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Chapter 1. What is Economics?. OBJECTIVES. Define economics and its fundamental principles. Differentiate between needs and wants. Analyze circular flow of economics. Examine productivity and economic growth. Apply concepts of choice and opportunity cost to economic decision-making.

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Chapter 1

Chapter 1

What is Economics?


Define economics and its fundamental principles.

Differentiate between needs and wants.

Analyze circular flow of economics.

Examine productivity and economic growth.

Apply concepts of choice and opportunity cost to economic decision-making.

Economics-Biba S. Kavass 2010

Thought provoking

Why do you think you are required to study Economics in order to graduate from high school?

Economics-Biba S. Kavass 2010

Definition of economics

Study of how people use limited resources to satisfy unlimited wants and needs.

Economics-Biba S. Kavass 2010

Fundamental economic problem
Fundamental Economic Problem

Limited Resources + Unlimited Wants and Needs = Scarcity Make Choices

Economics-Biba S. Kavass 2010

Needs and wants
Needs and Wants

Economics-Biba S. Kavass 2010

Need – basic requirement for survival – food, clothing, shelter

Want – something we would like to have but necessary for survival – IPOD, race car, cell phone

Is it a want or a need
Is it a Want or a Need?

Economics-Biba S. Kavass 2010

Tap Water Bottled Water

Mink Coat Regular Coat Sonic Hamburger PBJ Sandwich Ford Focus Mercedes Benz

Thought provoking1

Why is a want to one person a need to another person?

Economics-Biba S. Kavass 2010

3 basic economic questions
3 Basic Economic Questions







Economics-Biba S. Kavass 2010

Factors of production
Factors of Production

Economics-Biba S. Kavass 2010

Economic predictions

With a partner, make an economic prediction on the following scenario:

Now that summer is over, what do you think will happen with gasoline prices between August and December?

Economics-Biba S. Kavass 2010

Concept review

  • What is the definition of economics?

  • What is the fundamental economic problem?

  • What is the difference between a need and a want?

  • What are the 3 basic economic questions?

  • What are the 4 factors of production? Give an example of each.

  • Why do we have scarcity in our world?

Economics-Biba S. Kavass 2010

Basic economic concepts

Economics-Biba S. Kavass 2010

Goods and services

  • Good – useful, tangible item that satisfies a want – book, car, cell phone

    • Consumer Good – intended for final use by individuals

    • Durable Good – any good that last 3 or more years (ex. Automobile or robot welder)

    • Non-durable Good – item that lasts 3 years or less (ex. Paper, food, clothing)

  • Service – work that is performed for someone

    • Haircut, Accountant, Babysitter

Economics-Biba S. Kavass 2010


People or entities who consume goods and services to satisfy wants and needs.




Economics-Biba S. Kavass 2010

Value utility and wealth
Value, Utility, and Wealth

  • Value – worth that can be expressed in dollars and cents.

    • Paradox of Value - some necessities have less monetary value than some non-necessities (ex. Water vs. diamonds)

  • Utility - to be useful and provide satisfaction

  • Wealth – accumulation of products that are tangible, scarce, useful, and transferrable from one person to another.

Economics-Biba S. Kavass 2010

Thought provoking2

Why do you think that some goods are more valuable than others?

Economics-Biba S. Kavass 2010

Circular flow of economic activity
Circular Flow of Economic Activity

Economics-Biba S. Kavass 2010


  • Factor Market – where factors of production are bought and sold.

    • Hire labor

    • Acquire land/buildings in return for rent

    • Borrow money

  • Product Market – where producers sell goods and services

  • Markets create economic activity that connects individuals and businesses.

Economics-Biba S. Kavass 2010

Economic predictions1

What factors might determine economic growth?

Economics-Biba S. Kavass 2010

Economic growth
Economic Growth

  • Occurs when a nation’s total output of goods and services increases over times.

Economics-Biba S. Kavass 2010

Factors contributing to economic growth
Factors Contributing to Economic Growth

  • Productivity – measure of amount of G/S produced within a specific period of time

  • Human Capital – the sum of people’s skills, abilities, health, knowledge, and motivation.

  • Division of Labor – a way of organizing work so that each worker completes a separate part of the work.

  • Specialization – perform only tasks that they can do better or more efficiently.

  • Economic Interdependence – mutual dependency on others for goods and services.

Economics-Biba S. Kavass 2010

Effect of education on income
Effect of Education on Income

Economics-Biba S. Kavass 2010

Thought provoking3

How is a population with a higher level education beneficial to that country’s economic growth?

Economics-Biba S. Kavass 2010

Division of Labor – labor becomes more productive as each worker becomes more skilled at a single job.

Invisible Hand– competition and individual self-interest will guide resources to their most productive uses. Role of government should be limited. (Laissez-faire = let it be)

Wealth of Nations– defined as the sum of goods produced by labor, not the personal financial wealth of those that owned them.

Economics-Biba S. Kavass 2010

Economic choices

Economics-Biba S. Kavass 2010

Trade off

Alternative choice or choices

Name a trade-off or choice that you have had to make this week.

Economics-Biba S. Kavass 2010

Opportunity cost

  • Value of the next best choice or the next highest valued alternative use of that resource.

    • Example: Choosing between seeing a movie or staying at home and reading a book. If you choose the movie, you can not spend that time at home reading a book and you can not spend the money spent on the movie on something else.

      Your opportunity cost is 1) money spent on movie, 2) time spent at the movies, and 3) knowledge and pleasure you forgo by not reading the book.

Economics-Biba S. Kavass 2010

Concept review1

  • Define goods and services.

  • Describe three types of goods.

  • Describe a consumer.

  • What does the value of a good or service depend on?

  • Describe factor markets and product markets.

  • Discuss the factors contributing to economic growth.

  • Differentiate between trade-off and opportunity cost.

Economics-Biba S. Kavass 2010