1. Chapter 1: What is Economics?

2.  Why is economics important? Why does it
matter?
 It matters because every decision you make has
some impact and most decisions have an
economic impact.
 For example, assume you have been chosen to
head a committee to organize the prom. What
are some decisions you would have to make?
 Location, music – live or DJ, refreshments, etc.

3.  As we go through this section, complete a
bubble graphic that lists and describes the 3
economic choices every society must make.
 Also, answer the following questions:
 What is the difference between a need and a
want?
 What would happen if one of the factors of
production was missing?
 Why is economics considered to be a social
science?

4.  What is the fundamental economic problem
facing all societies?
 Scarcity – The condition that results from
society not having enough resources to
produce all the things people would like to
have.
 Resources – Things used to produce goods or
services

5.  Economics – the study of how people try to
satisfy seemingly unlimited and competing
wants through the careful use of relatively
scarce resources.
 We often hear economists discuss wants and
needs.
 * Need – basic requirement for survival
 * Want – something we would like to have but
do not need to survive

6.  Due to resources being limited, EVERYTHING
has a cost (be it monetary or not)
 Economists use the term TINSTAAFL to
describe this idea.
 TINSTAAFL – There Is No Such Thing As A
Free Lunch
 Scarcity makes us answer 3 basic questions:
What, How, and For Whom to produce.

7.  What to Produce?
 A society must decide the most important
things to produce. There is no right or wrong
answer, simply a choice that must be made.
 Military vs. Housing
 If Housing is the choice, should it be low-
income, mid-income, or high-income housing,
etc.

8.  How to Produce?
 The production method chosen leads to other
economic issues.
 Automated Production vs. Manual Production
 Automated is cheaper, which lowers costs and
makes items less expensive.
 Manual creates jobs, which gives people more
money to spend.

9.  For Whom to Produce?
 After the What and How questions are
answered, we must answer the above question.
 If Housing was the What and the How was
very expensive, the answer to For Whom the
houses were built would be the high-income
rich as opposed to the mid or low-income.

10.  The 4 Factors of Production – resources
required to produce the things we want: Land,
Capital, Labor, and Entrepreneurs.
 Land – In economics, refers to natural
resources not created by people.
 Land is thought of by economists as fixed, or in
limited supply, due to there being a finite
amount of natural resources at any time.

11.  Capital (aka Capital Goods) – tools, equipment,
and factories used in the production of goods
and services.
 Capital is unique because it is the result of
production.
 That means that what is now capital was once
the product of capital.

12.  Labor – people together with all of their
abilities, efforts, and skills.
 Birthrates, immigration, famine, war, and
disease have an impact on both the quality and
the quantity of labor.
 The only group of people left out of this
category is entrepreneurs because of their
distinct role in the economy.

13.  Entrepreneurs – risk-taking individuals in
search of profits.
 They are not included in labor because they are
the people who are responsible for change in
the economy with their innovations.
 They bring new products to market and start
new businesses with existing resources. This
makes them a driving force in the economy.

14.  *If one of the factors of production were
missing, production would not take place.
 *Economics is also a social science because it
deals with the behavior of people as they deal
with scarcity or scarce resources.
 The 4 elements of Economics: Description,
Analysis, Explanation, and Prediction.

15.  One part of Economics is Description –
describing economic activity.
 Gross Domestic Product (GDP) – dollar value
of all final goods, services, and structures
produced within a country’s borders in a 12-
month period.
 It is the most comprehensive measure of a
nation’s output and economic health.

16.  Economics also describes jobs, pricing, trade,
taxes, and government spending.
 Analysis – Economics analyzes the economic
activity which it describes. EX. Why do some
people make more money than others?
 Analysis helps us learn why things work and
how things happen, which helps us solve
problems.

17.  Explanation – the communication to others of
the knowledge received through analyzing a
problem.
 If there is a common understanding of how the
economy works, then we will be more
prepared for future problems and they will be
more-readily fixed.

18.  Prediction – predicting what may happen in
the future, including the most likely effects of
different actions.
 Economics is the study of both what IS
happening and what TENDS TO happen.
 It is important to realize that good economic
choices are the responsibility of all citizens in a
free and democratic society.

19.  What is the difference between a need and a
want?
 A need is necessary for survival, a want is not.
 What would happen if one of the factors of
production was missing?
 Production would not take place.
 Why is economics considered to be a social
science?
 It deals with the behavior of people.

20.  Go to page 28 and answer numbers 18 – 20.
 This is an open-book/open-notebook quiz
worth 100 points.

21.  As we go through the section, in a bubble
graphic, write and define the factors that lead
to economic growth and define economic
growth.
 Also, answer the following questions:
 How are goods, services, and consumers
related?
 How are value and utility related?

22.  Economic Products – goods or services that are
useful, relatively scarce, and transferrable to
others.
 Economic products help satisfy our wants and
our needs.
 Since they are both useful and scarce, they
command a price.
 There are two types of economic products:
Goods and Services

23.  Goods – useful, tangible items that satisfy a
want. Examples include books, cars, Blu Ray
players, etc.
 Capital Goods (Capital) - Goods that are used
to produce other goods.
 Consumer Goods - Goods that are intended for
final use by individuals.
 Durable Goods – Goods that last 3 or more
years when used regularly.

24.  Nondurable Goods – Goods that last less than 3
years when used regularly.
 Examples of Durable Goods include: cars,
factory machines, etc.
 Examples of Nondurable Goods include: food,
paper, clothing, etc.
 Is a computer a durable or nondurable good?
 Is a television a durable or nondurable good?

25.  Services – work that is performed for someone.
 Examples include haircuts, home repairs,
police, lawyers, doctors, teachers, etc.
 Goods vs. Services – Goods are tangible,
Services are not.
 * Consumers – people who use goods and
services to satisfy wants and needs.
 Value – in Economics is monetary worth of a
good or service as determined by the market

26.  Paradox of Value – phrase coined by Adam
Smith, a Scottish social philosopher, in 1776 to
describe the apparent contradiction between
the very low monetary value of some
necessities and the very high monetary value of
some non-necessities.
 Scarcity is necessary for something to have
value, but so is utility.
 Utility – ability or capacity of a good or service
to be useful and give satisfaction to someone.

27.  Utility is not fixed or even measurable, like
height or weight. In fact, it varies from person
to person.
 Examples: Computers, Rock Concerts, Blu
Ray players, etc.
 The emphasis on monetary value is important
to Economists. The value of something in
terms of dollars and cents is a concept that is
easily understood.
 * For something to have value, it must have
utility.

28.  Wealth – the accumulation of products that are
tangible, scarce, useful, and transferable from
one person to another.
 A nation’s wealth is comprised of all tangible
items that can be exchanged.
 Examples: land, factories, stores, houses,
theaters, clothing, books, even roads, video
games, sports equipment (basketballs,
footballs, etc.)
 Services are not included because they are
intangible.

29.  The wealth an economy generates is possible
due to the circular flow of economic activity.
 Factor markets – where the factors of
production are bought and sold.
 You participate in the factor market when you
work and sell your labor to an employer.
 Product markets – where producers sell their
goods and services.
 You participate in the product market when
you buy goods or services.

30.  The Circular Flow of Economic Activity:
http://glencoe.com/sites/common_assets/social
studies/in_motion_08/epp/EPP_p15.swf

31.  Economic growth occurs when a nation’s total
output of goods and services increases over
time.
 * Productivity is the most important factor
contributing to economic growth.
 Productivity – a measure of the amount of
goods and services produced with a given
amount of resources in a specific period of
time.

32.  * A major contribution to productivity comes
from investments in human capital.
 Human Capital – the sum of people’s skills,
abilities, health, knowledge, and motivation.
 Governments invest in human capital by
providing public education and, now, health
care.
 Businesses do so by providing training
programs to their employees.

33.  * Division of Labor – a way of organizing work
so that each individual worker completes a
separate part of the work.
 * Specialization – takes place when factors of
production perform only tasks they can do
better or more efficiently than others.
 The division of labor makes specialization
possible.

34.  Henry Ford’s use of the assembly line is a great
example of the advantages of division of labor
and specialization.
 By using the assembly line, he cut the assembly
time of a car from a day and a half to just over
90 minutes (an hour and a half).
 This reduced the price of a new car by more
than 50%.

35.  * Economic Interdependence means that we
rely on others and others rely on us to provide
most of the goods and services we consume.
 The Circular Flow Diagram of Economic
Activity that we looked at earlier online shows
the high degree of economic interdependence
in our economy.
 The gains in productivity and income that
come from specialization almost always offset
the costs associated with losing self-sufficiency.

36.  How are goods, services, and consumers
related?
 Consumers use goods and services to satisfy
their wants and needs.
 How are value and utility related?
 For something to have value, it must have
utility.

37.  Go to page 28 and answer numbers 21 – 24.
 This is an open-book/open-notebook quiz
worth 100 points.

38.  As we go through this section, answer the
following questions:
 How are trade-offs and opportunity cost
related?
 How does cost-benefit analysis help make
economic decisions?

39.  Trade-offs – alternative choices to the ones we
make
 Cost means more than the price tag on a good
or service.
 Opportunity Cost – the cost of the next-best
alternative
 * Trade-offs are all other alternatives while
opportunity cost is the next-best alternative.

40.  The Production Possibilities Frontier – a
diagram representing various combinations of
goods and services an economy can produce
when all its resources are in use.
 Economists are concerned with strategies that
will help people make the best choices.
 Two primary strategies used are building
models and preparing a cost-benefit analysis.

41.  Economic Model – a simplified equation,
graph, or figure showing how something
works.
 “The Circular Flow of Economic Activity” chart
that we looked at in the last section is an
example of an economic model.
 It is important to note that models can be
revised to make them better.

42.  Most economic decisions can be evaluated with
cost-benefit analysis.
 Cost-Benefit Analysis – a way of comparing the
costs of an action to the benefits received.
 For example, suppose that you like choices A
and B equally; if choice B costs less and gives
you equal satisfaction, then B is the better
choice because you get more satisfaction per
dollar spent.

43.  * Cost-benefit analysis reveals the choice with
the lowest cost and the highest benefits.
 Economics is also the study of how things are
made, bought, sold, and used.
 This helps to understand the workings of a free
enterprise economy (one in which consumers
and privately owned businesses, rather than
the government, make the majority of the
What, How, and For Whom decisions).

44.  Topics (like economic incentives, laws of
supply and demand, price system, economic
institutions, poverty rights, unemployment, the
business cycle, inflation, economic growth, and
the roles of business, labor, and government in
the U.S. economy) contribute to our standard of
living.
 Standard of Living – the quality of life based on
the ownership of the necessities and luxuries
that make life easier.

45.  How are trade-offs and opportunity cost
related?
 Trade-offs are all other alternatives while
opportunity cost is the next-best alternative.
 How does cost-benefit analysis help make
economic decisions?
 Cost-benefit analysis reveals the choice with
the lowest cost and the highest benefits.

46.  Go to page 28 and answer numbers 25 – 28.
 This is an open-book/open-notebook quiz
worth 100 points.