1. Scarcity—The Basic Economic Problem
Scarcity results from society not having enough resources to produce all the things people need and want.
Economics is the study of how people try to satisfy their needs and wants through the careful use of relatively scarce resources.
A need is a basic requirement for survival, and a want is something we would like to have that is not necessary for survival.
Goods can be categorized into durable, nondurable, consumer, and capital goods.
A product’s value depends both on its utility and its scarcity.
Wealth is an accumulation of tangible products; goods are counted as wealth, but services are not.
“There’s no such thing as a free lunch” *

2. Resource scarcity impacts the United States
Resource scarcity impacts the United States. As global oil prices increase, local gas prices rise.

3. Definition of Economics
All economic questions arise because we want more than we can get.
Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.
The choices we make depend on the incentives we face.
An incentive is a reward that encourages or a penalty that discourages an action.
No definition of economics can adequately capture the subject. For that reason, some teachers don’t like definitions and skip right over them. If you are one of these teachers, go ahead. Not much is lost.
Other teachers regard a basic definition as essential, and the textbook takes this view. The definition in the text…“the social science that studies the choices that individuals, businesses, and governments, and entire societies make as they cope with scarcity,” is a modern language version of Lionel Robbins famous definition, “Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses.”
Some teachers like to play with definitions a bit more elaborately. If you are one of these, here are four more, all of which add some useful insight and the last one a bit of fun:
John Maynard Keynes: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps it possessors to draw correct conclusions.”
Alfred Marshall: “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.”
Jacob Viner: “Economics is what economists do.”
Jim Duesenberry: “Economics is all about how people make choices. Sociology is about why there isn’t any choice to be made.”

4. Societies must decide WHAT to produce.
Questions All Societies Face
All societies face three basic economic questions about the use of resources.
Societies must decide WHAT to produce.
After determining what to produce, societies must decide HOW to produce it, making the best possible use of available resources.
Societies must determine FOR WHOM to produce the products. *

5. Definition of Economics
Microeconomics
Microeconomics is the study of choices made by individuals and businesses, and the influence of government on those choices.
Macroeconomics
Macroeconomics is the study of the effects on the national and global economy of the choices that individuals, businesses, and governments make.

6. The Scope of Economics
Economics describes economic activity using measures such as gross domestic product (GDP).
Economics analyzes economic activity to discover why things work and how things happen.
Economics explains how and why an economy works, allowing economic problems to be addressed more easily in the future.
Economics predicts what may happen in the future, based on current events and trends. *

7. The Choices Producers Make
The economy is made up of two groups: producers and consumers.
Producers use the factors of production—land, capital, labor, and entrepreneurs—to create their products.
Land includes not just the earth, but also mineral and oil deposits, livestock, and climate conditions.
Capital includes the tools, equipment, machinery, and factories used to produce goods and services.
Labor includes the efforts, abilities, and skills of all people except entrepreneurs.
Entrepreneurs are risk-takers who start new businesses or bring new products to market. 7

8. Production Possibilities
Economists use a production possibilities curve to illustrate all possible combinations of economic output.
All points on the production possibilities curve represent maximum combinations of output when all resources are fully employed.
All economic or production decisions have an opportunity cost—the value of the next best alternative that was not taken.
When resources are not fully employed, a society cannot reach its maximum potential, resulting in an opportunity cost. 8

11. The Choices Consumers Make
Every decision we make has trade-offs, or alternative choices.
Opportunity costs apply to consumers as well as producers.
Consumerism was a social movement that resulted in a list of five consumer rights.
Consumers also have responsibilities, such as behaving ethically with producers and researching products fully before making a purchase.. 11

12. Economic Growth
Economic growth occurs when a nation’s total output of goods and services increases over time.
Investing in new physical or human resources involves risks and sacrifices today to increase future production.
When more products can be produced with the same amount of resources, productivity goes up.
Human capital provides a major contribution to productivity, so investing in education can have a substantial payoff in the future.
Division of labor, specialization, and interdependence can improve productivity and income as well as make the world a safer place. 12

14. Circular Flow of Economic Activity
A circular flow diagram is a model that shows how markets connect people and businesses in the economy.
The factors of production are bought and sold in factor markets.
Goods and services are bought and sold in product markets.
All people and businesses are connected by markets. 14

16. Thinking Like an Economist
Economics models reduce complex situations to their most basic elements so that they can be more easily understood.
All models are based on assumptions.
A cost-benefit analysis compares the benefits of an action or decision with its expected costs.
Taking small steps toward a final goal is wise, especially when we are unsure of the exact costs involved. 16

17. The Road Ahead
Studying economics gives people a better understanding of how a free enterprise economy works.
Many economic topics have a bearing on our standard of living.
Studying economics helps people become better decision makers, both personally and as voting citizens.
Economics provides a framework to analyze the complex world around us. 17

18. Economies Based on Tradition
In a traditional economy, resource use and social behavior are dictated by ritual, habit, or custom.
Examples of traditional economies include the central African Mbuti, the Australian Aborigines, and the Inuit of Northern Canada.
The main advantage of a traditional economy is that the answers to WHAT, HOW, and FOR WHOM to produce are determined by customs and tradition.
The main disadvantage of a traditional economy is that it tends to discourage new ideas and new ways of doing things. 18

19. Economies Based on Command
In a command economy, a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produce.
Socialism is a modern, somewhat more liberal version of a command economy.
The main advantages of a command economy are that it can change direction quickly, and it allows many citizens to receive goods and services they otherwise could not afford.
Disadvantages include the loss of individual freedom to choose, the production of low-quality goods, a large decision- making bureaucracy, and lack of individual initiative. 19

20. Economies Based on Markets
A market economy is based on capitalism.
Supply, demand, and the price system help people make decisions and allocate resources.
People can spend money on what they want and can own resources privately.
Advantages of a market economy include a high degree of individual freedom and customer satisfaction, a variety of goods and services, the incentive to take care of private property, and decentralized decision making.
Disadvantages include not providing for basic needs of everyone, a shortage of some services, and a high degree of uncertainty. 20