Chapter 1 What is Economics?

Section 1-1: The Basic Problem in Economics What is economics?  The study of how people satisfy their unlimited wants and needs with limited resources (people have to make choices)  Wants vs. Needs:  Wants are anything other than what is needed for basic survival  New car, video games, or a stereo system  Needs are things required for basic survival  Food, clothing, and shelter

 Economic Choices  Choices are a result of unlimited wants in a world of limited resources (scarcity exists)  Spending and production decisions involve choices  Choices compete with each other  going to dinner vs. going to the movies  choices: 1. Eat steak and no movie, 2. Eat a burger and go to a budget movie, 3. Eat at home and see a new release  Societies and businesses face choices about how to utilize their resources in the production of goods and services.

 Scarcity  All resources are limited.  Income, time, natural resources  People compete for limited resources  Scarcity- not being able to have all of the goods and services one wants- an item is scarce even if the store shelves are full-that is why we pay for things (different from shortages) cont.

Scarcity always exists because of competing alternative uses for resources. (Why can’t everyone have a big house?)

 Factors of Production (p.6 figure 1.3)  Resources used to produce goods and services- land, labor, capital, and entrepreneurship  Land: natural resources and surface land and water  Land, water, fish, animals, forests, mineral deposits cont.

 Labor: the work people do-human effort both physical and mental  results in economic goods and services  Goods are tangible objects that satisfy people’s wants or needs  Ex. Clothes, food, cars, etc.  Services are actions that can satisfy people’s wants or needs  Ex. Seeing a doctor, watching a baseball game, getting my oil changed cont.

 Capital: manufactured goods used to make other goods and services  Ex. Machines, buildings, and tools used to assemble automobiles  Capital increases productivity- the amount of output that results from a given level of inputs  Entrepreneurship: the ability to start a new business or create new products  About 30% of new business enterprises fail  Of the 70% that survive, only a few become successful cont.

 Technology: (sometimes considered the 5 th F.O.P) the use of science to develop new products and production needs

Section 1-2: Trade-Offs  Trade offs: sacrificing one good or service to purchase or produce another  Trade-offs involve opportunity costs  Opportunity costs are the value of the next best alternative given up for the alternative that was chosen  There is no “free lunch”- everything has a cost because you could be doing something else with your time ex. Working, studying, sleeping, watching TV (all have value)

 Production Possibilities Curve  The production possibilities curve shows the maximum combination of goods and services that can be produced from a given amount of resources.  Ex. Military spending vs. domestic programs (trade off because of opportunity cost- we can’t have all of both- resources are scarce) (p. 16)  Using a production possibilities curve, a producer can decide how to use resources.

Section 1-3: What do Economists Do?  Two parts of economics  Microeconomics: the branch of economic theory that deals with behavior and decision making by small units-individuals and firms  Macroeconomics: the branch of economic theory that deals with the economy as a whole and decision making by large units (ex. Governments)  Economy: activity that affects the production and distribution of goods and services in a society

 Economic Models  Economic models are used to predict behavior in the real world  Models:  some factors remain constant  shows basic factors, not every detail  Models may not always be accurate due to the inability to predict human behavior.

 Schools of Economic Thought  Economists are influenced by personal opinions, beliefs, and the government under which they live  This leads to different economic theories  Different schools of thought can have an impact on laws and government policies.  Judgements about economic policies depend on a person’s values  Values are beliefs or characteristics that a person or group considers important  Economists inform us to the possible short and long term outcomes of policies.