Chapter 1 What Economics is About 1 Scarcity, Choice & Opportunity Cost 2 The Economic Way of Thinking 3 Economic Language
What Economics Is About 1 Scarcity, Choice, and Opportunity Costs
want A thing that we desire to have need Something like air, food or shelter that is necessary for survival
resource Anything that is used to produce goods or services. Resources are used to fill our wants and needs
Our wants are unlimited, but our resources are limited.
scarcity The condition in which our wants are greater than the resources available to satisfy those wants.
Scarcity exists; therefore we must make choices.
Every time we make a choice, we incur an opportunity cost.
opportunity cost The most highly valued opportunity or alternative forfeited when a choice is made.
Because of scarcity, we must have rationing devices.
rationing device A means for deciding who gets what portion of the available resources and goods.
Examples of Rationing Devices Price First come, first served One per customer Women and children first Survival of the fittest To the victor go the spoils Lottery Competition
economics The science that studies the choices of people trying to satisfy their wants in a world of scarcity.
What Economics Is About 2 The Economic Way of Thinking
Thinking in Terms of Costs & Benefits Economists do not think so much in terms of good and bad decisions, right and wrong. Every choice has costs and benefits. A person will only make choices when benefits outweigh the costs.
trade-off A situation in which more of one thing necessarily means less of something else.
Thinking in Terms of Trade-offs
Thinking in Terms of What Would Have Been Economists consider alternatives to choices made. New Interstate Highway v.?
Thinking in Terms of Unintended Effects
Unintended Effects A raise in shoe prices. A tariff imposed by Japan on imported computers from the U.S.
Thinking in Terms of a Global Economy Because of the global nature of economies, that which affects one economy tends to affect all other economies that interact with it.
global economy An economy in which economic actions taken anywhere in the world may affect an individual s standard of living.
microeconomics The branch of economics that deals with human behavior and choices as they relate to relatively small units an individual, a business firm, or a single market.
macroeconomics The branch of economics that deals with human behavior and choices as they relate to the entire economy.
theory An explanation of how something works, designed to answer a question for which there is no obvious answer.
Economic theories are built to answer questions such as What causes inflation? What causes unemployment to rise or fall? What causes prices of goods and services to rise, fall or remain stable?
We do not evaluate theories on how reasonable they appear, but on how well they predict.
want A thing that we desire to have need Something like air, food or shelter that is necessary for survival
resource Anything that is used to produce goods or services. In economics, resources are also called factors of production.
land All the natural resources found in nature. Water Minerals Animals Plants Forests
labor The physical and mental talents that people contribute to the production of goods and services.
capital Produced goods that can be used as resources for further production. Such things as factories, machines and farm equipment.
entrepreneurship The special talent that some people have for searching out and taking advantage of new business opportunities and for developing new products and new ways of doing things.
land labor capital The entrepreneur decides how to put together land, labor and capital to produce goods and services.
rent The payment to the resource land
wages The payment to the resource labor.
interest The payment to the resource capital.
profit The payment to the resource entrepreneurship.
The 3 Questions Every Society Must Answer: What goods will be produced? How will the goods be produced? For whom will the goods be produced?
economic system The way in which a society decides what goods to produce, how to produce them, and for whom goods will be produced.
free enterprise An economic system in which individuals (not government) own most, if not all, the resources and control their use.
socialism An economic system in which government controls and may own many of the resources.
economic plan A government program specifying economic activities, such as what goods are to be produced and what prices will be charged.
Major Differences Between Free Enterprise & Socialism Resources Government s Role in the Economy Economic Plans Income Distribution Controlling Prices
Resources Free Enterprise Resources are owned and controlled by private individuals
Resources Socialism The government controls the resources and may own many of the resources.
Government Role in Economy Free Enterprise Government has a small role to play. It does not make decisions on the three basic economic questions.
Government Role in Economy Socialism The government exercises a great deal of control in the economy. It answers the three basic questions.
The government does not plan out the direction economic activities are to take. Economic Plans Free Enterprise
Government decision makes write out a long term and short term plan with all details of how production will take place. Economic Plans Socialism
income distribution The way all the income earned in a country is divided among different groups of income earners.
Income Distribution Free Enterprise Income distribution is unequal, but there is income mobility. Those in lowest income level can move up to higher levels.
Government uses its powers to redistribute income, usually directing it away from the highest earners. Income Distribution Socialism
Prices are allowed to fluctuate. The government does not attempt to control prices. Controlling Prices Free Enterprise
Controlling Prices Socialism The government sets prices for products and labor.
mixed economy An economy that has features of both free enterprise and socialism.
Most economies are not purely socialistic or capitalistic, but rather mixed economies falling somewhere in a spectrum between the two.