Download Chapter 1 Basic Economics

Economics Notes
Chapter One
Scarcity – the fundamental problem facing all societies.
It is the condition that results from society not having enough
resources to produce all the things that people would like to have.
Economics – the study of how people try to satisfy what appears to be
unlimited wants and needs with limited/scarce resources
Need – basic things for survival
Wants – way of expressing a need
“There is no such thing as a free Lunch”
No matter what you think you may have gotten for free, it cost something
to someone.
Three main economic choices
1. What to produce
2. How to produce
3. For whom to produce
Factors of production – resources required to produce the thing we
would like to have
1. Land – gifts of nature – natural resources – not created by humans
2. Labor- elbow grease – people efforts, abilities and skills (everyone
except for entrepreneurs)
3. Capital – tools, equipment, machinery, and factories used to
produce goods and services
Entrepreneurs – responsible for much of the changes in the economy,
risk takers in search of new profits using existing resources. People who
start their own businesses
Production – can only take place once all three factors of production are
in place
Gross Domestic Product – GDP – dollar value of all goods, services and
structures produced within a countries’ borders
GNP – Gross National Product – everything that a country produces
within and outside of its own borders
Opportunity Cost – cost of the next best alternative use of money, time or
resources when one choice is made rather than another
Goods – an item that is economically useful or satisfies an economic want,
it is something that is tangible
Consumer good – used by an individual
Capital good – used to produce a consumer good
Durable good – anything that gets regular use and lasts more than
three years
Trade Offs – alternative choices made by consumers in the market place
Services – work that is performed for someone
Value – worth that can be expressed in dollars and cents
Wealth – accumulation of those products that are tangible, scarce, useful
and transferable from one person to another.
Liquid – can be turned into cash quickly
Standard of Living – quality of life based on the possession of the
necessities and luxuries that make life easier
Circular Flow of Economic Activity
Market – location or other mechanism that allows buyers and sellers to
exchange a certain economic product.
Product Markets – producers sell their goods and services to consumers
Factor Markets – where individuals earn their incomes, where
productive resources are bought and sold
Businesses - A commercial enterprise or establishment
Individual – people, consumers – spend their money in markets
Division of Labor – individual workers -> make on thing really well,
rather than many things just OK
Specialization – Ford’s assembly line, Idaho potatoes, Texas oil
Human capital – sum of skills, abilities, health and motivation
Invisible Hand – Adam Smith – every individual “intends only his own
gain, and he is in this…..led by an invisible hand.”
Competition in the market is another part of the invisible hand
The Wealth of Nations by Adam Smith – division of labor and
specialization will lead to a greater wealth of nations. A nation’s wealth
should be measured by labor-produced goods, not who owns them.
Free Enterprise Economy – consumers and privately owned businesses,
rather than the government, make the majority of the WHAT, HOW, and
WHOM decisions.
Chapter one vocabulary list:
1. Resources
2. Produce
3. Trade-off
4. Economics
5. TINSTAAFL
6. Gross Domestic Product
7. Decision-making
8. Factors
9. Produce
10. Production possibilities frontier
11. Capital good
12. Consumption
13. Need
14. Want
15. Service
16. Production possibilities frontier
17. Production
18. Factor market
19. Durable good
20. Free enterprise economy
21. Value
22. Economics
23. Capital
24. Scarcity
25. Opportunity cost
26.
27.
28.
29.
Wealth
Labor
Standard of living
Good