1 Contents CHAPTER INTRODUCTION SECTION 1Scarcity and the Science of Economics SECTION 2Basic Economic Concepts SECTION 3Economic Choices and Decision Making CHAPTER SUMMARY CHAPTER ASSESSMENT Click a hyperlink to go to the corresponding section. Press the ESC key at any time to exit the presentation.

2 Section 1-4 Click the mouse button or press the Space Bar to display the information. Did You Know? We witness scarcity with each year’s “hot” new toy. Inspired by hunter President Teddy Roosevelt, Americans coveted the teddy bear in Cabbage Patch dolls were big during the 1980s, as were Tickle Me Elmos in By 1999 Game Boy’s Pokémon was the rage with a 10-cent trading card. The most-prized first-edition pocket monsters were in such short supply that they commanded from $8 to $182.

3 Section 1-5 Click the mouse button or press the Space Bar to display the information. The Fundamental Economic Problem Economics is the study of how people satisfy wants with scarce resources.  Scarcity is the condition where unlimited human wants face limited resources.  Needs are required for survival; wants are desired for satisfaction.  Someone has to pay for production costs, so There Is No Such Thing As A Free Lunch (TINSTAAFL).

4 Section 1-9 Click the mouse button or press the Space Bar to display the information. Three Basic Questions What must we produce? Society must choose based on its need.  How should we produce it? Society must choose based on its resources.  Figure 1.1 For whom should we produce? Society must choose based on its population and other available markets.

5 Section 1-13 Click the mouse button or press the Space Bar to display the information. The Factors of Production Land is the society’s limited natural resources—landforms, minerals, vegetation, animal life, and climate.  Factors of production are resources necessary to produce what people want or need.  Capital is the means by which something is produced such as money, tools, equipment, machinery, and factories.

6 Section 1-13 Click the mouse button or press the Space Bar to display the information. Entrepreneurs are risk-takers who combine the land, labor, and capital into new products.  Labor is the workers who apply their efforts, abilities, and skills to production.  Production is creating goods and services—the result of land, capital, labor, and entrepreneurs. The Factors of Production (cont.)

7 Section 1-14 The Factors of Production (cont.) Click the mouse button or press the Space Bar to display the information.

8 Section 1-20 Click the mouse button or press the Space Bar to display the information. The Scope of Economics Economics deals with the description of economic activity—Gross Domestic Product, unemployment rate, government spending, tax rates, etc.  Analysis looks at the “why” and “how” of economic activity—why prices go up and down, for example, or how taxes affect savings.

9 Section 1-20 Click the mouse button or press the Space Bar to display the information. The Scope of Economics (cont.) Explanation refers to how economists communicate knowledge of the economy and its activities to the society’s population.  Prediction refers to how yesterday’s and today’s economic activities advise us of potential future activity.

10 Section 2-4 Click the mouse button or press the Space Bar to display the information. Did You Know? The 20 percent of the world’s people who live in the wealthiest nations consume 86 percent of the world’s goods and services. The 20 percent who live in the poorest nations consume just 1.3 percent.

11 Section 2-5 Click the mouse button or press the Space Bar to display the information. Goods, Services, and Consumers Goods are items that are economically useful or satisfy an economic want. They are tangible and can be classified as consumer/capital and durable/ nondurable.  Services are work performed for someone and are intangible.  Consumers use goods and services to satisfy wants and needs.

12 Section 2-9 Click the mouse button or press the Space Bar to display the information. Value, Utility, and Wealth Value is worth expressed in dollars and cents. Scarcity by itself is not enough to create value. For something to have value, it must also have utility.  Utility is a good’s or service’s capacity to provide satisfaction, which varies with the needs and wants of each person.  Wealth is the accumulation of goods that are tangible, scarce, useful, and transferable to another person. Wealth does not include services.

13 Section 2-13 Click the mouse button or press the Space Bar to display the information. The Circular Flow of Economic Activity Markets are locations/mechanisms for buyers and sellers to trade. They are classified as local, regional, national, global, and cyberspace.  A factor market is where people earn their incomes. Factor markets center on the four factors of production: land, capital, labor, and entrepreneurs.  A product market is where people use their income to buy from producers. Product markets center on goods and services.

14 Section 2-14 Click the mouse button or press the Space Bar to display the information. Figure 1.3 The Circular Flow of Economic Activity (cont.)

15 Circular-Flow of Economic Activities A household is a person or a group of people that share their income. A firm is an organization that produces goods and services for sale. Firms sell goods and services that they produce to households in markets for goods and services. Firms buy the resources they need to produce—factors of production—in factor markets.

16 Section 2-17 Click the mouse button or press the Space Bar to display the information. Productivity and Economic Growth Productivity is a measure of the amount of output produced by the amount of inputs within a certain time. Productivity increases with efficient use of scarce resources.  Specialization and division of labor may improve productivity because they lead to more proficiency (and greater economic interdependence).

17 Section 2-17 Click the mouse button or press the Space Bar to display the information. Productivity and Economic Growth Investing in human capital improves productivity because when people’s skills, abilities, health, and motivation advance, productivity increases.  Economic growth depends on high productivity. Yet, an economy’s productivity may be affected by its interdependence— reliance on others and their reliance on us to provide goods and services.

18 Growth in the U.S. Economy from 1962…

19 …to 1988

20 Section 3-4 Click the mouse button or press the Space Bar to display the information. Did You Know? Economists reward their greatest for breakthrough discoveries. The 1999 Nobel Prize for Economics went to Robert A. Mundell, a Canadian economist at New York’s Columbia University, for his career- long work in international currency exchange rates, vital in today’s global marketplace. The prize is worth a million dollars in U.S. currency.

21 Section 3-5 Click the mouse button or press the Space Bar to display the information. Trade-Offs and Opportunity Cost Trade-offs are the alternative choices people face in making an economic decision. A decision-making grid lists the advantages and disadvantages of each choice.  Opportunity cost is the cost of the next best alternative among a person’s choices. The opportunity cost is the money, time, or resources a person gives up, or sacrifices, to make his final choice.

22 Section 3-6 Click the mouse button or press the Space Bar to display the information. Figure 1.5 Trade-Offs and Opportunity Cost (cont.)

23 Section 3-9 Click the mouse button or press the Space Bar to display the information. Production Possibilities The production possibilities frontier diagram illustrates the concept of opportunity cost. It shows the combinations of goods and/or services that can be produced when all productive resources are used. The line on the graph represents the full potential—the frontier—when the economy employs all of these productive resources.  Identifying possible alternatives allows an economy to examine how it can best put its limited resources into production.

24 “How much?” is a decision at the margin. You make a trade-off when you compare the costs with the benefits of doing something. Decisions about whether to do a bit more or a bit less of an activity are marginal decisions.

25 Marginal Analysis Making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. The study of such decisions is known as marginal analysis. Ex.: Hiring one more worker, studying one more hour, eating one more cookie, buying one more CD

26 People usually take advantage of opportunities to make themselves better off. An incentive is anything that offers rewards to people who change their behavior. Ex.: Price of gasoline rises  people buy more fuel-efficient cars. There are more well-paid jobs available for college graduates with economics degrees  more students major in economics. People respond to these incentives.

27 Section 3-9 Click the mouse button or press the Space Bar to display the information. Production Possibilities (cont.) Considering different ways to fully employ its resources allows an economy to analyze the combination of goods and services that leads to maximum output.  An economy pays a high cost if any of it resources are idle. It cannot produce on its frontier and it will fail to reach its full production potential.  Economic growth made possible by more resources, a larger labor force, or increased productivity causes a new frontier for the economy.

28 Section 3-10 Click the mouse button or press the Space Bar to display the information. Figure 1.6 The Production Possibilities Frontier Production Possibilities (cont.)

29 Section 3-10 Click the mouse button or press the Space Bar to display the information. Figure 1.6 The Production Possibilities Frontier Production Possibilities (cont.)

30 What causes shifts in the production possibilities frontier (PPF)? 1. If someone developed a faster computer, or a more efficient way of manufacturing cars, we might see a shift right in the PPF. This means that everything else held constant (ceteris paribus) more goods can be produced after the technological change.

31 2. Allows more production of both capital and consumer goods What causes shifts in the production possibilities frontier (PPF)?

32 Section 3-17 Click the mouse button or press the Space Bar to display the information. Figure 1.6 The Production Possibilities Frontier Production Possibilities (cont.)

33 What causes shifts in the production possibilities frontier (PPF)? 3. Destroys some of the inputs in the production process. Imagine if a hurricane took out a factory, then we would see lower production in the economy as a result.

34 4. Capital grows over time, then we could see the PPF curve shift out (representing higher possibilities for production: What causes shifts in the production possibilities frontier (PPF)?

35 Using Models is the branch of economic analysis that describes the way the economy actually works. makes prescriptions about the way the economy should work. is a simple prediction of the future.

36 Section 3-19 Click the mouse button or press the Space Bar to display the information. Thinking Like an Economist Building simple models helps economists analyze or describe actual economic situations.  _______________analysis helps economists evaluate alternatives by looking at each choice’s cost and benefit.  Taking small, incremental steps in implementing an economic decision helps economists test whether the estimated cost of the decision was correct.