Chapter 1: What Is Economics? Section 1

Chapter 1: What is Economics?
Section 1
Objectives
1. Explain why scarcity and choice are the

basis of economics.
2. Describe what entrepreneurs do.
3. Define the three factors of production
and the differences between physical
and human capital.
4. Explain how scarcity affects the factors
of production.
Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 7

Key Terms
• need: something essential for survival

• want: something that people desire but
that is not necessary for survival
• goods: the physical objects that someone
produces
• services: the actions or activities that one
person performs for another
• scarcity: the principle that limited amounts
of goods and services are available to
meet unlimited wants
Key Terms, cont.
• economics: the study of how people seek to

satisfy their needs and wants by making choices
• shortage: a situation in which consumers want
more of a good or service than producers are
willing to make available at particular prices
• entrepreneur: a person who decides how to
combine resources to create goods and services
• factors of production: the resources that are
used to make goods and services

Key Terms, cont.
• land: all natural resources used to produce

goods and services
• labor: the effort people devote to tasks for which
they are paid
• capital: any human-made resource that is used
to produce other goods and services
• physical capital: the human-made objects used
to create other goods and services
• human capital: the knowledge and skills a
worker gains through education and experience

Introduction
• How does scarcity force people to make

economic choices?
– Scarcity forces all of us to make choices by
making us decide which options are most
important to us.
– The principle of scarcity states that there are
limited goods and services for unlimited
wants. Thus, people need to make choices in
order to satisfy the wants that are most
important to them.

Scarcity and Choice
• People satisfy their needs and wants with

goods and services.
– People’s needs and wants are unlimited, yet

goods and services are limited.
– Every society is then faced with three key
questions; What will be produced, How will it
be produced and Who will receive what is
produced?

Scarcity and Choice, cont.
• Economics begins with the idea that people

cannot have everything they need and want.
– The fact that limited amounts of goods and

services are available to meet unlimited wants
is called scarcity.
• Scarcity forces people to make choices but it is
not the same as a shortage.
• Shortages are temporary while scarcity always
exists.

Entrepreneurs
• Entrepreneurs play a key role in turning scarce
resources into goods and services.
• Entrepreneurs are
willing to take risks
in order to make a
profit. They:
– Develop original ideas
– Start businesses
– Create new industries
– Fuel economic growth

Entrepreneurs, cont
• An entrepreneur’s first task is to assemble the

factors of production: land, labor, and capital.

Factors of Production: Land
• Land refers to all natural
resources used to
produce goods and
services.
• These resources include:
– Fertile land for farming
– Oil
– Coal
– Iron
– Water
– Forests

Factors of Production: Labor
• Labor is the effort people devote to tasks

for which they are paid.
• Labor includes:
– The medical care provided by a doctor
– The classroom instruction provided by a
teacher
– The tightening of a bolt by an assembly-line
worker
– The creation of a painting by an artist
– The repair of a television by a technician

Factors of Production: Capital
• Capital refers to any human-made resource that is
used to produce other goods and services.
• An economy requires both physical and human
capital to produce goods and services.
– Physical capital includes:

• Buildings
• Equipment
• Tools
– Human capital includes:
• A college education
• Training
• Job experience
Benefits of Capital
• Capital is a key factor of production

because people and companies can use it
to save a great deal of time and money.
• The benefits of capital include:

– Increased efficiency
– Increased knowledge
– Better time management
– Increased productivity

Scarce Resources
• Checkpoint: Why are goods and services

scarce?
– All goods and services are scarce because

the resources used to produce them are
scarce.
– There are only so many natural resources
available to produce particular goods.

Scarce Resources, cont.
• The amount of labor available to produce

goods and services can be limited.
• Physical capital is also limited for many
industries.
• Each resource may also have alternative
uses. Individuals, businesses, and
governments have to choose which
alternative they want most.

Review
• Now that you have learned how scarcity

forces people to make economic choices,
go back and answer the Chapter Essential
Question.
– How can we make the best economic
choices?

Section 2
Objectives
1. Explain why every decision involves

trade-offs.
2. Summarize the concept of opportunity
cost.
3. Describe how people make decisions by
thinking at the margin.

Key Terms
• trade-off: the alternatives that we give up when

we choose one course of action over another
• “guns or butter”: a phrase expressing the
idea that a country that decides to produce
more military goods (“guns”) has fewer
resources to produce consumer goods (“butter”)
and vice versa
• opportunity cost: the most desirable alternative
given up as the result of a decision

Key Terms, cont.
• thinking at the margin: the process of

deciding how much more or less to do
• cost/benefit analysis: a decision-making
process in which you compare what you
will sacrifice and gain by a specific action
• marginal cost: the extra cost of adding a
unit
• marginal benefit: the extra benefit of
adding a unit

Introduction
• How does opportunity cost affect decision

making?
– Every time we choose to do something, like
sleep in late, we are giving up the opportunity
to do something less, like study an extra hour
for a big test.
– When we make decisions about how to spend
our scarce resources, like money or time, we
are giving up the chance to spend that money
or time on something else.

Trade-offs
• All individuals, businesses, and large

groups of people make decisions that
involve trade-offs.
• Trade-offs involve things that can be easily

measured such as money, property, and
time or things that cannot be easily
measured, like enjoyment or job
satisfaction.

Businesses and Governments
• Businesses make trade-offs

when they decide how to use
their factors of production.
– A farmer who uses his or her
land to plant broccoli, for
example, cannot use that
same land to plant squash.
• Governments also make
trade-offs when they decide to
spend their money on military
needs instead of domestic
ones, and vice versa.

Opportunity Costs
• In most trade-offs, one of the rejected

alternatives is more desirable than the
rest.
• The most desirable alternative somebody

gives up as a result of a decision is the
opportunity cost.

Decision-Making Grids
• Checkpoint: Why does every choice involve an
opportunity cost?
– We always face an opportunity cost. When we
select one alternative, we must sacrifice another.
• Using a decision-making grid can help you
decide if you
are willing to
accept the
opportunity
cost of a choice
you are about
to make.

Thinking on the Margin
• When you decide how much more or less

to do, you are thinking on the margin.
– Deciding by thinking on the margin involves

comparing the opportunity costs and benefits.
– This decision-making process is called a
cost/benefit analysis.

Marginal Costs and Benefits
• To make good decisions on the margin, you

must weigh marginal costs against marginal
benefits.
– The marginal cost is the extra cost of adding one unit
such as sleeping an extra hour or building one extra
house.
– The marginal benefit is the extra benefit of adding the
same unit.
• Once the marginal costs outweigh the marginal

benefit, no more units can be added.

Cost/Benefit Analysis
• The cost/benefit analysis below shows the opportunity
costs and benefits of extra hours of sleep against extra
house of study time.
– What is the opportunity cost of one extra hour of sleep? What is
the benefit?

Decision-Making on the Margin
• Like opportunity cost, thinking at the

margin applies not just to individuals, but
to businesses and governments as well.
– Employers think at the margin when they

decide how many workers to hire.
– Legislators think at the margin when they
decide how much to increase government
spending on a particular project.

Review
• Now that you have learned how

opportunity costs affect decision making,
go back and answer the Chapter Essential
Question.
– How can we make the best economic
choices?

Section 3
Objectives
1. Interpret a production possibilities curve.

2. Explain how production possibilities
curves show efficiency, growth, and cost.
3. Explain why a country’s production
possibilities depend on its resources and
technology.

Key Terms
• production possibilities curve: a graph

that shows alternative ways to use an
economy’s productive resources
• production possibilities frontier: a line
on a production possibilities curve that
shows the maximum possible output an
economy can produce
• efficiency: the use of resources in such a
way as to maximize the output of goods
and services

Key Terms, cont.
• underutilization: the use of fewer

resources than an economy is capable of
using
• law of increasing costs: an economic
principle which states that as production
shifts from making one good or service to
another, more and more resources are
needed to increase production of the
second good or service

Introduction
• How does a nation decide what and how

to produce?
– To decide what and how to produce,

economists use a tool known as a production
possibilities curve.
• This curve helps a nation’s economists determine
the alternative ways of using that nation’s
resources.

Production Possibilities
• Economists often use graphs to analyze

the choices and trade-offs that people
make.
• A production possibilities curve is a graph
that shows alternative ways to use an
economy’s productive resources.
– To draw a production possibilities curve, an
economist begins by deciding which goods or
services to examine.

Production Possibilities Curve
• The table below shows six different combinations

of watermelons and shoes that Capeland could
produce using all of its factor resources.
– How many
watermelons
can Capeland
produce if they
are making 9
million pairs
of shoes?

Production Possibilities Frontier
• The line on a production possibilities curve

that shows the maximum possible output
an economy can produce is called the
production possibilities frontier.
– Each point on the production possibilities
frontier reflects a trade-off. These trade-offs
are necessary because factors of production
are scarce.
– Using land, labor, and capital to make one
product means that fewer resources are left to
make something else.

Efficiency
• A production possibilities frontier

represents an economy working at its
most efficient level.
• Sometimes an economy works inefficiently

and it uses fewer resources than it is
capable of using. This is known as
underutilization.

Growth
• A production possibilities curve can also

show growth.
– When an economy grows, the curve shifts to

the right.
– However, when an economy’s production
capacity decreases, the economy slows and
the curve shifts to the left.

Cost
• Production possibilities curves can be

used to determine the opportunity costs
involved in make an economic decision.
– Cost increases as production shifts from

making one item to another.
– The law of increasing costs help explain the
production possibilities curve.
• As we move along the curve, we trade off more
and more for less and less output.

Law of Increasing Costs

Technology and Education
• Technology can
increase a nation’s
efficiency.
• Many governments
spend money
investing in new
technology,
education, and
training for the
workforce.

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Chapter 1: What is Economics?

1. Explain why scarcity and choice are the

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 7

• need: something essential for survival

• economics: the study of how people seek to

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 9

• land: all natural resources used to produce

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 10

• How does scarcity force people to make

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 11

• People satisfy their needs and wants with

– People’s needs and wants are unlimited, yet

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 12

• Economics begins with the idea that people

– The fact that limited amounts of goods and

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 13

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 14

• An entrepreneur’s first task is to assemble the

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 15

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 16

• Labor is the effort people devote to tasks

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 17

– Physical capital includes:

• Capital is a key factor of production

• The benefits of capital include:

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 19

• Checkpoint: Why are goods and services

– All goods and services are scarce because

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 20

• The amount of labor available to produce

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 21

• Now that you have learned how scarcity

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 22

1. Explain why every decision involves

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 24

• trade-off: the alternatives that we give up when

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 25

• thinking at the margin: the process of

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 26

• How does opportunity cost affect decision

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 27

• All individuals, businesses, and large

• Trade-offs involve things that can be easily

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 28

• Businesses make trade-offs

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 29

• In most trade-offs, one of the rejected

• The most desirable alternative somebody

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 30

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 31

• When you decide how much more or less

– Deciding by thinking on the margin involves

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 32

• To make good decisions on the margin, you

• Once the marginal costs outweigh the marginal

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 33

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 34

• Like opportunity cost, thinking at the

– Employers think at the margin when they

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 35

• Now that you have learned how

Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 36

1. Interpret a production possibilities curve.