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Chapter One . Vocabulary Terms and Concepts. What is Economics? the study of how people decide ways to get the things they need and want by making choices. Needs – what people must have to live. Food Clothing Shelter.

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Chapter One

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Chapter One

Vocabulary Terms and Concepts

What is Economics?

  • the study of how people decide ways to get the things they need and want by making choices

Needs – what people must have to live.




Wants – the things we would like to have, but can live without.

Needs vs. Wants

What choices have you had to make lately?

Why do we have to make choices about which goods or services we can buy?

The resources used to make goods and services are scarce(limited number/not enough). That makes the goods and services scarce.

  • What is the difference between scarcity and shortage?

  • Scarcity means that there is a limitedquantity of resources to meet unlimitedwants and needs.

  • Shortage is a situation where a good or a service is temporarily unavailable.


Economic Choice= Opportunity Cost

You make an economic choice when you only have money for certain items, not all.


I do not have enough money for both popcorn and a pretzel. I must choose, so I buy the popcorn. That is my economic choice.


Economic Choice= Opportunity Cost

Opportunity cost is what you must give up when you make an economic choice.


I chose the popcorn, so I have to give up the pretzel. That is my opportunity cost.

Goods and Services

  • Goods

  • Services

How do we satisfy our wants and needs?

  • We buy goods and services.

    What are “Goods” ?

  • physical objects such as

    clothes or shoes

    What are “Services” ?

  • actions or activities that one person does for another such as haircuts or auto repair. Can you think of any more?

All goods and services are produced using resources.

  • What is the term we use in economics that means resources?

    • Factors of Production: the FOUR groups of resources that are used to make all goods and services

    • Human (labor) (labor force) (services)

    • Capital

    • Natural (land)

    • (Entrepreneurship)

Factors of Production

Resourcesneeded to produce goods and services






  • the person who organizes or combines (puts together) land (natural), labor (human) and capital to create and market new goods and services- a business owner.

  • Who do you know that owns their own business? What type of business is it?

Human Resources

Natural Resources

Capital Resources

Three types of resources work together in our economy




Factors of Production Model

Resources needed to produce goods and services

LAND (nature) - cotton

LABOR (human) -seamstress

ENTREPRENEUR –designer, business owner

GOOD – t-shirt

CAPITAL – thread, sewing machine.

3 questions every society must answerallocation of resources

  • What goods shall be produced (made)?

  • How will the goods be produced?

  • For whom will the goods be produced?

    How a society answers those questions defines its economic system.

What goods shall be produced?

How will the goods be produced?

For whom will the goods be produced?

Think about a very small society

“Market Economy”

Free Enterprise


“Command Economy”







Private Ownership of Resources

Government plays a small role

No central economic plan

Variable Income Distribution

Market supply and demand sets

prices so prices fluctuate

Government Ownership of Resources

Government Controls the Economy

Government creates a central plan

Government may redistribute income

(income distribution)

May use price controls to regulate market

TRADITIONAL - Economic decisions are based on custom, habit or ritual.

  • Life and economic decisions revolve around the family.

    • Roles are defined by gender. Fathers teach sons, mothers teach daughters

  • Communities are small and close.

    • The entire group is supported.

  • Agriculture and hunting primary activities.

Example of Traditional Inuit Economy article.

WEAKNESSES of Traditional Economy

  • Unable to deal with environmental disasters

  • Slow to adopt new technology or methods

  • Lack modern conveniences

  • Low standard of living

CENTRALLY PLANNED (or Command) – Government makes all the economic decisions

  • Government controls resources and production

  • Can quickly change production in selected industries

  • Guarantees jobs and incomes

Karl Marx


Command Economy

  • Cannot meet consumers’ needs or wants

  • Workers lack incentive to work hard

  • Large expensive bureaucracy needed to make production decisions

  • Individual freedoms sacrificed

MARKET – an arrangement that allows buyers and sellers to echange goods and services

  • Individuals specialize

  • Self-interest or personal gain is the motivating factor

  • Responds efficiently to changing market conditions

  • Provides freedom of choice

  • Encourages economic growth

  • Very little government interference

WEAKNESSES of a Market Economy

  • No guarantee of economic equity (fairness). There is an unequal distribution of wealth.

  • There is no economic security- you are free to succeed or fail


Free Enterprise




Ownership of resources; private property?

Governments Role in the Economy?

Intervention in the Market; the role of price?

Why is the United States considered a mixed economy?

Why is the United States considered a mixed economy?

  • With your partner, create a list in your notes of all the ways you can think that prove that the US is a mixed economy.

The Rise of Mixed Economies

A Continuum of Mixed Economies

Pure Market


Hong Kong United States Finland China Cuba Singapore France RussiaNorth Korea

The Rise of Mixed Economies

  • Market economies, although able to provide the most benefits to individuals, are not able to meet the economic needs of modern society without the help of government.

  • Government is needed to provide defense, roadways, education, safety nets, health care, mass transit, workplace safety, adequate income levels, adequate competition, product safety, etc.

Government’s Role in a Mixed Economy

The government purchases land, labor, and capital from households in the factor market

It purchases goods and services from businesses in the product market.

In order to pay for its purchases and the services it provides households and businesses, it collects taxes from both.

Economic Specialization

Individuals or groups who concentrate on one type of good or service.

Apple farmerCarpenter


  • the choices we have when faced with a decision (sleep or study)

    Opportunity Cost

  • the most desirable alternative given up as the result of a decision (I chose sleep so my opportunity cost is studying)

    Guns or Butter

  • the choices a country must make when choosing whether to produce more or less military or consumer goods

Production Possibilities Curve

  • a graph that shows alternative ways to use an economy’s resources

    Production Possibilities Frontier

  • the line on the graph that shows the maximum output possible.

  • The location of the frontier is determined by the amount of resources and technology available.

  • These are scarce so our ability to produce is limited.

Production Possibilities Curve



Production Possibilities Frontier

military goods “guns”




consumer goods “bread”

Production Possibilities Curve


A production possibilities curve shows the opportunity cost of producing more of one type of good or service.





Opportunity Cost = 3 less military goods

1 2 3 4 5 6 7 8 9 10 11 Q

Military goods in thousands


1 more consumer good



1 2 3 4 5 6 Q

Consumer goods in hundred thousands

Production Possibilities Curve

  • Any points (production) along the frontier line (A,B,C, D) is efficient and possible

  • Any point (production) inside the frontier line (E) is possible but inefficient. Resources are underutilized.



  • Any point outside of the frontier line (W) is not possible. We do not have the resources or the technology to produce it.





1 2 3 4 5 6 7 8 9 Q


Military goods





1 2 3 4 5 6 Q

Consumer goods

By adding more resources (land, labor or capital) or using the ones we have more efficiently (technology), the curve can shift outward


Military goods in thousands

Consumer goods in hundred thousands

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