1. Chapter 1: The Economic Way of Thinking

2. Sec. 1: Scarcity: The Basic Economic Problem

3. What is Scarcity? Wants – Needs –
People always want more, no matter what they have
wants are unlimited, but resources to fill are limited
Scarcity –
not a temporary shortage, it is a problem facing individuals, businesses, govt., society
Science to study it is called economics

4. Economics – the study of how people choose to use scarce resources to satisfy their wants
Econ involves:
Examining –
Organizing, analyzing, and interpreting data about those economic behaviors
Developing theories and economic laws that explain how the economy works and to predict what might happen in the future.

5. Scarcity affects which goods are made and services are provided
Principle 1:
Choice is central to the use of scarce resources.
Choices about needs – what kind of food
Choices about wants – these are unlimited & ever changing
Principle 2:
Scarcity affects which goods are made and services are provided
Goods – physical objects that can be purchased
Services – work that one person performs for another for payment
Consumer –
Producer –

6. Scarcity Leads to 3 Questions

7. Question 1:
Society must decide the mix of goods and services it will produce
what is produced depends on the natural resources possessed
but resources do not completely control what a country produces
some countries decide by allowing consumers and producers to decide
in other countries, the govt. decides what goods and services will be produced
This question also involves how much to produce
the country must review its wants at any time to decide this

8. Question 2:
This involves using scarce resources in the most efficient ways to satisfy wants
this is also influenced by the natural resources that a society possesses
ex. - growing crops – different approaches
large unskilled labor force – labor intensive methods – few machines
highly skilled labor force – capital intensive – lots of machines

9. Question 3: This involves how goods will be distributed
among people in society
Questions –Need to determine how much people should get how much they pay or equal share
Distribution networks –

10. The Factors of Production
-the economic resources needed to produce goods and services

11. Factor 1:
Includes all natural resources found on or under the ground that are used to produce goods and services

12. Factor 2:
is all the human time, effort, and talent that goes in to the making of products

13. Factor 3:
is all the resources made and used by people to produce and distribute goods and services
ex. –
human capital –
ex. – college, job training

14. Factor 4:
Is the combination of vision, skills, ingenuity, and willingness to take risks that is needed to create and run new businesses
most entrepreneurs are innovators
try to anticipate and meet needs of consumers in new ways
new product, method of production, way of marketing or distributing
Are also risk takers – risk time, energy, creativity, money in hope for profit

15. Sec. 2: Economic Choice Today: Opportunity Cost

16. Making Choices -What shapes the economic choices? -incentive –
-utility –
-“economize” – consider both incentive and utility –
-make decisions according to what you believe is the best combination of costs and benefits

17. Every choice involves costs Money, time, or something else of value
Factor 1:
Factor 2:
Choices are shaped by incentive, expected utility, and the desire to economize
Costs vs. benefits – looking for best mix of costs and benefits
Making decisions – guided by self-interest – looking for ways to maximize utility 
Every choice involves costs
Money, time, or something else of value

18. Trade-Offs and Opportunity Costs

19. selects 6 week course, less credits, but gets summer vacation
Example 1:
Example 2:
*choice – semester long course at university vs. 6 week course at high school
selects 6 week course, less credits, but gets summer vacation
Opportunity cost –
Alternative over another
*choice – work for year vs. work for 6 months and travel for months
Selects work for 6 months and travel for 6 months – less income, but visits friends

20. Analyzing Choices
-cost-benefits analysis –
-useful tool for individuals, businesses and govt. when to evaluate relative worth of
economic choices

21. Example: Max’s Decision-Making Grid
application of cost-benefit analysis is decision-making grid
shows what you get and what you give up when you make choices
costs and benefits change over time, as do goals and circumstances
changes influence decisions people make

22. Example: Marginal Costs and Benefits
marginal benefit –
analysis is central to study of economics
helps explain the decisions consumers, producers, and govt. make as they try to meet their unlimited wants with limited resources

23. Sec. 3: Analyzing Production Possibilities

24. Graphing the Possibilities
Economic models –
Production Possibilities Curve(PPC) – a graph used to illustrate the impact of scarcity on an economy by showing the maximum number of goods or services that can be produced using limited resources

25. PPC assumptions
Resources are fixed – no way to increase the availability of land, labor, capital and entrepreneurship
All resources are fully employed – there is no waste of any of the factors of production
Only two things can be produced – assumption simplifies the situation and suits the graphic format – one variable on each axis
Technology is fixed – no technological breakthroughs to improve methods of production
-Curve represents border or frontier between what is and what is not possible to produce
also called a Production Possibilities Frontier
useful for bus. & govt., but can be used by individual

26. Production Possibilities Curve
Figure 1.3 – 5 production possibilities for loaves of bread and bran muffins
Figure 1.4 – graph plotted from data in table – line is the PPC
points represent maximum of one product relative to the other
also shows opportunity cost of one product compared to the other

27. What We Learn From PPCs
No economy operates according to simplified assumptions of PPC
but it spotlights concepts that work in the real world of scarce resources
Efficiency –
Underutilization –

28. Example: Efficiency and Underutilization
Figure 1.5 – guns vs. butter – military vs. consumer production
each point the on curve shows different combination of each, and each represents efficiency
each point inside the curve is underutilization, and points outside the curve are impossible because resources are fixed

29. Law of Increasing Opportunity Costs

30. Example: Increasing Opportunity Costs
Figure 1.5 – switching from guns to butter or butter to guns
each additional unit costs more to make than the last, explains bow shape of curve
reason – making one is different from making the other – new machines, factories, and retrain Workers

31. Changing Production Possibilities
The PPC represents present PP if resources are fixed, but that usually changes over time
additional resources means new PP and the PPC moves outward 
Example: A Shift in the PPC
in the 1700s the US occupied only a small area along the Atlantic
100 yrs. Later, it expanded to the Pacific – meaning the addition of resources, in addition to the added immigrants means additional labor
this is shown on the PPC as a shift of the curve outward – this is called economic growth

32. Sec. 4: The Economist’s Toolbox

33. Working with Data
Economics is something that everyone knows and works with everyday
Economists study this to figure out why some nations are rich or poor and why consumers want one product while others want another product
Statistics –

34. Using Economic Models
Models are based on assumptions and are simplified because they are based on a limited number of variables
models expressed in words, graphs or equations
explain why things are as they are, help predict future economic activity

35. Using Charts and Tables
Look for trends, connections and other interesting relationships
Showing numbers in relation to other numbers can reveal patterns in the data

36. Using Graphs Graphs are used to ID trends in statistics
Line graph – useful for showing changes over time
Line graphs use 2 sets of numbers or variables – one on horizontal and one on vertical axis
The numbers of what is being used are plotted on the graph and connected to form a line
upward slope – upward trend
downward slope – downward trend
straight line – same slope
curved line – varied slope

37. Bar Graph – useful for comparisons
vividly shows changes in data
Pie Graph –
slices drawn in proportion to the number they represent

38. Microeconomics & Macroeconomics
-Macroeconomics – is the study of the behavior of the economy as a whole and involves topics such as inflation, unemployment, aggregate demand, and aggregate supply

39. Microeconomics Micro – “Small”
examines specific, individuals elements in the economy
prices, costs, profits, competition, behavior of consumers and producers
areas of specialized concentration
business organization, labor markets, agricultural economics, econ of environmental issues

40. Macroeconomics Macro – “LARGE
examines the big picture – economy as a whole
the effect of widespread unemployment on the whole nation
a general rise on prices
studies the consumer sector (household sector), business sector, and public or govt. sector
Sector –
bring a national or global perspective to work
study monetary system, up and down of business cycles, impact of national tax policies on economy, international trade and effect on rich and poor nations

41. Micro or MACRO
1. How the Federal Reserve influences consumer spending in the U.S.
2. How a household decides which brand of laundry detergent to buy
3. How a firm decides when to go out of business
4. How debt affects the income gap among Americans
5. How new parents decide whether to work or stay home with their children

42. Positive Economics and Normative Economics
-Positive economics – way of describing and explaining economics as it is and not how it should be, involves verifiable facts
- Normative economics – involves judgements of what economic behavior ought to be.

43. Uses scientific method –
Positive economics
Normative economics
Uses scientific method –
Statements can be tested against real world data and either proved or disproved
Based on value judgments
goes beyond facts to ask if actions are good, values differ, so then recommendations will

44. Normative or Positive
1. “Congress should approve the new bill to give prescription drug benefits to Medicare
recipients.”
2. “Productivity increased last quarter.”
3. “The inflation rate in this country is normal.”
4. “The current administration has created the largest budget deficits since Ronald Reagan’s
presidency.”
5. “If the poverty line is raised, then those whose income level is currently at the bottom of
the middle class will benefit from a tax break.”

45. Adam Smith: Founder of Modern Economics
Born in Kirkcaldy, Scotland in 1723
Studied and taught literature, logic, and moral philosophy
1764 – traveled to France – the Enlightenment – result – looked at world in new way

46. -1776 –
challenged idea of mercantilism – govt. controlled trade with its colonies
said free trade would be better
said people behave in ways that satisfy their economic self-interests
an invisible hand guides the marketplace
buyers and sellers benefit from each transition
becomes foundation of modern economics