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Chapter 1
What Is Economics?
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Did You Know?
• We witness scarcity with each year’s “hot”
new toy. Inspired by hunter President
Teddy Roosevelt, Americans coveted the
teddy bear in 1906. Cabbage Patch dolls
were big during the 1980s, as were Tickle
Me Elmos in 1996. By 1999 Game Boy’s
Pokémon was the rage with a 10-cent
trading card. The most-prized first-edition
pocket monsters were in such short supply
that they commanded from $8 to $182.
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The Fundamental Economic Problem
• Scarcity is the condition where unlimited
human wants face limited resources. 
• Economics is the study of how people
satisfy wants with scarce resources. 
• Needs are required for survival; wants are
desired for satisfaction. 
• Someone has to pay for production costs,
so There Is No Such Thing As A Free
Lunch (TINSTAAFL).
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Discussion Question
Why do you think scarcity is an issue
with the rich as well as the poor?
It is a human trait that few people,
regardless of their economic status,
are satisfied with what they have.
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Three Basic Questions
• What must we produce? Society must
choose based on its need. 
• How should we
produce it? Society
must choose based
on its resources. 
Figure 1.1
• For whom should we
produce? Society
must choose based
on its population and
other available
markets.
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Discussion Question
How might the economic decisions of a
mountainous island society differ from
those of a mountainous landlocked
society?
An island society has water
resources to consider and likely a
more limited population.
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The Factors of Production
• Factors of production are resources
necessary to produce what people want or
need. 
• Land is the society’s limited natural
resources—landforms, minerals,
vegetation, animal life, and climate. 
• Capital is the means by which something
is produced such as money, tools,
equipment, machinery, and factories.
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The Factors of Production (cont.)
• Labor is the workers who apply their efforts,
abilities, and skills to production. 
• Entrepreneurs are risk-takers who combine
the land, labor, and capital into new
products. 
• Production is creating goods and
services—the result of land, capital, labor,
and entrepreneurs.
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The Factors of Production (cont.)
Figure 1.2
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The Scope of Economics
• Economics deals with the description of
economic activity—Gross Domestic
Product, unemployment rate, government
spending, tax rates, etc. 
• Analysis looks at the “why” and “how” of
economic activity—why prices go up and
down, for example, or how taxes affect
savings.
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The Scope of Economics (cont.)
• Explanation refers to how economists
communicate knowledge of the economy
and its activities to the society’s
population. 
• Prediction refers to how yesterday’s and
today’s economic activities advise us of
potential future activity.
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Section Assessment (cont.)
List the three basic economic
questions every society must answer.
Every society must ask what to
produce, how to produce, and
for whom to produce.
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Section Assessment (cont.)
Describe the factors of production.
The factors of production are land,
capital, labor, and entrepreneurs.
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Goods, Services, and Consumers
• Goods are items that are economically
useful or satisfy an economic want. They
are tangible and can be classified as
consumer/capital and durable/
nondurable. 
• Services are work performed for someone
and are intangible. 
• Consumers use goods and services to
satisfy wants and needs.
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Discussion Question
Why do you think the United States
has been called a “society of
consumption”?
Answers will vary. Students should
support their opinions with examples.
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Value, Utility, and Wealth
• Value is worth expressed in dollars and
cents. Scarcity by itself is not enough to
create value. For something to have value,
it must also have utility. 
• Utility is a good’s or service’s capacity to
provide satisfaction, which varies with the
needs and wants of each person. 
• Wealth is the accumulation of goods that
are tangible, scarce, useful, and
transferable to another person. Wealth
does not include services.
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The Circular Flow of Economic
Activity
• Markets are locations/mechanisms for
buyers and sellers to trade. They are
classified as local, regional, national,
global, and cyberspace. 
• A factor market is where people earn their
incomes. Factor markets center on the four
factors of production: land, capital, labor,
and entrepreneurs. 
• A product market is where people use their
income to buy from producers. Product
markets center on goods and services.
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The Circular Flow of Economic
Activity (cont.)
Figure 1.3
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Productivity and Economic Growth
• Productivity is a measure of the amount of
output produced by the amount of inputs
within a certain time. Productivity increases
with efficient use of scarce resources. 
• Specialization and division of labor may
improve productivity because they lead to
more proficiency (and greater economic
interdependence).
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Productivity and Economic Growth
• Investing in human capital improves
productivity because when people’s skills,
abilities, health, and motivation advance,
productivity increases. 
• Economic growth depends on high
productivity. Yet, an economy’s productivity
may be affected by its interdependence—
reliance on others and their reliance on us
to provide goods and services.
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Introduction
• The process of making a choice is not
always easy. 
• Because resources are scarce, consumers
need to make wise choices. 
• To become a good decision maker, you
need to know how to identify the problem
and then analyze your alternatives. 
• Finally, you have to make your choice in a
way that carefully considers the costs and
benefits of each possibility.
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Trade-Offs and Opportunity Cost
• Trade-offs are the alternative choices
people face in making an economic
decision. A decision-making grid lists the
advantages and disadvantages of each
choice. 
• Opportunity cost is the cost of the next best
alternative among a person’s choices. The
opportunity cost is the money, time, or
resources a person gives up, or sacrifices,
to make his final choice.
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Trade-Offs and Opportunity Cost (cont.)
Figure 1.5
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Production Possibilities
• The production possibilities frontier diagram
illustrates the concept of opportunity cost.
It shows the combinations of goods and/or
services that can be produced when all
productive resources are used. The line on
the graph represents the full potential—the
frontier—when the economy employs all of
these productive resources. 
• Identifying possible alternatives allows an
economy to examine how it can best put its
limited resources into production.
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Production Possibilities (cont.)
• Considering different ways to fully employ
its resources allows an economy to analyze
the combination of goods and services that
leads to maximum output. 
• An economy pays a high cost if any of it
resources are idle. It cannot produce on its
frontier and it will fail to reach its full
production potential. 
• Economic growth made possible by more
resources, a larger labor force, or
increased productivity causes a new
frontier for the economy.
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Production Possibilities (cont.)
Figure 1.6
The Production Possibilities Frontier
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Production Possibilities (cont.)
Figure 1.6
The Production Possibilities Frontier
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Production Possibilities (cont.)
Figure 1.6
The Production Possibilities Frontier
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Section Assessment (cont.)
Describe the relationship between
trade-offs and opportunity costs.
All economic decisions involve tradeoffs. The opportunity cost of a choice
is the cost of the next best use of
money, time, or resources.
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Section 1: Scarcity and the Science
of Economics
• The basic economic problem of scarcity is due to
the combination of people’s seemingly unlimited
wants and relatively scarce resources. 
• In a world of scarce resources, There Is No Such
Thing As A Free Lunch (TINSTAAFL). 
• Because of scarcity, society has to decide WHAT,
HOW, and FOR WHOM to produce. 
• Land, capital, labor, and entrepreneurs are the
four factors of production required to produce
the things that people use.
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Section 1: Scarcity and the Science
of Economics (cont.)
• Entrepreneurs are risk-taking individuals who go
into business in order to make a profit; they
organize the other factors of production. 
• The scope of economics deals with description,
analysis, explanation, and prediction.
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Section 2: Basic Economic Concepts
• Consumers use goods and services to satisfy
their wants and needs. 
• Something has value when it has utility and is
relatively scarce. 
• Wealth consists of products that are scarce,
useful, and transferable to others, but wealth
does not include services, which are intangible.

• Markets link individuals and businesses in the
circular flow of economic activity; the factors of
production are traded in factor markets; goods
and services are traded in the product markets.
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Section 2: Basic Economic Concepts
(cont.)
• Productivity and investments in human capital
help economic growth; investments in human
capital are among the most profitable of all
investments. 
• Increases in specialization and division of labor
cause more economic interdependence.
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Section 3: Economic Choices and
Decision Making
• The opportunity cost of doing something is the
next best alternative, or trade-off, that you give
up. 
• A decision-making grid can be used to help
evaluate alternatives. 
• A production possibilities frontier shows the
various possible combinations of output that can
be produced when all resources are fully
employed; production inside the frontier occurs
when some resources are idle or are not being
used to their maximum capability.
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Section 3: Economic Choices and
Decision Making (cont.)
• When economic growth takes place, the
production possibilities frontier shifts outward,
showing that more products are produced than
before. 
• The economic way of thinking involves
simplification with model building, cost-benefit
analysis to evaluate alternatives, and incremental
decision making. 
• The study of economics will make you a better
decision maker and will help you to understand
the world around you; however, the study of
economics will not tell you which decisions to
make.
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