What Is Economics? The Economic Problem Economic Theory Opportunity Cost and Choice CHAPTER 1

© 2013 Cengage Learning. All Rights Reserved. Learning Objectives LO1Recognize the economic problem, and explain why it makes choice necessary. LO2Identify productive resources, and list examples. LO3Define goods and services, and explain why they are scarce. 1.1THE ECONOMIC PROBLEM 2 CHAPTER 1

© 2013 Cengage Learning. All Rights Reserved. Key Terms  scarcity  productive resources  economics  human resources  labor  entrepreneur  natural resources  capital goods  good  service CHAPTER 1 3

© 2013 Cengage Learning. All Rights Reserved. Economic Choices  The economic problem  Scarcity is the condition facing all societies because there are not enough productive resources to satisfy people’s wants.  Productive resources are the inputs used to produce the goods and services that people want.  Economics defined  Economics studies how people use their scarce resources to satisfy their unlimited wants. CHAPTER 1 4

© 2013 Cengage Learning. All Rights Reserved. Productive Resources  Human resources  Natural resources  Capital resources CHAPTER 1 5

© 2013 Cengage Learning. All Rights Reserved. Human Resources  Human resources is the broad category of human efforts, both physical and mental, used to produce goods and services.  Labor is the physical and mental effort used to produce goods and services.  An entrepreneur tries to earn a profit by developing a new product or finding a better way to produce an existing one. CHAPTER 1 6

© 2013 Cengage Learning. All Rights Reserved. Natural Resources  Natural resources are so-called “gifts of nature” used to produce goods and services  Examples are land, forests, minerals, oil reserves, bodies of water, and animals. CHAPTER 1 7

© 2013 Cengage Learning. All Rights Reserved. Capital Resources  Capital goods include all human creations used to produce goods and services  Examples are factories, trucks, and machines CHAPTER 1 8

© 2013 Cengage Learning. All Rights Reserved. Goods and Services  A good is tangible—something you can see, feel, and touch; it requires scarce resources to produce and satisfies human wants.  A service is intangible—not physical—yet uses scarce resources to satisfy human wants. CHAPTER 1 9

© 2013 Cengage Learning. All Rights Reserved. No Free Lunch  All goods involve a cost to someone, and draw scarce resources away from the production of other goods.  A good or service is scarce if the amount people desire exceeds the amount available at a zero price. CHAPTER 1 10

© 2013 Cengage Learning. All Rights Reserved. Learning Objectives LO1Explain the goal of economic theory. LO2Understand the role of marginal analysis in making economic choices. LO3Explain how market participants interact. 1.2ECONOMIC THEORY 11 CHAPTER 1

© 2013 Cengage Learning. All Rights Reserved. Key Terms  economic theory  marginal  microeconomics  macroeconomics  markets CHAPTER 1 12

© 2013 Cengage Learning. All Rights Reserved. The Goal of Economic Theory  An economic theory is a simplification of economic reality used to make predictions about the real world CHAPTER 1 13

© 2013 Cengage Learning. All Rights Reserved. Economic Theory  Simplify the problem  Simplifying assumptions  Rational self-interest  Everybody uses theories  Economists tell stories  Normative vs. positive statements CHAPTER 1 14

© 2013 Cengage Learning. All Rights Reserved. Marginal Analysis  Compare marginal cost with marginal benefit  Choice requires time and information  Microeconomics and macroeconomics CHAPTER 1 15

© 2013 Cengage Learning. All Rights Reserved. Market Participants  Four types of market participants  Households  Firms  Governments  The rest of the world CHAPTER 1 16

© 2013 Cengage Learning. All Rights Reserved. Markets  Markets are the means by which buyers and sellers carry out exchange.  Product markets  Resource markets  Labor market CHAPTER 1 17

© 2013 Cengage Learning. All Rights Reserved. A Circular-Flow Model  A circular-flow model describes the flow of resources, products, income, and revenue among economic decision makers. CHAPTER 1 18

© 2013 Cengage Learning. All Rights Reserved. Circular-Flow Model CHAPTER 1 19 Figure 1.1

© 2013 Cengage Learning. All Rights Reserved. Learning Objectives LO1Define opportunity cost. LO2Evaluate guidelines for making choices. LO3Analyze the opportunity cost of attending college. 1.3OPPORTUNITY COST AND CHOICE 20 CHAPTER 1

© 2013 Cengage Learning. All Rights Reserved. Key Terms  opportunity cost  sunk cost CHAPTER 1 21

© 2013 Cengage Learning. All Rights Reserved. Opportunity Cost  The opportunity cost of an item or activity is the value of the best alternative you must pass up. 22 CHAPTER 1

© 2013 Cengage Learning. All Rights Reserved. Opportunity Cost  Nothing better to do?  Estimate opportunity cost  Opportunity cost varies 23 CHAPTER 1

© 2013 Cengage Learning. All Rights Reserved. Choose Among Alternatives  Calculate opportunity cost  Consider your time  Ignore sunk cost  Sunk cost is a cost you have already incurred and cannot recover. 24 CHAPTER 1

© 2013 Cengage Learning. All Rights Reserved. The Opportunity Cost of College  Forgone earnings  Direct costs of college  Other college costs  Other-things-constant assumption 25 CHAPTER 1