Chapter 1: What is Economics?
Section 1
Key Terms
• 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
• scarcity: the principle that limited amounts
of goods and services are available to
meet unlimited wants
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Key Terms, cont.
• 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 particular prices
• 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
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Key Terms, cont.
• 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
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• How does scarcity force people to make
economic choices?
– Scarcity forces all of us to make choices by
making us decide which options are most
important to us.
– The principle of scarcity states that there are
limited goods and services for unlimited
wants. Thus, people need to make choices in
order to satisfy the wants that are most
important to them.
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Scarcity and Choice
• People satisfy their needs and wants with
goods and services.
– People’s needs and wants are unlimited, yet
goods and services are limited.
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Scarcity and Choice, cont.
• Economics begins with the idea that people
cannot have everything they need and want.
– The fact that limited amounts of goods and
services are available to meet unlimited wants
is called scarcity.
• Scarcity forces people to make choices but it is
not the same as a shortage.
• Shortages are temporary while scarcity always
exists.
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Slide 7
Entrepreneurs
• Entrepreneurs play a key role in turning scarce
resources into goods and services.
• Entrepreneurs are
willing to take risks
in order to make a
profit. They:
–
–
–
–
Develop original ideas
Start businesses
Create new industries
Fuel economic growth
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Entrepreneurs, cont
• An entrepreneur’s first task is to assemble the
factors of production: land, labor, and capital.
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Factors of Production: Land
• Land refers to all natural
resources used to
produce goods and
services.
• These resources include:
–
–
–
–
–
–
Fertile land for farming
Oil
Coal
Iron
Water
Forests
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Slide 10
Factors of Production: Labor
• Labor is the effort people devote to tasks
for which they are paid.
• Labor includes:
– The medical care provided by a doctor
– The classroom instruction provided by a
teacher
– The tightening of a bolt by an assembly-line
worker
– The creation of a painting by an artist
– The repair of a television by a technician
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Factors of Production: Capital
• Capital refers to any human-made resource that is
used to produce other goods and services.
• An economy requires both physical and human
capital to produce goods and services.
– Physical capital includes:
• Buildings
• Equipment
• Tools
– Human capital includes:
• A college education
• Training
• Job experience
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Benefits of Capital
• Capital is a key factor of production
because people and companies can use it
to save a great deal of time and money.
• The benefits of capital include:
– Increased efficiency
– Increased knowledge
– Better time management
– Increased productivity
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Slide 13
Scarce Resources
• Checkpoint: Why are goods and services
scarce?
– All goods and services are scarce because
the resources used to produce them are
scarce.
– There are only so many natural resources
available to produce particular goods.
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Slide 14
Scarce Resources, cont.
• The amount of labor available to produce
goods and services can be limited.
• Physical capital is also limited for many
industries.
• Each resource may also have alternative
uses. Individuals, businesses, and
governments have to choose which
alternative they want most.
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Chapter 1: What is Economics?
Section 2
Key Terms
• 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
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Key Terms, cont.
• 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 extra cost of adding a
unit
• marginal benefit: the extra benefit of
adding a unit
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• How does opportunity cost affect decision
making?
– Every time we choose to do something, like
sleep in late, we are given up the opportunity
to do something less, like study an extra hour
for a big test.
– When we make decisions about how to spend
our scarce resources, like money or time, we
are giving up the chance to spend that money
or time on something else.
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Trade-offs
• All individuals, businesses, and large
groups of people make decisions that
involve trade-offs.
• Trade-offs involve things that can be easily
measured such as money, property, and
time or things that cannot be easily
measured, like enjoyment or job
satisfaction.
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Slide 21
Businesses and Governments
• Businesses make trade-offs
when they decide how to use
their factors of production.
– A farmer who uses his or her
land to plant broccoli, for
example, cannot use that
same land to plant squash.
• Governments also make
trade-offs when they decide to
spend their money on military
needs instead of domestic
ones, and vice versa.
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Slide 22
Opportunity Costs
• In most trade-offs, one of the rejected
alternatives is more desirable than the
rest.
• The most desirable alternative somebody
gives up as a result of a decision is the
opportunity cost.
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Slide 23
Decision-Making Grids
• Checkpoint: Why does every choice involve an
opportunity cost?
– We always face an opportunity cost. When we
select one alternative, we must sacrifice another.
• Using a decision-making grid can help you
decide if you
are willing to
accept the
opportunity
cost of a choice
you are about
to make.
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Slide 24
Thinking on the Margin
• When you decide how much more or less
to do, you are thinking on the margin.
– Deciding by thinking on the margin involves
comparing the opportunity costs and benefits.
– This decision-making process is called a
cost/benefit analysis.
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Slide 25
Marginal Costs and Benefits
• To make good decisions on the margin, you
must weigh marginal costs against marginal
benefits.
– The marginal cost is the extra cost of adding one unit
such as sleeping an extra hour or building one extra
house.
– The marginal benefit is the extra benefit of adding the
same unit.
• Once the marginal costs outweigh the marginal
benefit, no more units can be added.
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Cost/Benefit Analysis
• The cost/benefit analysis below shows the opportunity
costs and benefits of extra hours of sleep against extra
house of study time.
– What is the opportunity cost of one extra hour of sleep? What is
the benefit?
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Chapter 1: What is Economics?
Section 3
Key Terms
• production possibilities curve: a graph
that shows alternative ways to use an
economy’s 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
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Slide 30
Key Terms, cont.
• 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 and more resources are
needed to increase production of the
second good or service
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• How does a nation decide what and how
to produce?
– To decide what and how to produce,
economists use a tool known as a production
possibilities curve.
• This curve helps a nation’s economists determine
the alternative ways of using that nation’s
resources.
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Slide 32
Production Possibilities
• Economists often use graphs to analyze
the choices and trade-offs that people
make.
• A production possibilities curve is a graph
that shows alternative ways to use an
economy’s productive resources.
– To draw a production possibilities curve, an
economist begins by deciding which goods or
services to examine.
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Production Possibilities Curve
• The table below shows six different combinations
of watermelons and shoes that Capeland could
produce using all of its factor resources.
– How many
watermelons
can Capeland
produce if they
are making 9
million pairs
of shoes?
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Slide 34
Production Possibilities Frontier
• The line on a production possibilities curve
that shows the maximum possible output
an economy can produce is called the
production possibilities frontier.
– Each point on the production possibilities
frontier reflects a trade-off. These trade-offs
are necessary because factors of production
are scarce.
– Using land, labor, and capital to make one
product means that fewer resources are left to
make something else.
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Efficiency
• A production possibilities frontier
represents an economy working at its
most efficient level.
• Sometimes an economy works inefficiently
and it uses fewer resources than it is
capable of using. This is known as
underutilization.
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Growth
• A production possibilities curve can also
show growth.
– When an economy grows, the curve shifts to
the right.
– However, when an economy’s production
capacity decreases, the economy slows and
the curve shifts to the left.
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Slide 37
Cost
• Production possibilities curves can be
used to determine the opportunity costs
involved in make an economic decision.
– Cost increases as production shifts from
making one item to another.
– The law of increasing costs helps explain the
production possibilities curve.
• As we move along the curve, we trade off more
and more for less and less output.
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Law of Increasing Costs
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Technology and Education
• Technology can
increase a nation’s
efficiency.
• Many governments
spend money
investing in new
technology,
education, and
training for the
workforce.
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Chapter 1, Section 1
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