• Chapter 1, Lesson 1                                          Chapter 1 Presentation                   Chapter 1 Summary


    Concept 1:  Foundations of Economics

    PO 1.  Analyze the implications of scarcity:

    1.     limited resources and unlimited human wants influence choice at individual, national, and international levels

    Lesson 1: Vocabulary

    Content Vocabulary
    • scarcity
    • economics
    • need
    • want
    • good
    • durable good
    • nondurable good
    • consumer good
    • capital good
    • service
    • value
    • paradox of value
    • utility
    • wealth
    • gross domestic product
    Academic Vocabulary
    • transferable
    • accumulation
    • intangible
    • comprehensive

    Why We Have Scarcity

    Have you ever noticed that very few people are satisfied with the things they have? For example, someone without a home may want a small one; someone else with a small home may want a larger one; someone with a large home may want a mansion. Whether they are rich or poor, most people seem to want more than they already have. In fact, if each of us were to make a list of all the things we want, it would most likely include more things than our country could ever hope to produce.

    This is why we have scarcity, and this is why scarcity is the fundamental economic problem facing all societies. Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have. Scarcity affects almost every decision we make. This is where economics comes in. Economics is the study of how people try to satisfy seemingly unlimited and competing needs and wants through the careful use of relatively scarce resources.

    Our Needs and Wants

    Economists often talk about people’s needs and wants. A need is a basic requirement for survival, such as food, clothing, and shelter. A want is simply something we would like to have but is not necessary for survival. Food, for example, is needed for survival. 

    Our needs and wants are usually expressed in terms of economic products—goods and services that are useful, relatively scarce, and transferable to others. These products generally fall into two groups. The first one is a good—a useful, tangible item, such as a book, car, or iPhone, that can be used to satisfy a need or want. Goods are then divided into categories, depending on their use—and some goods, such as an automobile, can belong to two groups at the same time:

    • durable good is one that lasts three years or more when used on a regular basis. Durable goods include tools such as robot welders and tractors, and consumer goods such as automobiles.

    • nondurable good is an item that lasts for fewer than three years when used on a regular basis. Food, writing paper, and most clothing items are examples of nondurable goods.

    • consumer good is a good intended for final use by individuals, such as shoes, a shirt, or an automobile.

    • capital good is a tool or good such as machinery or equipment that is used by businesses to produce other products.

    The other type of economic product is a service, or work that is performed for someone. Services include haircuts, home repairs, and forms of entertainment such as concerts. They also include the work that doctors, lawyers, and teachers perform. The difference between a good and a service is that a good is tangible, or something that can be touched, while a service is not.

    Most goods and services have something called value, a term that refers to a worth that can be expressed in dollars and cents. 

    The Paradox of Value

    For something to have value, it must also have utility, or the capacity to be useful and provide satisfaction. Utility is not something that is fixed or even measurable, like weight or height. Instead, the utility of a good or service may vary from one person to the next. One person may get a great deal of satisfaction from a home computer; another may get very little. One person may enjoy a rock concert; another may not.

    For something to have value that can be expressed in monetary terms, it must be scarce and have utility. This is the solution to the paradox of value. Diamonds are scarce and have utility; thus they possess a value that can be stated in monetary terms. Water has utility but is not scarce enough in most places to give it much value. Therefore, water is less expensive, or has less monetary value, than diamonds. The emphasis on monetary value is important to economists. Unlike moral or social value, which is the topic of other social sciences, the value of something in terms of dollars and cents is a concept that everyone can easily understand.

    Questions All Societies Face


    WHAT to Produce?

    The first question is WHAT to produce. For example, should a society direct most of its resources to the production of military equipment or to other items such as food, clothing, or housing? Suppose the decision is to produce housing. Should the limited resources be used to build low-income, middle-income, or upper-income housing? A society cannot produce everything its people want, so it must decide WHAT to produce.

    In some countries, the decision of WHAT to produce is made by the government. For example, in North Korea, the government has almost complete control over this decision. As a result, large quantities of military goods are produced rather than consumer goods for the people. In the United States, however, spending decisions made by consumers largely determine the answer to the WHAT to produce question.

    HOW to Produce?

    A second question is HOW to produce. Should factory owners use automated production methods that require more machines and fewer workers, or should they use fewer machines and more workers? If a community has many unemployed people, using more workers might be better. On the other hand, in countries where machinery is widely available, automation can often lower production costs. Lower costs make manufactured items less expensive and, therefore, available to more people.

    Japan and Mexico provide a good example of this. In Japan, more than half the population is older than 45 years of age. With relatively fewer young people working, they have highly automated factories that require fewer workers. In Mexico, however, the population is much younger, so production techniques rely less on automation with robots and use people instead.

    FOR WHOM to Produce?

    The third question is FOR WHOM to produce. After a society decides WHAT and HOW to produce, it must decide who will receive the things produced. If a society decides to produce housing, for example, should it be the kind of housing that is wanted by low-income workers, middle-income professional people, or the very rich? If there are not enough houses for everyone, a society has to make a choice about who will receive the existing supply. These questions concerning WHAT, HOW, and FOR WHOM to produce are never easy for any society to answer. Nevertheless, they must be answered as long as there are not enough resources to satisfy people’s seemingly unlimited wants and needs.

    The Scope of Economics

    Why do we study economics?

    Economics is the study of human efforts to satisfy seemingly unlimited and competing wants through the careful use of relatively scarce resources. Economics is also a social science because it deals with the behavior of people as they deal with this basic issue. The four key elements of this study are description, analysis, explanation, and prediction.


    One part of economics describes economic activity. For example, we often hear about gross domestic product (GDP)—the monetary value of all final goods, services, and structures produced within a country’s borders in a 12-month period. GDP is the most comprehensive measure of a country’s total output and a key measure of a nation’s economic health. Economics also describes jobs, prices, trade, taxes, and government spending. Description allows us to know what the world looks like. However, description is only part of the picture, because it leaves many important “why” and “how” questions unanswered.


    Economics analyzes the economic activity that it describes. Why, for example, are the prices of some items higher than others? Why do some people earn higher incomes than others? How do taxes affect people’s desire to work and save? When analyzing primary sources or secondary sources, take into account the bias of the author. After accounting for that source author's individual point of view, you are more likely to provide an accurate analysis of the evidence.


    Economics also involves explanation. After economists analyze a problem and understand why and how things work, they need to communicate this knowledge to others. Like all scientists, this explanation should be based in careful research that properly attributes ideas to source material so that other economists can evaluate and duplicate the work for accuracy. If we all have a common understanding of the way our economy works, some economic problems will be easier to address or fix in the future. When it comes to GDP, you will soon discover that economists spend much of their time explaining why the measure is, or is not, performing in the manner that is expected.


    Finally, economics is concerned with prediction. For example, we may want to know whether our incomes will rise or fall in the near future. Because economics is the study of both what is happening and what tends to happen, it can help predict what may happen in the future, including the most likely effects of different actions. The study of economics helps us become more informed citizens and better decision makers. Because of this, it is important to realize that good economic choices are the responsibility of all citizens in a free and democratic society.

    By way of summary, economics deals with all these questions, and sometimes even more. It is also a dynamic science in that the subjects it studies—individuals such as ourselves and the economy as a whole—are always changing. Fortunately, the methods and the tools—the graphs and models of the economy—are well-suited to the task. This is something that gives the economist a certain amount of confidence when explaining or describing events, and we hope it gives you confidence as well.

    Lesson 2 Our Economic Choices

    Lesson 2: Vocabulary


    Concept 1:  Foundations of Economics

    PO 1.  Analyze the implications of scarcity:

    1.     limited resources and unlimited human wants influence choice at individual, national, and international levels
    2.     factors of production  (e.g., natural, human, and capital resources, entrepreneurship, technology)
    Content Vocabulary
    • factors of production
    • land
    • capital
    • labor
    • entrepreneurs
    • production possibilities curve
    • opportunity cost
    • trade-offs
    • consumerism
    Academic Vocabulary
    • transformed

    The Choices Producers Make

    Why must producers make production choices?

    It helps to think of our economy as being made up of two broad groups—producers and consumers. Of course we also have government, but more on that later; let’s turn our attention to producers first.

    Producers include all kinds of businesses, from individual artists who sell their creations at art shows to giant corporations whose annual revenue is in the billions of dollars. All of these producers have one thing in common: they all use what economists call “factors of production.” The factors of production, or resources required to produce the things we would like to have, are land, capital, labor, and entrepreneurs.


    In economics, land refers to the “gifts of nature,” or natural resources not created by people. Land includes deserts, fertile fields, forests, mineral deposits, livestock, sunshine, and the climate necessary to grow crops. Because a finite amount of natural resources are available at any given time, economists tend to think of land as being fixed, or in limited supply. Changing world events and market speculation can easily affect the prices of limited natural resources such as oil and metals.

    Sometimes newer methods of production can be used to extract more resources out of the ground. For example, relatively new “fracking” techniques are used to recover natural gas locked in underground shale deposits, but the natural gas was already there before the new mining methods were developed.


    A second factor of production is capital, sometimes called capital goods—the tools, equipment, machinery, and factories used in the production of goods and services. Capital is unique because it is the result of production. A bulldozer, for example, is a capital good used in construction. When it was built in a factory, it was the result of production involving other capital goods. The computers in your school that are used to produce the service of education also are capital goods.


    A third factor of production is labor—people with all their efforts, abilities, and skills. This category includes all people except a unique group of individuals called entrepreneurs, whom we single out because of their special role in the economy. Historically, factors such as birthrates, immigration, famine, war, and disease have had a dramatic impact on the quantity and quality of labor.


    A fourth factor of production is the people responsible for much of the change and progress in our economy. These individuals are entrepreneurs, risk-takers in search of profits who do something new with existing resources. Entrepreneurs are often thought of as being the driving force in an economy because they are the people who start new businesses or bring new products to market.

    Henry Ford is one example of an entrepreneur. His introduction of the moving assembly line in 1913 revolutionized the way cars were produced. Steve Jobs was another entrepreneur who transformed, or dramatically changed the nature of, the personal computer, cell phone, and music distribution industries.

    Opportunity Cost

    People often think of cost in terms of dollars and cents. To an economist, however, cost means more than the price tag on a good or service. Instead, economists think broadly in terms of opportunity cost, the value of the next best alternative given up. 

    The Choices Consumers Make

    Why is it important to evaluate trade-offs and opportunity costs when making choices?

    In a world where “there is no such thing as a free lunch,” there are alternatives and costs to everything we do. Choices can be made by society as a whole, or by individuals in the society. Either way, the alternatives and their opportunity costs are important, so it pays to examine these concepts closely.


    Making the right decision, or at least the best decision from a limited group of alternatives, is not always easy. This is because every decision we make has its trade-offs, or alternative choices that are given up in favor of the choice we select. Because of this, it helps to have a consistent strategy, or a plan to make the best decision. 

    Lesson 3: Economic Models

    Lesson 3: Vocabulary

    Content Vocabulary
    • economic growth
    • productivity
    • human capital
    • division of labor
    • specialization
    • economic interdependence
    • market
    • factor markets
    • product markets
    • economic model
    • cost-benefit analysis
    • free enterprise economy
    • standard of living
    Academic Vocabulary
    • mechanism
    • assumptions

    Economic Growth

    Why is economic growth important?

    Economic growth occurs when a nation’s total output of goods and services increases over time. Economic growth is important for two reasons. First, because of scarcity, everybody currently wants more goods and services than they have now. Second, if the population is growing, there will be even more people wanting goods and services to satisfy their wants and needs in the future.

    Increases in Productivity

    Everyone in a society benefits when scarce resources are used efficiently. This is described by the term productivity, a measure of the amount of goods and services produced with a given amount of resources in a specific period of time.

    Productivity goes up whenever more can be produced with the same amount of resources. For example, if a company produced 5,000 pencils in an hour, and then it produced 5,100 in the next hour with the same amount of land, labor, and capital, then productivity went up in the second hour. Productivity is often discussed in terms of labor, but it applies to all factors of production.

    The Importance of Human Capital

    A major contribution to productivity comes from investments in human capital, the sum of people’s skills, abilities, health, knowledge, and motivation. Individuals can invest in their own education by completing high school, going to technical school, or attending college. Businesses can invest in training and other programs that improve the skills of their workers. Government can invest in human capital by providing financial aid for education and health care.

    Division of Labor and Specialization

    The division of labor and specialization can also improve productivity. Division of labor is a way of organizing work so that each worker or work group completes a separate part of the overall task. A worker who performs a few tasks many times a day is likely to be more proficient than a worker who performs several different tasks in the same period.

    The division of labor has another advantage: it makes specialization possible. Specialization takes place when factors of production perform only tasks they can do better or more efficiently than others. For example, the assembly of a product may be broken down into a number of separate tasks to be performed by different workers (division of labor). When each worker is assigned to perform the specific task he or she does best, the result is specialization.

    One example of the advantages offered by the division of labor and specialization is Henry Ford’s use of the moving assembly line in automobile manufacturing in 1913. Having each worker add one part to the car, rather than a few workers assembling the entire vehicle, cut the assembly time of a car from a day and a half to just over two and a half hours—and reduced the price of a new car by more than 50 percent.

    The Circular Flow of Economic Activity

    Circular Flow Diagram

    Cost-Benefit Analysis

    The second strategy is to use cost-benefit analysis, a way of comparing the benefits of an action to the expected costs. Cost-benefit analysis can be used to evaluate a single course of action or to make a choice between two alternatives.

    For example, if you are trying to analyze a single course of action such as whether or not to go to a basketball game, you would simply compare all of the expected benefits to the anticipated cost. The benefits could include enjoyment, time with friends, and cheering on your favorite team. The cost could include time away from studying, the price of admission and parking, and loss of sleep. If the benefits exceeded the costs, you would go to the game. If it did not, you would choose to do something else.

    Or suppose that you have to choose between two video games, A and B, which you like equally. If B costs less, it would be the better choice because you would get more satisfaction per dollar spent. However, if the benefits of A and B were different, you could still divide the benefits by the costs and then choose the one with the highest ratio.