
microeconomics.
d. neither macroeconomics nor
microeconomics.
A. Macroeconomics is the study of the
economy as a whole.
47

48. 7. An economic theory claims that a rise in
gasoline prices will cause gasoline purchases
to fall, ceteris paribus. The phrase “ceteris
paribus” means that
a. other relevant factors like consumer
incomes must be held constant.
b. the gasoline prices must first be adjusted
for inflation.
c. the theory is widely accepted, but cannot
be accurately tested.
d. consumers need for gasoline remains the
same regardless of price.
A. Anytime price changes we always make
the assumption that nothing else changes.
48

49. 8. An economist notices that sunspot activity
is high just prior to recessions and
concludes that sunspots cause recessions.
The economist has
a. confused association with and causation.
b. misunderstood the ceteris paribus
assumption.
c. Used normative economics to answer a
positive question.
d. built an untestable model.
A. Just because one action follows another, does
not mean that the first caused the second.
49

50. 9. Which of the following is a statement of
positive economics?
a. The income tax system collects a lower
percentage of the incomes of the poor.
b. A reduction in the tax rates of the rich
makes the tax system more fair.
c. Taxes ought to be raised to finance
health care.
d. All of the above are primarily
statements of positive economics.
A. Positive economic statements are testable
by facts and explain the world as it is
without making value judgements.
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51. 10. Which of the following is a statement of
positive economics?
a. An unemployment rate of greater than 8
percent is good because prices will fall.
b. An unemployment rate of 7% is a serious
problem.
c. If the overall unemployment rate is 7%,
black unemployment rates will average
15%.
d. Unemployment is a more severe problem
than inflation.
C. Other answers are based on a value
judgement concerning the relationship
between black and white unemployment rates.
51

52. 11. Which of the following is a statement of
normative economics?
a. A minimum wage is good because it
raises wages for the working poor.
b. The minimum wage is supported by
unions.
c. The minimum wage reduces jobs for
unskilled workers.
d. The minimum wage encourages firms
to substitute capital for labor.
A. Even though the minimum wage reduces
jobs for some working poor, it is a value
judgement that the minimum wage is good
for the economy overall.
52

53. 12. Select the normative statement that
completes the following sentence: If the
minimum wage is raised rapidly, then
a. inflation increases.
b. workers will gain their rightful share of
total income.
c. profits will fall.
d. unemployment will rise.
B. To say that workers have right to a
certain part of total income entails a
value judgement.
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54. Internet Exercises
Click on the picture of the book,
choose updates by chapter for
the latest internet exercises
54

55. END
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