Chapter 1 Economics PDF

ECONOMICS Chapter 1 The Economic Way of Thinking SECTION 1 SCARCITY: THE BASIC ECONOMIC PROBLEM WHAT IS ECONOMICS? • Economics is the study of how people choose to use scarce resources to satisfy their unlimited wants with limited resources • Economics involves: • Examining how individuals, busi...

ECONOMICS Chapter 1 The Economic Way of Thinking SECTION 1 SCARCITY: THE BASIC ECONOMIC PROBLEM WHAT IS ECONOMICS? • Economics is the study of how people choose to use scarce resources to satisfy their unlimited wants with limited resources • Economics involves: • Examining how individuals, businesses, governments, and societies choose to use scarce resources to satisfy their wants • 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 WHAT ARE WANTS? • Wants are desires that can be satisfied by consuming a good or service WHAT ARE NEEDS? • Needs are things such as food, clothing, and shelter, that are necessary for survival WHAT IS SCARCITY? • The situation that exists when there are not enough resources to meet human wants • People always want more, no matter how much they have already. In fact, wants are unlimited, but the resources available to satisfy them are limited • Scarcity is a fundamental and ongoing tension that confronts individuals, businesses, governments, and societies WHAT OCCURS BECAUSE WANTS ARE UNLIMITED AND RESOURCES ARE SCARCE? • Choice • People make choices about all the things they desire – both needs and wants • Choices have to be made about how to best use these resources • Scarcity, then affects which goods are made and which services are provided WHAT ARE GOODS? • Goods are physical objects that can be purchased, such as food, clothing, and furniture WHAT ARE SERVICES? • Services are work that one person performs for another for payment (work that one person does for another) • Services include the work of sales clerks, technical support representatives, teachers, nurses, doctors, and lawyers SCARCITY REQUIRES EVERY SOCIETY TO ADDRESS THREE BASIC ECONOMIC QUESTIONS. WHAT ARE THESE QUESTIONS? • What will be produced? • How will it be produced? • From whom will it be produced? HOW DO COUNTRIES AND INDIVIDUALS DETERMINE “WHAT WILL BE PRODUCED”? • The goods and services a society chooses to produce depend, in part, on the natural resources it possesses • The first fundamental economic question involves not only what to produce, but also how much to produce HOW DO COUNTRIES AND INDIVIDUALS DETERMINE “HOW WILL IT BE PRODUCED”? • Answering this second question involves using scarce resources in the most efficient way to satisfy society’s wants • Again, decisions on methods of production are influenced by the natural resources a society possesses HOW DO COUNTRIES AND INDIVIDUALS DETERMINE “FROM WHOM WILL IT BE PRODUCED”? • This involves two questions: • How much should people get? • How should their share be delivered to them? • Once the question of how much has been decided, societies must then decide exactly how they are going to get these goods and services to the people • To do this, societies develop distribution systems, which include road and rail systems, seaports, airports, trucks, trains, ships, airplanes, computer networks – anything that helps move goods and services from producers to consumers in an efficient manner DEFINE FACTORS OF PRODUCTION. • The resources needed to produce goods and services IDENTIFY AND EXPLAIN THE FOUR FACTORS OF PRODUCTION: • Land • Land refers to all natural resources used to produce goods and services • Water, forests, and all kinds of wildlife belong in the category of land; so do buried deposits of minerals, gas, and oil • Labor • Labor is all of the human effort used to produce goods and services • Capital • Capital is all of the resources made and used by people to produce goods and services. • Tools, machinery, and factories are all forms of capital; so are all of the producer’s physical resources • Entrepreneurship • Entrepreneurship involves the vision, skills, and risk-taking needed to create and run businesses • Most entrepreneurs are innovators; they try to anticipate the wants of consumers and then satisfy these wants in new ways. This may involve developing a new product, method of production, or way of marketing or distributing products. Entrepreneurs are also risk takers; they risk their time, energy, creativity, and money in hopes of making a profit SECTION 2 ECONOMIC CHOICE TODAY: OPPORTUNITY COST WHAT ARE INCENTIVES? • Incentives are methods used to encourage people to take certain actions • Grades in school, wages paid to workers, and praise or recognition earned in personal and public life are all incentives CHOICE IS INFLUENCED BY UTILITY. DEFINE UTILITY. • The benefit or satisfaction received from using a good or service DEFINE ECONOMIZE. • Economize means to make decisions according to the best combination of costs and benefits. • The choices people make are shaped by incentives, by expected utility, and by the desire to economize. “EVERY CHOICE INVOLVES COST.” EXPLAIN THIS STATEMENT. • Every choice you make you give up something WHAT IS A TRADE-OFF? • The alternative you give up when you make an economic choice WHAT IS AN OPPORTUNITY COST? • Opportunity cost is the value of something that is given up to get something else that is wanted; the value of the next best alternative • All economic decisions involve an opportunity cost WHAT IS A COST-BENEFIT ANALYSIS? • Cost-benefit analysis is an approach that weighs the benefits of an action against its costs • Cost-benefit analysis is one of the most useful tools for individuals, businesses, and governments when they need to evaluate the relative worth of economic choices WHEN MAKING A DECISION, AN ECONOMIST EXAMINES MARGINAL COSTS AND MARGINAL BENEFITS. EXPLAIN EACH CONCEPT. • Marginal Cost – the additional cost of using one or more unit of a product (good or service) • Marginal Benefit – the additional satisfaction from using one more unit of a product • The analysis of marginal costs and marginal benefits is central to the study of economics; it helps to explain the decisions consumers, producers, and governments make as they try to meet their unlimited wants with limited resources SECTION 3 ANALYZING PRODUCTION POSSIBILITIES WHAT IS A PRODUCTION POSSIBILITIES CURVE (PPC)? • A graph used to illustrate the impact of scarcity on an economy by showing the maximum number of goods and services that can be produced using limited resources • The PPC shows the opportunity cost for each choice in a visual way THE PRODUCTION POSSIBILITIES CURVE (PPC) IS BASED ON ASSUMPTIONS THAT SIMPLIFY THE ECONOMIC INTERACTIONS. WHAT ARE THESE ASSUMPTIONS? • Resources are fixed • There is 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; the economy is running at full production • Only two things can be produced • This assumption simplifies the situation and suits the graphic format, with one variable on each axis • Technology is fixed • There are no technological breakthroughs to improve methods of production. THE PPC REVEALS THREE CONCEPTS: EFFICIENCY, UNDERUTILIZATION, AND THE LAW OF INCREASING OPPORTUNITY COSTS. EXPLAIN EACH. • Efficiency – the condition in which economic resources are being used to produce the maximum amount of goods and services • Underutilization – the condition in which economic resources are not being used to their fullest potential • Law of increasing opportunity costs – states that as production switches from one product to another, increasing amounts of resources are needed to increase the production of the second product THE PPC CAN CHANGE. EXPLAIN. • The PPC illustrates a country’s present production possibilities as if all resources are fixed; if a country’s resources change, the PPC will change as well SECTION 4 THE ECONOMIST’S TOOLBOX WHAT IS MICROECONOMICS? • Microeconomics is the study of individuals, families, and businesses in an economy. • Microeconomics examines specific, individual elements in an economy; these elements include prices, costs, profits, competition, and the behavior of consumers and producers WHAT IS MACROECONOMICS? • Macroeconomics is the study of the economy as a whole and is concerned with large-scale economic activity • Focuses on topics like inflation, unemployment, aggregate demand, and aggregate supply