CHAPTER 1. What Is Economics? 1.1 The Economic Problem 1.2 Economic Theory 1.3 Opportunity Cost and Choice CONTEMPORARY ECONOMICS: LESSON 1.

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1 CHAPTER 1 What Is Economics? 1.1 The Economic Problem 1.2 Economic Theory 1.3 Opportunity Cost and Choice 1 CONTEMPORARY ECONOMICS: LESSON 1.1

2 Consider CHAPTER 1 What Is Economics? Why are characters in comic strips like Hagar the Horrible, Cathy, and Fox Trot missing a finger on each hand? Why are you reading this book right now rather than doing something else? Why is there no sense crying over spilt milk? In what way are people who pound on vending machines relying on a theory? 2 CONTEMPORARY ECONOMICS: LESSON 1.1

3 Objectives LESSON 1.1 The Economic Problem Recognize the economic problem, and explain why it makes choice necessary. Identify productive resources, and list examples. Define goods and services, list examples, and explain why they are scarce. 3 CONTEMPORARY ECONOMICS: LESSON 1.1

4 Key Terms LESSON 1.1 The Economic Problem scarcity productive resources economics human resources labor entrepreneur natural resources capital goods good service 4 CONTEMPORARY ECONOMICS: LESSON 1.1

5 Economic Choices The economic problem Scarcity is the condition facing all societies because there are not enough productive resources to satisfy people s wants. Productive resources are the inputs used to produce the goods and services that people want. Economics defined Economics examines how people use their scarce resources to satisfy their unlimited wants. 5 CONTEMPORARY ECONOMICS: LESSON 1.1

6 Productive Resources Human resources Natural resources Capital resources 6 CONTEMPORARY ECONOMICS: LESSON 1.1

7 Human Resources Human resources is the broad category of human efforts, both physical and mental, used to produce goods and services. Labor is the physical and mental effort used to produce goods and services. An entrepreneur tries to earn a profit by developing a new product or finding a better way to produce an existing one. 7 CONTEMPORARY ECONOMICS: LESSON 1.1

8 Natural Resources Natural resources are gifts of nature including land, forests, minerals, oil reserves, bodies of water, and animals. 8 CONTEMPORARY ECONOMICS: LESSON 1.1

9 Capital Resources Capital goods include all human creations used to produce goods and services. 9 CONTEMPORARY ECONOMICS: LESSON 1.1

10 Goods and Services Goods A good is tangible something you can see, feel, and touch. Services A service is intangible not physical yet uses scarce resources to satisfy human wants. 10 CONTEMPORARY ECONOMICS: LESSON 1.1

11 No Free Lunch All goods involve a cost to someone, and draw scarce resources away from the production on other goods. A good or service is scarce if the amount people desire exceeds the amount available at a zero price. 11 CONTEMPORARY ECONOMICS: LESSON 1.1

12 Objectives LESSON 1.2 Economic Theory Explain the goal of economic theory. Understand the role of marginal analysis in making economic choices. Explain how market participants interact. 12 CONTEMPORARY ECONOMICS: LESSON 1.2

13 Key Terms LESSON 1.2 Economic Theory economic theory marginal market economics national economics market 13 CONTEMPORARY ECONOMICS: LESSON 1.2

14 The Role of Theory An economic theory is a simplification of economic reality that is used to make predictions about the real world 14 CONTEMPORARY ECONOMICS: LESSON 1.2

15 Economic Theory Simplify the problem Simplifying assumptions Rational self-interest Everybody uses theories Economists tell stories Normative versus positive statements 15 CONTEMPORARY ECONOMICS: LESSON 1.2

16 Marginal Analysis Compare marginal cost with marginal benefit Choice requires time and information Market economics and national economics 16 CONTEMPORARY ECONOMICS: LESSON 1.2

17 Market Participants Four types of participants Households Firms Governments The rest of the world 17 CONTEMPORARY ECONOMICS: LESSON 1.2

18 Markets Markets are the means by which buyers and sellers carry out exchange. Product markets Resource markets Labor market 18 CONTEMPORARY ECONOMICS: LESSON 1.2

19 A Circular-Flow Model A circular-flow model describes the flow of resources, products, income, and revenue among economic decision makers. 19 CONTEMPORARY ECONOMICS: LESSON 1.2

20 Circular-Flow Model 20 CONTEMPORARY ECONOMICS: LESSON 1.2

21 Objectives LESSON 1.3 Opportunity Cost and Choice Define opportunity cost. Evaluate guidelines for making choices. Analyze the opportunity cost of attending college. 21 CONTEMPORARY ECONOMICS: LESSON 1.3

22 Key Terms LESSON 1.3 Opportunity Cost and Choice opportunity cost sunk cost 22 CONTEMPORARY ECONOMICS: LESSON 1.3

23 Opportunity Cost The opportunity cost of an item or activity is the value of the best alternative you must pass up. 23 CONTEMPORARY ECONOMICS: LESSON 1.3

24 Opportunity Cost Nothing better to do? Estimate opportunity cost Opportunity cost varies 24 CONTEMPORARY ECONOMICS: LESSON 1.3

25 Choose Among Alternatives Calculate opportunity cost Time the ultimate limitation Ignore sunk cost Sunk cost is a cost you have already incurred and cannot recover. 25 CONTEMPORARY ECONOMICS: LESSON 1.3

26 The Opportunity Cost of College Forgone earnings Direct costs of college Other college costs Other-things-constant assumption 26 CONTEMPORARY ECONOMICS: LESSON 1.3