Chapter 1: What Is Economics?

1 2 UNIT 1 FUNDAMENTAL economic CONCEPTSAs you read this unit, learn how the study ofeconomics helps answer the following questions:How do you make the decisionbetween buying gas for your car or taking your friend out for pizza?Why is your friend from Russiastunned by all the shoes available at your local shoe store?Why is an item at a departmentstore less expensive than that sameitem at a specialty shop? Chapter 1 What Is Economics? Chapter 2 economic Systems and DecisionMakingCHAPTER 3 Business OrganizationsThe factors of production land,labor, capital, and entrepreneur-ship make production factors of production land,labor, capital, and entrepreneur-ship make production learn more about basic economic conceptsthrough information, activities, and links to othersites, visit the Economics: Principles and PracticesWeb site at study of economicswill help you become abetter decision maker it helpsyou develop a way of thinkingabout how to make the bestchoices for you.

2 To learn moreabout the scope of economics,view the Chapter 2 video lesson:What Is Economics? Chapter OverviewVisit the Economics: Principlesand PracticesWeb site at andclick on Chapter 1 Chapter Overviewsto previewchapter must make choicesfrom many StoryHarris Poll Shows High Interestin EconomicsAmerican adultshave an exceptionallykeen interest in eco-nomics. More thanseven in ten say theyshare the same highlevel of interest ineconomics as they dopolitics, business andfinance. A full 96%believe basic econom-ics should be taught inhigh school. Yet, halfof these same adults and two out of three high schoolstudents flunked an elementary quiz on basic economicconcepts. Clearly the time has come [to] place eco-nomic literacy higher on the national education agenda.

3 April 27, 1999 press release, The National Councilon economic EducationThe focus on economics educa-tion is IdeaScarcity forces us to make choices. We can t haveeverything we want, so we are forced to choosewhat we want StrategyGraphic OrganizerAs you read the section, com-plete a graphic organizer like the one below by list-ing and describing the three economic choices everysociety must and the Scienceof EconomicsKey Termsscarcity, economics, need, want, factors of production,land, capital, financial capital, labor, entrepreneur,production, Gross Domestic Product (GDP)ObjectivesAfter studying this section, you will be able the fundamental economic the three basic economic questions everysociety must economic ConceptsScarcityRead to find out why scarcity is the basic economic problem that faces choicesDo you think the study of economics is worthyour time and effort?

4 According to the Harrispoll in the cover story, a huge percentage ofAmericans think it is. They must know what econo-mists know that a basic understanding of economicscan help make sense of the world around Fundamental economic ProblemHave you ever noticed that very few peopleare satisfied with the things they have?Someone without a home may want a small one;someone else with a small home may want a largerone; someone with a large home may want a man-sion. Others want things like expensive sports cars,lavish jewelry, and exotic trips. Whether they are richor poor, most people seem to want more than theyalready have. In fact, if each of us were to make a listof all the things we want, it would include morethings than we could ever hope to fundamental economic problem facing allsocieties is that of scarcity.

5 Scarcityis the conditionthat results from society not having enough resourcesto produce all the things people would like to 1: WHAT IS Economics? 5As shown in Figure , scarcity affects almostevery decision we make. This is where the study ofeconomics comes in. Economics is the study ofhow people try to satisfy what appears to be seem-ingly unlimited and competing wants through thecareful use of relatively scarce and WantsEconomists often talk about people s needs andwants. A need is a basic requirement for survivaland includes food, clothing, and shelter. A want isa way of expressing a need. Food, for example, is abasic need related to survival. To satisfy the needfor food, a person may want a pizza or otherfavorite meal. Because any number of foods willsatisfy the need for nourishment, the range ofthings represented by the term want is muchbroader than that represented by the term need.

6 There Is No Such Thing as a Free Lunch Because resources are limited, virtually every-thing we do has a cost even when it seems as if weare getting something for free. For example, you may think you are getting afree lunch when you use a buy one, get one free coupon. However, while you may not pay for theextra lunch then and there, someone had to pay thefarmer for raising the food, the truck driver fordelivering the food, the chef for preparing thefood, and the server for serving the does business recover these costs? Chancesare that the price of the giveaway is usually hiddensomewhere in the prices the firm charges for itsproducts. As a result, the more a business givesaway free, the more it has to raise the prices forthe items it sells. In the end, someone always paysfor the supposedly free lunch and that someonemay be you!

7 Unfortunately, most things in life are not freebecause someone has to pay for the production inthe first place. economic educators use the termTINSTAAFLto describe this concept. In short,this term means that There Is No Such Thing As AFree Basic QuestionsBecause we live in a world of relatively scarceresources, we have to make wise economicchoices. Figure presents three of the basic ques-tions we have to answer. In so doing, we make deci-sions about the ways our limited resources will to ProduceThe first question is that of WHAT to a society direct most of its resources to theproduction of military equipment or to otheritems such as food, clothing, or housing? Supposethe decision is to produce housing. Should its lim-ited resources be used for low-income, middle-income, or upper-income housing?

8 How many ofeach will be needed? A society cannot have every-thing its people want, so it must decide WHAT A GLANCEECONOMICSAT A GLANCEF igure ChartsUsing Charts Scarcity is the fundamental economic problem that forces consumers and producers to use resources wisely. Why is scarcity a universal problem?UnlimitedWantsLimitedResourcesCh oicesScarcityWhatto ProduceHowto ProduceFor Whomto Produce6 UNIT 1 FUNDAMENTAL economic CONCEPTSHOW to ProduceA second question is that of HOW to factory owners use mass production meth-ods that require a lot of equipment and few work-ers, or should they use less equipment and moreworkers? If an area has many unemployed people,the second method might be better. On the otherhand, mass production methods in countries wheremachinery and equipment are widely available canoften lower production costs.

9 Lower costs makemanufactured items less expensive and, therefore,available to more WHOM to ProduceThe third question deals with FOR WHOM toproduce. After a society decides WHAT and HOWto produce, the things produced must be allocatedto someone. If the society decides to produce hous-ing, should it be distributed to workers, profes-sional people, or government employees? If thereare not enough houses for everyone, a choice mustbe made as to who will receive the existing questions concerningWHAT, HOW, and FOR WHOMto produce are not easy for any soci-ety to answer. Nevertheless, theymust be answered as long as thereare not enough resources to satisfypeople s seemingly unlimited Factors of ProductionThe reason people cannot sat-isfy all their wants and needs isthe scarcity of productive factors of production, orresources required to produce thethings we would like to have, areland, capital, labor, and entrepre-neurs.

10 As shown in Figure , allfour are required if goods and serv-ices are to be economics, land refers to the gifts of nature, or natural resourcesnot created by humans. Land includes deserts,fertile fields, forests, mineral deposits, livestock,sunshine, and the climate necessary to grow only so many natural resources are avail-able at any given time, economists tend to think ofland as being fixed, or in limited example, there is not enough good farm-land to adequately feed all of the earth s popula-tion, nor enough sandy beaches for everyone toenjoy, nor enough oil and minerals to meet ourexpanding energy needs indefinitely. Because thesupply of a productive factor like land is relativelyfixed, the problem of scarcity is likely to becomeworse as population grows in the factor of production is capital thetools, equipment, machinery, and factories used inthe production of goods and services.