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Welcome to Economics!
Standard 1: Students understand common economic
terms, concepts, and economic reasoning and make
connections to their daily lives.
Scarcity and the
Science of Economics
Objective: Examine the causal relationship between scarcity
and the need for choices.
Scarcity: Needs vs. Wants
Economics is the study of how people try
to satisfy seemingly unlimited and
competing wants through the careful use
of relatively scarce resources.
Scarcity is the condition that results from
society not having enough resources to
produce all the things people would like to
A need is a basic requirement for
survival, such as food, clothing and
A want is simply something we would like
to have but is not necessary for survival.
“The gap in our economy is between
what we have and what we think we
ought to have - and that is a moral
problem, not an economic one.” Paul
Economic YAHOO
You always have other options!
Unlimited Wants + Limited
Resources = Scarcity
Because there is scarcity, we
must make choices.
These choices drive economic
HOW to
The Factors of Production
• Includes “gifts of nature” not
created by human effort.
• Since natural resources are
finite, land is said to be fixed
or in limited supply.
• Includes the tools,
equipment, and factories
used in production.
• Capital drives production
and innovation.
• Includes individuals who
start a new business or bring
a product to market.
• Entrepreneurs do something
new with existing resources;
they take risks in search of
profits and drive economic
• Includes people with all their
efforts, abilities and skills.
• Factors such as birthrates,
immigration, famine, war,
and disease have had a
dramatic impact on the
quantity and quality of labor.
The Scope of Economics
Gross Domestic Product (GDP) is the dollar value of
all final goods, services, and structures produced
within a country’s borders within a 12-month period.
Like other sciences, economics uses an inquiry
process that is similar to the scientific method.
Economists use their skills to describe economic
activities, analyze trends, communicate their ideas
and make predictions about what will happen in the
The Bureau of Economic Analysis provides data for
the GDP. The BEA is part of the US Department of
How does the GDP of the United States compare to
other countries around the world?
“Economists are pessimists. They have
predicted eight of the last three depressions.”
Barry Asmus
Economic Choices and
Decision Making
Objective: Explain opportunity cost, marginal benefit and
marginal cost.
Basic Economic Concepts
Goods: Useful, tangible items. Capital goods are used to produce other goods and services.
Consumer goods are intended for final use by individuals. Durable goods last more than three
years; nondurable goods last less than three years.
Services: Work performed for someone.
Consumers: People who used goods and services to satisfy their wants and needs.
Value: A worth that can be expressed in dollars and cents. The paradox of value is that sometimes
nonessential items have high value while essential items have low value. For something to have
monetary value, it must be scarce and have utility.
Utility: The capacity to be useful and provide satisfaction.
Wealth: The accumulation of products that are tangible, scarce, useful and transferable from one
person to another.
Factor Market: Mechanism by which the factors of production are bought and sold. Examples of
factor markets include the labor market, the real estate market, and the banking market.
Product Markets: Mechanism by which producers sell their goods and services.
Productivity and Economic Growth
Economic growth occurs when a nations total
output of goods and services increases over time.
Productivity measures the amount of output
produced with a given amount of productive factors—
productivity goes up when more can be produced
with the same amount of resources.
Everyone in a society benefits when productivity
increases and scarce resources are used more
One way to boost productivity is to invest in human
capital—the sum of people’s skills, abilities, health,
knowledge and motivation.
Both governments and businesses can invest in
human capital and improve economic growth.
Division of labor and specialization can also boost
productivity. For example, it is sometimes more
efficient to divide work into a number of separate
tasks to be performed by different workers. This
division of labor leads to specialization—assigning
specific tasks to the workers, factories, regions or
nations that can perform them most efficiently.
In the United States, there is a high degree of
economic interdependence. We rely on others—
and others rely on us—to provide goods and services
in a global market.
Efficiency is doing
things right;
effectiveness is doing
the right thing.
Trade-Offs and Opportunity Cost
Every decision has its trade-offs, or
alternative choices. Decisions are not
usually based entirely on one factor.
Opportunity cost is the cost of the next
best alternative use of money, time, or
resources when making a choice.
A decision making grid lists alternatives
and criteria to help evaluate choices.
A production possibilities frontier shows
the different combinations of two products
that can be produced if all resources are
fully employed.
The Production Possibility
Identifying Possible
Fully Employed
 Identifying Possible
The Cost of Idol
Opportunity Cost
Economic Growth
Cost-Benefit Analysis
An economic model is a simplifies version of
a complex concept or behavior expressed in
the form of an equation, graph or illustration.
Marginal benefit
Marginal cost
Models are based on assumptions, or ideas
economists believe are true. Models with
more assumptions are easier to understand,
but they are usually less accurate.
A cost-benefit analysis is a way of thinking
about choices that compares the cost of an
action to its benefit.
Incentives for Change
Objective: Identify the difference between monetary and nonmonetary incentives and how changes in incentives cause
changes in behavior.
Private Property and
Environmental Conservation
Objective: Evaluate the role of private property as an
incentive in conserving and improving scarce resources,
including renewable and nonrenewable natural resources.
Economic Systems
Objective: Compare and contrast the impact of command, market, and
mixed economies on political and personal liberty and national and
individual prosperity. Example: Through the works of Adam Smith
Major Economic Systems
Traditional Economies
Market Economies
A traditional economy is an economic system in which the
allocation of scarce resources and other economic
activities are based on ritual, habit or custom.
A market economy is an economic system in which supply,
demand, and the price system help people make economic
decisions and allocate resources.
This system is stable and predictable; there are clear
economic roles for each member of society and a social
safety net that allows for continuation of a way of life.
A free enterprise economy is a market economy in which
privately owned businesses have the freedom to operate
for a profit with limited government intervention.
Stagnation and lack of progress can be a problem. New
ideas and new ways of doing things are discouraged,
which often leads to a lower standard of living.
Command Economies
The main draw of a market economy is that there tends to
be an incredible variety of goods and services and a high
degree of consumer satisfaction. Decentralized decision
making and lack of government interference means there
is a high degree of individual freedom.
A command economy is an economic system with a
central authority that makes the major economic decisions.
In a true market economy, workers and businesses face
uncertainty as a result of competition and change; there is
no social safety net and no public services, such as
defense, education or health care.
Because a central authority dictates what to produce and
how to produce it, the market is capable of dramatic
change in a short time. Basic public services, such as
education, are often available at little or no cost.
Mixed Economies
A mixed economy is an economic system that has some
combination of traditional, command, and market
This system requires a large and expensive bureaucracy
and lacks room for individual initiative. Workers tend to be
unmotivated, there is little flexibility in how things get done,
and it usually does not meet the needs and wants of
American Free Enterprise
Major World Economic Systems
Characteristics of Free Enterprise Capitalism
Capitalism: economic system in which private
citizens own and use the factors of production in
order to generate profits.
While capitalism stands for the private ownership
of resources, free enterprise is the unhindered
use of privately owned resources to earn profits.
Socialism: economic and political system in
which the government owns and controls some
factors of production.
Economic Freedom applies to both consumers
and producers. Individuals are free to make
choices for themselves and their families; likewise,
businesses are free to success or failure.
Communism: economic and political system in
which all factors of production are collectively
owned and controlled by the state.
Voluntary Exchange occurs when buyers and
sellers freely and willingly engage in market
Private Property Rights are a fundamental
feature of capitalism and allow individuals to own
and control their possessions as they wish.
Private property gives people the incentive to
work, save and invest.
Profit Motive acts as an incentive that
encourages people and organizations to improve
their financial and material well-being.
Competition is the struggle among sellers to
attract consumers. It is not possible to have
competition without economic freedom!
Economic and Social Goals
Typically, Americans value economic freedom,
economic efficiency, economic equity, economic
security, full employment, price stability, and
economic growth.
All economic policies have opportunity costs!
How might a politician use a cost-benefit analysis
to develop public policy?
Adam Smith