Chapter 1

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What is Economics Economics is the study of the ways in which society uses limited resources to satisfy their wants and needs. Economics as A science The Fundamental Economic Problem o Scarcity A lack of resources to produce everything the people want Scarcity is not related to a lack of money. Shortage can be short term or long term. Scarcity is always there. o What if everyone became millionaires? People would still go without many of the things they want or need. People would not want to work. Store shelves would go empty and the economy would come to a halt. The 3 Basic Economic Questions o The way limited resources are going to be used.

What? How? For whom? o Societies answer these questions in different ways Entrepreneurs and the Factors of Production People who decide how to combine resources to create new goods and services. Factors of Production o Land o Labor o Capital resources to make all goods and services Capital is the human made resources to produce other goods and services. Physical Capital vs. Human Capital Example o 1 Land: Iron ore

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Labor: machinist Capital: blast furnace Land: cotton Labor: tailor Capital: mechanical loom Land: sunlight Labor: engineer Capital: solar panels

Opportunity Cost o People, businesses, and governments use trade-offs o Opportunity cost is the next best alternative o Think how much more or less is thinking at the margin. o Marginal cost is the extra cost of adding one unit and the marginal benefit must exceed the cost. Production Possibilities o A production possibilities curve shows alternative ways to use resources. o The production possibilities frontier shows combinations of production of resources. o Every point on the graph is a trade-off o The production possibilities frontier represents an economy working at its most efficient level. o Any point inside the curve indicates underutilization o When the economy grows the curve shifts to the right. o The curve also determines cost which does not o Technology increases economic growth..

Vocab

Need- something essential for survival Want- something that people desire but that is not necessary for survival Goods- the physical objects that someone produces Services- the actions or activities that one person performs for another

Economics- the study of how people seek to satisfy their needs and wants by making choices Shortage- a situation in which consumers want more of a good or service than producers are willing to make available at a particular price Entrepreneur- a person who decides how to combine resources to create goods and services Factors of production- the resources that are used to make goods and services Land- all natural resources used to produce goods and services Labor- the effort people devote to tasks for which they are paid Capital- any human-made resource that is used to produce other goods and services Physical capital- the human-made objects used to create other goods and services Human capital- the knowledge and skills a worker gains through education and experience Trade-off- the alternatives that we give up when we choose one course of action over another guns or butter- a phrase expressing the idea that a country that decides to produce more military goods (guns) has fewer resources to produce consumer goods (butter) and vice versa Opportunity cost- the most desirable alternative given up as the result of a decision Thinking at the margin- the process of deciding how much more or less to do Cost/benefit analysis- a decision-making process in which you compare what you will sacrifice and gain by a specific action Marginal cost- the cost of producing one more unit of a good Marginal benefit- the extra benefit of adding one unit Production possibilities curve- a graph that shows alternative ways to use an economys productive resources Production possibilities frontier- a line on a production possibilities curve that shows the maximum possible output an economy can produce

Efficiency- the use of resources in such a way as to maximize the output of goods and services Underutilization- the use of fewer resources than an economy is capable of using Law of increasing costs- an economic principle which states that as production shifts from making one good or service to another, more resources are needed to increase production of the second good or service

1/22/2013 8:42:00 AM

1/22/2013 8:42:00 AM