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Chapter 1

Chapter 1. What is Economics?. Section 1-1: The Basic Problem in Economics. What is economics? The study of how people satisfy their unlimited wants and needs with limited resources (people have to make choices) Wants vs. Needs:

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Chapter 1

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  1. Chapter 1 What is Economics?

  2. Section 1-1: The Basic Problem in Economics • What is economics? • The study of how people satisfy their unlimited wants and needs with limited resources (people have to make choices) • Wants vs. Needs: • Wants are anything other than what is needed for basic survival • New car, video games, or a stereo system • Needs are things required for basic survival • Food, clothing, and shelter

  3. Economic Choices • Choices are a result of unlimited wants in a world of limited resources (scarcity exists) • Spending and production decisions involve choices • Choices compete with each other • going to dinner vs. going to the movies • choices: 1. Eat steak and no movie, 2. Eat a burger and go to a budget movie, 3. Eat at home and see a new release • Societies and businesses face choices about how to utilize their resources in the production of goods and services.

  4. Scarcity • All resources are limited. • Income, time, natural resources • People compete for limited resources • Scarcity- not being able to have all of the goods and services one wants- an item is scarce even if the store shelves are full-that is why we pay for things (different from shortages) cont.

  5. Scarcity always exists because of competing alternative uses for resources. (Why can’t everyone have a big house?)

  6. Factors of Production (p.6 figure 1.3) • Resources used to produce goods and services- land, labor, capital, and entrepreneurship • Land: natural resources and surface land and water • Land, water, fish, animals, forests, mineral deposits cont.

  7. Labor: the work people do-human effort both physical and mental • results in economic goods and services • Goods are tangible objects that satisfy people’s wants or needs • Ex. Clothes, food, cars, etc. • Services are actions that can satisfy people’s wants or needs • Ex. Seeing a doctor, watching a baseball game, getting my oil changed cont.

  8. Capital: manufactured goods used to make other goods and services • Ex. Machines, buildings, and tools used to assemble automobiles • Capital increases productivity- the amount of output that results from a given level of inputs • Entrepreneurship: the ability to start a new business or create new products • About 30% of new business enterprises fail • Of the 70% that survive, only a few become successful cont.

  9. Technology: (sometimes considered the 5th F.O.P) the use of science to develop new products and production needs

  10. Trade-Offs • Trade offs: sacrificing one good or service to purchase or produce another • Trade-offs involve opportunity costs • Opportunity costs are the value of the next best alternative given up for the alternative that was chosen • There is no “free lunch”- everything has a cost because you could be doing something else with your time ex. Working, studying, sleeping, watching TV (all have value)

  11. Production Possibilities Curve • The production possibilities curve shows the maximum combination of goods and services that can be produced from a given amount of resources. • Ex. Military spending vs. domestic programs (trade off because of opportunity cost- we can’t have all of both-resources are scarce) (p. 16) • Using a production possibilities curve, a producer can decide how to use resources.

  12. What do Economists Do? • Two parts of economics • Microeconomics: the branch of economic theory that deals with behavior and decision making by small units-individuals and firms • Macroeconomics: the branch of economic theory that deals with the economy as a whole and decision making by large units (ex. Governments) • Economy: activity that affects the production and distribution of goods and services in a society

  13. Economic Models • Economic models are used to predict behavior in the real world • Models: • some factors remain constant • shows basic factors, not every detail • Models may not always be accurate due to the inability to predict human behavior.

  14. Schools of Economic Thought • Economists are influenced by personal opinions, beliefs, and the government under which they live • This leads to different economic theories • Different schools of thought can have an impact on laws and government policies. • Judgements about economic policies depend on a person’s values • Values are beliefs or characteristics that a person or group considers important • Economists inform us to the possible short and long term outcomes of policies.

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