Chapter 1

 The basic problem in economics….is what?  How is the economy reported in the news?  How does this affect your life?  Did you know? Pg. 5 predictions… Based on this…what do you think economics is?

scarce resources Economics: the study of how individuals and nations make choices about how to use scarce resources to fulfill their wants.

Resource: anything that people can use to make or obtain what they want.

1. Make a list of all the things you NEED in a week. 2. Make a list of all the things you WANT in a week. 3. You have $100 to live on for a week: make a list of items you would buy. Approximate prices and add them together. Eliminate items if you went over $100. Why did you make the choice to keep or eliminate each item?

Scarcity: means that people do not and cannot have enough income, time, or other resources to satisfy their every desire.

 Not the same as shortage, which is temporary and often exists after disasters where goods and property are destroyed.  Example: Gas Prices change when conditions change providing access to the resource  Scarcity always exists. There are limited amounts of money, time, resources, etc.

 Business’ application – affects decisions about what to produce now, later, and when to stop production. Therefore, affects peoples income and buying power.  Nations’ application – how to spend scarce resources.  Example: social security vs. higher education

 NEEDS:  DEFINATE: Food, clothing, shelter  POSSIBLE: education, job, healthcare  WANTS:  Anything else other than basic needs  WANT = LUXURY  Can be a perceived need

 Land: natural resources – i.e.: land, things found in nature, location of land (determines value)  Labor: work people do – human resources – anyone who works provides this resource  Capital: all the property people use to make other goods and services – i.e. machines used to make autos  NOT the autos, UNLESS they are used as a business i.e. taxi or log trucks, delivery trucks, etc.  Combining capital with land or labor increases the value of all resources by increasing their PRODUCTIVITY: ability to produce greater quantities of goods and services in better & faster ways.

 Entrepreneurship: refers to the ability of individuals to start new businesses, to introduce new products and techniques, and to improve management techniques  Requires initiative and individual willingness to take RISKS.

 Factors of Production: together, the resources of land, labor, capital, and entrepreneurship  Are used to produce goods and services.  Goods : items that people buy  Services: activities done for other for a fee  Technology: use of science to develop new products and new methods for producing and distributing goods and services. Increases productivity!!!

 SCARCITY– Forces choices!  i.e. Education vs. buy a house  What is the resource that is scarce?  LONG TERM VS. SHORT TERM GOALS: Choices change with maturity and life conditions  TRADE-OFF – exchanging one thing for the use of another  i.e. exchange $ for the right to own an iPod  Why are these choice to “trade” made?

When you choose one thing you give up another ALWAYS! i.e. time is a scarce resource. When you choose to spend your time watching T.V. you are giving up that chunk of time for any other purpose (studying, exercising, etc.) Is life a series of trade-offs? How and why???

DEFINITION: the value of the next best alternative that had to be given up for the alternative chosen i.e. national level – tax $: space program or clean polluted river? Making choices that are unavoidable because of the problem of scarcity. i.e. auto pollution vs. increased car manufacturing costs – a choice has to be made.

DEFINITION: all the combinations of goods and services that can be produced from a FIXED AMOUNT OF RESOURCES in a GIVEN PERIOD OF TIME i.e. Guns vs. Butter!! (military spending vs. civilian goods) ** To produce one $ is given up to produce the other. How do you BEST decide what to produce?

 Economy: All the activity in a nation that together affects the production, distribution, and use of goods and services  Economists: gather data to develop theories that are then used to make decisions by businesses or government agencies

 Economic models show the way people react to changes in the economy, usually changes in PRICES!  Three ways to present models: 1. Explanation in words 2. A graph 3. A mathematical equation  Limits 1. A lack of detail 2. Infinite possibilities (things you cannot account for) 3. Shows only basic factors:  i.e. only need to know 3 basic factors to determine buyers reaction to price change: 1) price of item, 2) income of average buyer, 3) price of alternative items

 They only take into account the most important factors, not ALL of them. 1. Creating: a model is considered “good” if it provides useful materials for analyzing the way the real world works through RESEARCH a) Form a hypothesis (idea about the way things should work; educated guess) b) Gather facts c) Draw conclusions 2. Testing: gather and compare data 3. Applying: predicting human behavior – IS THIS POSSIBLE? 1. i.e. cut taxes, increase government spending = people spend more $ = increase of total production 2. Alternative view: view that if taxes are decreased, people may save and therefore no increase in spending.

 1980s – emphasis on business and consumers; reducing unemployment “Reaganomics”  1990s – government intervening to reduce unemployment  Each government era has its own school of thought!  What goes into a government developing its school of thought?

 Values: the beliefs or characteristics that a group or person considers important  Having the same values does not mean that people will agree about solutions!  How would you describe our current government’s school of thought?  What facts do you have to support your hypothesis?