ECONOMICS

CHAPTER 1

KEY TERMS FOR UNIT:

Scarcity Factors of Production land capital financial capital

Entrepreneur economics trade-offs opportunity costs production possibilities

Satisfaction Budget constraint diminishing returns

Need want free product consumer good capital good

Durable good service value wealth market

Free enterprise

SECTION 1 – SCARCITY AND THE SCIENCE OF ECONOMICS

 The fundamental economic problem facing all societies is that of scarcity (the condition that
arises because society does not have enough resources to produce all the things people would
like to have)
 The problem of scarcity is not caused by the shortage of money
 (ACTIVITY WHERE STUDENTS WRITE DOWN EVERYTHING THEY WOULD WANT IF THEY HAD $1
MILLION)
 What would happen if everyone had $1 million? Would you work? How many people would
quit their job? What would happen to the supply of merchandise on the store shelves? Who
would be working in the factories?
 So, would the huge increase in everyone’s income solve the economic problem of scarcity?
 (SLEEPING WATER ACTIVITY)
 The reason people cannot satisfy all their wants and needs is the scarcity of productive
resources
 The resources (factors of production) are
o Land
o Capital
o Labor
o Entrepreneurship
 LAND refers to the “gifts of natures” or natural resources not created by human effort
 This includes deserts, fertile fields, forests, cattle, whales, sunshine, and climate
 Because only so many natural resources are available at any given time, they are considered
being fixed (limited supply)
  Examples: Not enough good farmland to feed all the people of the earth, not enough sandy
beaches for everyone to enjoy, not enough minerals to meet our expanding energy needs
 CAPITAL refers to the tools, equipment, and factories used in the production of goods and
services
 There are capital goods (tools and equipment used) and financial capital (money used to buy
those)
 Capital is unique because it is a result of earlier production (bulldozer used as capital was once a
result of production)
 LABOR refers to the people with all their efforts, abilities, and skills
 Labor refers to all people except for an unique group of individuals called entrepreneurs (later)
 Land doesn’t vary, but labor does
 What might factor into to labor? (population growth, immigration, famine, war, and disease)
 ENTREPRENEUR refers to a special status of workers who are innovators responsible for much of
the change in our economy
 They are the risk-taker in search of profits
 They are the driving force of an economy
 They bring the initiative that when combined with land, labor, and capital make new products
 (NAME THAT RESOURCE ACTIVITY)

“Three Basic Questions”

 In order to meet the needs of its people, a society must answer three basic questions:
o What to produce
o How to produce
o For whom to produce
 WHAT TO PRODUCE is the first question and must be answered before production happens
 Should we devote most of our resources to producing military equipment? Food? Clothing?
Housing? Leisure?
 We cannot have everything people want, so we must decide WHAT to produce
 HOW TO PRODUCE is the second question and refers to questions such as: should factories use
assembly line methods that require little labor or should they use less equipment and more
workers? If unemployment is high you might think more workers, however that leads to higher
prices and less people can afford it
 FOR WHOM TO PRODUCE is the third question and means the production must be allocated to
someone
 Example: If we are producing housing, who is it for? Workers? Professionals? Government
employees? If we cannot produce enough, who is left out?

“Meaning of economics”

 ECONOMICS is the study of human efforts to satisfy what appear to be unlimited and competing
wants through the careful use of relatively scarce resources
  It is also a social science because it deals with the behavior of people as they cope with the
fundamental problem of scarcity
 It is concerned with what is produced and who gets how much
 It deals with unemployment, inflation, international trade, the interaction of business and labor,
and the effects of government spending and taxes
 This DESCRIPTION is not enough because the “why” and “how” are unanswered
 To answer these questions, the focus is on the ANALYSIS of economic activity as well
 Examples: Why are prices of some items high and others low? Why are incomes higher in some
states than others? How do taxes affect people’s desire to work and save?
 Economics is also concerned with the EXPLANATION of economic activity
 Once we figure out how things work, we must communicate this to others
 Finally, the PREDICTION (likely consequences of different courses of action)
 The prediction might be helpful in understand the consequences of how people will react but
the people will still make the decision (example: community building a school, where does the
money come from?)

SECTION 2 – TRADE-OFFS AND OPPORTUNITY COSTS

“Trade-Offs Among Alternatives”

 (PLANNING A DANCE ACTIVITY)

 Because people cannot have everything they want, they face TRADE-OFFS (alternative choices)
when spending their income or time
 Choices are not easy to make, and having a plan for making decisions can help
 (PACED DECISION-MAKING PROCESS handout)
 Discuss the 5 steps of the process of PACED
 People often think of cost in terms of dollars
 To economists, cost means more than a price tag
 They used the term OPPORTUNITY COST which means the cost of the next best alternative use
of money, time, or resources when one choice is made rather than another (think about the
school dance planning, to select the great band, what was the opportunity cost?)
 Time can also lead to opportunity cost (chance to make $50 this morning before school but you
overslept, the opportunity cost is $50)

“Production Possibilities Curve”

 This model is used to show the concept of opportunity cost

 It is a diagram that shows the various combinations of goods and/or services an economy can
produce when all productive resources are fully employed
 (ALL THE POSSIBILITIES ACTIVITY)
 Point out that in this activity that the line is straight because of the limited possibilities
 (THREE BEARS, TWO GOODS, AND ONE CRAZY GIRL ACTIVITY)
SECTION 3 – BASIC ECONOMIC CONCEPTS

 (JOE BUYING COLAS AND HOT DOGS ACTIVITY)

 This activity focuses on budget constraint, satisfaction, and diminishing returns
 Making financial decisions should be based on this criteria, is it always followed?
 Before you can make those decisions you must understand the difference between a need and a
want
 A NEED is a basic requirement for survival
 A WANT is a means of expressing a need
 Food is a need, but a person might “want” pizza, or hamburger, or steak
 Depending on your budget, your choices might be limited

“Goods, Services, and Consumers”

 Some things, such as sunshine or air, are known as FREE PRODUCTS because they are so
plentiful
 No one could possibly own them, and no price can be attached to them
 Some are so important that life would be impossible w/o them
 Even so, because they are not scarce, they are not a major concern in the study of economics
 Instead, economics is concerned with ECONOMIC PRODUCTS (goods and services that are
useful, relatively scarce, and transferable to others)
 The are scarce in the sense that one cannot get enough to satisfy individual wants and needs
 Because of this, these products command a price (Bottled water, certain rocks)
 A GOOD is a tangible commodity like a book, car, or ipod
 A CONSUMER GOOD is intended for final use by individuals
 A CAPITAL GOOD is a manufactured good used to produce other goods and services
o Examples: robot welder used to make an automobile
o Oven used in a bakery
o Computer in a high school
 A DURABLE GOOD lasts for 3 or more years when used on a regular bases (can include capital
goods such as the robot or a consumer good such as the car)
 A NONDURABLE GOOD is an item that lasts for less than 3 years when used regularly (food,
writing paper, most clothing)
 The other type of economic product is a SERVICE (work that is performed for someone)
 Services include: haircuts, home repairs, concerts, doctors, lawyers, teachers
 The difference between a good and a service is that a service is something that cannot be
touched
 People who use goods and services to satisfy wants and needs are CONSUMERS
 As consumers, people indulge in CONSUMPTION (process of using up goods and services in
order to satisfy wants and needs)
“Value, Utility, and Wealth”

 VALUE refers to something that has a worth that can be expressed in dollars and cents
 Value is determined by the price someone would pay for the item
 Determining why some things are worth more than others is a problem economists deal w/ daily
 Why is water essential for life yet has little monetary value, and a diamond is not essential but
has much higher value
 This is due to scarcity
 WEALTH is the sum of economic products that are tangible, scarce, useful, and transferable
from one person to another
 Most goods are counted as wealth, but services are not
 A country’s total wealth is the stockpile of useful, scarce, transferable, and tangible things in
existence at a given time (natural resources, factories, stores, books, etc)
 The MARKET is a location or other mechanism that allows buyers and sellers to deal readily in
certain economic product
 The market can be anywhere from local to global
 The study of economics does more than explain how people deal with scarcity
 It provides insight as to how incomes are earned and spent, how jobs are created, and how the
economy works on a daily basis
 It also helps to understand FREE ENTERPRISE (consumers and privately owned businesses jointly
make the majority of the what, how, and for whom decision – instead of the government)
 The study of economics helps people become better decision makers