1. CHAPTER 1
What is Economics??

2. Section 1: Scarcity and the Science of Economics
Main Idea: Scarcity forces us to make choices. We can’t have everything we want, so we are forced to choose what we want most.
Objectives:
Explain the fundamental economic problem.
Examine the three basic economic questions every society must decide.

3. Section 1 Introduction
Do you think the study of economics is worth your time and effort?
According to a Harris poll, a huge percentage of Americans think it is.
They must know what economists know—that a basic understanding of economics can help make sense of the world around us.

4. The Fundamental Economic Problem
Scarcity is the condition where unlimited human wants face limited resources.
Economics is the study of how people satisfy wants with scarce 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).

5. 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.
For whom should we produce? Society must choose based on its population and other available markets.
Figure 1.1

6. The Factors of Production
Factors of production are resources necessary to produce what people want or need.
Land is the society’s limited natural resources—landforms, minerals, vegetation, animal life, and climate.
Capital is the means by which something is produced such as money, tools, equipment, machinery, and factories.

7. The Factors of Production (cont.)
Labor is the workers who apply their efforts, abilities, and skills to production.
Entrepreneurs are risk-takers who combine the land, labor, and capital into new products.
Production is creating goods and services—the result of land, capital, labor, and entrepreneurs.

8. The Factors of Production (cont.)

9. 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.

10. 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.

11. Section 2: Basic Economic Concepts
Main Idea: An economic product is a good or service that is useful, relatively scarce, and exchangeable.
Objectives:
Explain the relationship among scarcity, value, utility, and wealth.
Understand the circular flow of economic activity.

12. Section 2 Introduction
Economics, like any other social science, has its own vocabulary.
To understand economics, a review of some key terms is necessary.
Fortunately, most economic terms are widely used, and many will already be familiar to you.

13. 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.

14. 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.

15. 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.

16. The Circular Flow of Economic Activity (cont.)
Figure 1.3

17. 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).

18. 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.

19. Section 3: Economic Choices and Decision Making
Main Idea: Trade-offs are present whenever choices are made.
Objectives:
Analyze trade-offs and opportunity costs.
Explain decision-making strategies.

20. Section 3 Introduction
The process of making a choice is not always easy.
Because resources are scarce, consumers need to make wise choices.
To become a good decision maker, you need to know how to identify the problem and then analyze your alternatives.
Finally, you have to make your choice in a way that carefully considers the costs and benefits of each possibility.

21. 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. Frederic Bastiat 1801-1850 Born in France Classical liberal economist
Developed the idea of opportunity cost
Strong supporter of free trade
Advocated an unrestricted free market
Thought that economic truths should be arrived at by observing not only the immediate consequences – that is, benefits or liabilities – of an economic decision, but also by examining the long-term second and third consequences”
 One must examine the decision's effect not only on a single group of people or a single industry but on all people and all industries in the society as a whole.
Placed stress on the role of consumer demand in initiating economic progress
Wrote The Law, Economic Sophisims, What is seen and what is unseen (Parable of the Broken Window), The Candlemakers’ Petition

23. Trade-Offs and Opportunity Cost (cont.)
Figure 1.5

24. 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.

25. 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.

26. Production Possibilities (cont.)
Figure 1.6 The Production Possibilities Frontier

27. Production Possibilities (cont.)
Figure 1.6 The Production Possibilities Frontier

28. Production Possibilities (cont.)
Figure 1.6 The Production Possibilities Frontier

29. Thinking Like an Economist
Building simple models helps economists analyze or describe actual economic situations.
Cost-benefit 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.

30. The Road Ahead
Studying economics will help us know how the economy works on a daily basis.
It helps us understand a free enterprise economy, where people and privately owned businesses rather than the government make the majority of the economic decisions.
The study of economics helps us to become better decision makers.
The world of economics is complex and dynamic, as is our society.

31. Adam Smith Each person selfishly doing what is best for themselves
Born in Scotland
Met and worked with Voltaire and Benjamin Franklin
“The Father of Modern economics”
Wrote The Wealth of Nations
Division of labor & specialization increase production and will lead to greater “wealth of nations”
Each person selfishly doing what is best for themselves
economically will lead promote the economy overall
Competition= crucial to economic success
Free competitive market; minimal government intervention
Laissez-faire economic doctrine