C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 1 of 40 Unit I: Basic Economic Concepts Topic A: The economic perspective: limits, alternatives, choices and trade- offs

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 2 of 40 What is economics? Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 3 of 40 What is scarcity? Relationship between limited resources and seemingly unlimited wants. Fundamental problem of all economies.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 4 of 40 The Scope of Economics Microeconomics is the branch of economics that examines the behavior of individual decision-making units— that is, business firms and households.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 5 of 40 The Scope of Economics Macroeconomics is the branch of economics that examines the behavior of economic aggregates— income, output, employment, and so on—on a national scale.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 6 of 40 The Scope of Economics Examples of microeconomic and macroeconomic concerns ProductionPricesIncomeEmployment MicroeconomicsProduction/Output in Individual Industries and Businesses How much steel How many offices How many cars Price of Individual Goods and Services Price of medical care Price of gasoline Food prices Apartment rents Distribution of Income and Wealth Wages in the auto industry Minimum wages Executive salaries Poverty Employment by Individual Businesses & Industries Jobs in the steel industry Number of employees in a firm MacroeconomicsNational Production/Output Total Industrial Output Gross Domestic Product Growth of Output Aggregate Price Level Consumer prices Producer Prices Rate of Inflation National Income Total wages and salaries Total corporate profits Employment and Unemployment in the Economy Total number of jobs Unemployment rate

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 7 of 40 Marginalism In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 8 of 40 Marginalism For example, when a firm decides whether to produce additional output, it considers only the additional (or marginal cost), not the sunk cost. Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 9 of 40 Scarcity, Choice, and Opportunity Cost Human wants are unlimited, but resources are not. Three basic questions must be answered in order to understand an economic system: What gets produced? How is it produced? Who gets what is produced?

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 10 of 40 Scarcity, Choice, and Opportunity Cost Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 11 of 40 Scarcity, Choice, and Opportunity Cost Capital refers to the things that are themselves produced and then used to produce other goods and services. The basic resources that are available to a society are factors of production: Land Labor Capital

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 12 of 40 Scarcity, Choice, and Opportunity Cost Production is the process that transforms scarce resources into useful goods and services. Resources or factors of production are the inputs into the process of production; goods and services of value to households are the outputs of the process of production.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 13 of 40 Scarcity and Choice in a One-Person Economy Nearly all the basic decisions that characterize complex economies must also be made in a single- person economy. Constrained choice and scarcity are the basic concepts that apply to every society.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 14 of 40 Scarcity and Choice in a One-Person Economy Opportunity cost is that which we give up or forgo, when we make a decision or a choice.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 15 of 40 Scarcity and Choice in an Economy of Two or More A producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resources.

C H A P T E R 2: The Economic Problem: Scarcity and Choice © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 16 of 40 Scarcity and Choice in an Economy of Two or More A producer has a comparative advantage in the production of a good or service over another if it can produce that product at a lower opportunity cost.