Download Chapter 1 Lecture notes

Chapter 1 Lecture notes.
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.
I. The Fundamental Economic Problem
A. Scarcity is the condition where unlimited human wants face limited resources.
B. Economics is the study of how people satisfy wants with scarce resources.
C. Needs are required for survival; wants are desired for satisfaction.
D. Someone has to pay for production costs, so There Is No Such Thing As A
Free Lunch (TINSTAAFL).
• 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.)
II. Three Basic Questions
A. What must we produce? Society must choose based on its needs.
B. How should we produce it? Society must choose based on its resources.
C. For whom should we produce? Society must choose based on its population
and other available markets.
• Discussion Question
How might the economic decisions of a mountainous island society differ from
those of a mountainous landlocked society?
III. The Factors of Production
A. Factors of production are resources necessary to produce what people want
or need.
B. Land is the society’s limited natural resources—landforms, minerals,
vegetation, animal life, and climate.
C. Capital is the means by which something is produced such as money, tools,
equipment, machinery, and factories.
D. Labor is the workers who apply their efforts, abilities, and skills to production.
E. Entrepreneurs are risk-takers who combine the land, labor, and capital into
new products.
F. Production is creating goods and services—the result of land, capital, labor,
and entrepreneurs.
• Discussion Question
Why are entrepreneurs an economy’s driving force? (Their abilities to start new
businesses and introduce new products may re-energize a sluggish economy or
strengthen a successful economy.)
IV. The Scope of Economics
A. Economics deals with the description of economic activity—Gross Domestic
Product, unemployment rate, government spending, tax rates, etc.
B. Analysis looks at the “why” and “how” of economic activity—why prices go up
and down, for example, or how taxes affect savings.
C. Explanation refers to how economists communicate knowledge of the
economy and its activities to the society’s population.
D. Prediction refers to how yesterday’s and today’s economic activities advise us
of potential future activity.
• Discussion Question
What makes economics a social science?
DID YOU KNOW?
The 20 percent of the world’s people who live in the wealthiest nations consume
86 percent of the world’s goods and services. The 20 percent who live in the
poorest nations consume just 1.3 percent.
I. Goods, Services, and Consumers
A. 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.
B. Services are work performed for someone and are intangible.
C. Consumers use goods and services to satisfy wants and needs.
• Discussion Question
Why do you think the United States has been called a “society of consumption”?
II. Value, Utility, and Wealth
A. 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.
B. Utility is a good’s or service’s capacity to provide satisfaction, which varies
with the needs and wants of each person.
C. Wealth is the accumulation of goods that are tangible, scarce, useful, and
transferable to another person. Wealth does not include services.
• Discussion Question
Why might a wealthy society not have as much economic staying power as
another wealthy society with a highly skilled labor force?
III. The Circular Flow of Economic Activity
A. Markets are locations/mechanisms for buyers and sellers to trade. They are
classified as local, regional, national, global, and cyberspace.
B. A factor market is where people earn their incomes. Factor markets center on
the four factors of production: land, capital, labor, and entrepreneurs.
C. A product market is where people use their income to buy from producers.
Product markets center on goods and services.
• Discussion Question
How are landlords a part of a factor market? (They provide land or property [a
factor of production] to consumers in exchange for rent money, which is the
landlords’ source of income.)
IV. Productivity and Economic Growth
A. 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.
B. Specialization and division of labor may improve productivity because they
lead to more proficiency (and greater economic interdependence).
C. Investing in human capital improves productivity because when people’s skills,
abilities, health, and motivation advance, productivity increases.
D. 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.
• Discussion Question
How may economic interdependence be a strength of an economy? A
weakness?
III. The Circular Flow of Economic Activity
A. Markets are locations/mechanisms for buyers and sellers to trade. They are
classified as local, regional, national, global, and cyberspace.
B. A factor market is where people earn their incomes. Factor markets center on
the four factors of production: land, capital, labor, and entrepreneurs.
C. A product market is where people use their income to buy from producers.
Product markets center on goods and services.
• Discussion Question
How are landlords a part of a factor market? (They provide land or property [a
factor of production] to consumers in exchange for rent money, which is the
landlords’ source of income.)
IV. Productivity and Economic Growth
A. 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.
B. Specialization and division of labor may improve productivity because they
lead to more proficiency (and greater economic interdependence).
C. Investing in human capital improves productivity because when people’s skills,
abilities, health, and motivation advance, productivity increases.
D. 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.
• Discussion Question
How may economic interdependence be a strength of an economy? A
weakness?
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DDID YOU KNOW?
Economists reward their greatest for breakthrough discoveries. The 1999 Nobel
Prize for Economics went to Robert A. Mundell, a Canadian economist at New
York’s Columbia University, for his career-long work in international currency
exchange rates, vital in today’s global marketplace. The prize is worth a million
dollars in U.S. currency.
I. Trade-Offs and Opportunity Cost
A. 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.
B. 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.
• Discussion Question
Why do you think economists believe opportunity cost is an important factor to
consider in addition to monetary cost? (The money, time, or resources given up
when one choice is made rather than another are just as important as the
monetary cost of the choice that was made.)
II. Production Possibilities
A. 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.
B. Identifying possible alternatives allows an economy to examine how it can
best put its limited resources into production.
C. Considering different ways to fully employ its resources allows an economy to
analyze the combination of goods and services that leads to maximum output.
D. An economy pays a high cost if any of its resources are idle. It cannot produce
on its frontier and it will fail to reach its full production potential.
E. Economic growth made possible by more resources,
• Discussion Question
How might economic growth stimulate greater production possibilities? (Answers
will vary. Students may indicate that with a larger labor force, more goods and
services are created;
newly discovered natural resources open up new products and services.)
III. Thinking Like an Economist
A. Building simple models helps economists analyze or describe actual economic
situations.
B. Cost-benefit analysis helps economists evaluate alternatives by looking at
each choice’s cost and benefit.
C. Taking small, incremental steps in implementing an economic decision helps
economists test whether the estimated cost of the decision was correct.
• Discussion Question
What behaviors and personality traits might you observe in the most successful
economists?
IV. The Road Ahead
A. Studying economics will help us know how the economy works on a daily
basis.
B. It helps us understand a free enterprise economy, where people and privately
owned businesses rather than the government make the majority of the
economic decisions.
C. The study of economics helps us to become better decision makers.
D. The world of economics is complex and dynamic, as is our society.
• Discussion Question
What single economic goal have you set for yourself as a result of your study of
economics?