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Chapter 1. The Economic Way of Thinking. Scarcity: The Basic Economic Problem. Have you ever wanted something new? All consumers have wants , which are desires that can be satisfied by consuming a good or a service. Can you live without these wants?

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Chapter 1

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chapter 1

Chapter 1

The Economic Way of Thinking

scarcity the basic economic problem
Scarcity: The Basic Economic Problem

Have you ever wanted something new?

All consumers have wants, which are desires that can be satisfied by consuming a good or a service.

Can you live without these wants?

The things that are necessary for survival, such as food, clothing & shelter are called needs.

Economics is the study of how individuals and societies satisfy their unlimited wants with limited resources.


We as consumers always demand more, no matter how much we have already.

Our wants are unlimited, but resources to produce them are, the result of this difference is: Scarcity

Scarcity exists when there is not enough resources to satisfy human wants

two principles of scarcity
Two Principles of Scarcity

Principle 1 – people make choices about things they desire – both wants and needs.

Food is necessary for survival, but we make choices as to they type (gourmet, frozen, or at a restaurant). The same is true with clothes.

two principles of scarcity1
Two Principles of Scarcity

Principle 2 – Scarcity affects everyone.

Our wants are unlimited, but resources are scarce, therefore choices have to be made as to what goods and services will be available.

goods and services
Goods and Services

Goods arephysical (tangible) objects that can be purchased




Services are work that one person performs for another for payment. (intangible)

Sales clerks

Technical support



three economic questions
Three Economic Questions

a.) What will be produced?

b.) How will it be produced?

c.) For whom will it be produced?

what will be produced
What Will Be Produced?

A society must decide what goods andservices it will provide.

The goods and services it produces usually depend on natural resources it possesses.

Some countries, like the US, allow producers and consumers to decide production and consumption.

In other countries, Cuba and North Korea, the consumers plays little or no part in answering the question. Instead, the government decides what goods and services will be produced.

how will it be produced
How Will It Be Produced?

Once a society decides what it will produce, it must then decide how these goods and services will be produced.

Countries with highly skilledworkers, would not use labor-intensive methods in agriculture. Instead they would utilizemachinery and few workers.

Developing countries with unskilled workers would usually adopt labor-intensive farming methods

examples of how it will be produced
Examples of How It Will Be Produced

US Agriculture

Chinese Agriculture

for whom will it be produced
For Whom Will It Be Produced?

This determines how goods and services are distributed among people in society.

Two questions need to be asked: Exactly how muchshould people get, and How should their share be delivered to them?

This leads to distribution systems: roads, rail systems, seaports, and airports.

The United States government and producers both help answer this question.

Countries like China and the former Soviet Union did not allow producers to help answer this question.

examples of for whom it will be produced
Examples of For Whom It Will Be Produced

I – 75 Atlanta, GA

Chinese Transportation

factors of production
Factors of Production

In order to understand how societies answer the first two basic questions – Economists have identified factors of production.

a. Land

b. Labor

c. Capital

d. Entrepreneurship


Land is all natural resources found on or under the ground used to produce goods and services.

Examples are: water, forests, wildlife, minerals, gas, and oil


Labor is all the human time, effort, and talent that go into the making of products.

Examples are: Garbage collectors, factory workers, construction workers, teachers, and doctors.


Capital is all the resources made and used by people to produce and distribute goods and services.

Examples are: Tools, machinery, factories, offices,warehouses, stores, roads.

These are physical resources so they are sometimes called physical or real capital.

Human capital is the knowledge and skills gained through experience.

Examples are: College degrees and job training


Entrepreneurship is the combination of vision, skill, ingenuity, and willingness to take risks necessary to create and run new businesses.

They anticipate the wants of consumers, then satisfy these wants in new ways.

trade offs

For every choice you make, you give up something

A trade-off is the alternative (other choice or option) that people give up when they make choices.

opportunity cost
Opportunity Cost
  • Any time you make a choice, it will involve costs.
  • An Opportunity Cost is the value of something that is given up to get something else that is wanted.