Economics Honors

Chapter 1

Section 1: Scarcity
Scarcity forces us all to make economic decisions
Economics deals with the fact that we cannot have
everything we need and want
Need- Essential for survival
Food, medical care, etc

Want- Something we desire but that is not

necessary for survival
These are satisfied with goods and services

Section 1: Scarcity
Goods- physical objects that someone produces
food, clothing, etc.

Services- actions or activities that one person

performs for another
Medical care, education, etc.

Needs and wants are unlimited

Goods and services are limited

Section 1: Scarcity
Scarcity- the fact that limited amounts of goods and
services are available to meet unlimited wants
Forces people to make choices
Time
Money

Economics- the study of how people seek to satisfy

their needs and wants by making choices
Individually
Groups
governments

Section 1: Scarcity
Scarcity is not the same things as shortage
Shortage- when consumers want more of a good of
service than producers are willing to make available
at a particular price
May be temporary or long term

Scarcity always exists

Section 1: Scarcity
Entrepreneurs- people who decide how to combine
resources to create new goods and services
Anyone who opens a business
Willing to take risks for potential profit
Fuel economic growth

Section 1: Scarcity
Factors of Production
Resources used to make all goods and services
Land- all natural resources
Labor- effort people devote to tasks for which they are paid
Capital- any human-made resource that is used to produce other
good and services
Physical capital- human-made objects used to create other good and
services (capital goods)
Human capital- the knowledge and skills a worker gains through
education and experience

Section 1: Scarcity
All goods and services are scarce because the
resources used to produce them are scare
All factors of production used to produce goods and
services are scarce
Individuals, businesses, and governments have to
choose which alternative they most want

Section 2: Opportunity Cost & Trade-Offs

Every time we choose to do something, we give up
the opportunity to do something else
Scarcity forces us to make choices among limited
resources

Section 2: Opportunity Cost & Trade-Offs

Trade-Off- the act of giving up one benefit in order
to gain another, greater benefit
Opportunity cost- the most desirable alternative
somebody gives up as a result of their decision
When we select on alternative, we must sacrifice at least
one other alternative and its benefits

Section 2: Opportunity Cost & Trade-Offs

Thinking at the margin- when you decide how much
more or less to do
Cost/benefit analysis- the decision-making processcomparing the opportunity costs and the benefits

Section 2: Opportunity Cost & Trade-Offs

Marginal costs- the extra cost of adding one unit
Marginal benefit- the extra benefit of adding the
same unit
As long as the marginal benefit outweighs the
marginal costs- it is a rational decision

Section 3: Production Possibilities

Production possibilities curve- graph that shows
alternative ways to use an economys productive
resource
Decide which goods and service to examine

Section 3: Production Possibilities

Production possibilities frontier- combinations of the
production of both products
Any spot on the line means the country is using all its
resource to produce a maximum combination of the two
products

Each point on the production possibilities frontier

reflects a trade-off
Necessary since factors of production are scarce

Section 3: Production Possibilities

Can show how efficient a country is
Whether an economy is growing
Opportunity cost of producing more of one good or
service

Section 3: Production Possibilities

Trade-offs are necessary because factors of
production are scarce
Using land, labor, and capital to make one product means
that fewer resources are left for something else

Section 3: Production Possibilities

Efficiency- the use of resources in such a way as to
maximize the output of goods and services
Underutilization- the use of fewer resources than
the economy is capable of using

Section 3: Production Possibilities

If the quantity or quality of land, labor, or capital
changes, then the curve will move
When an economy grows, economists say that the
production possibilities frontier has shifted right
When a countrys production capacity decreases, the
curve shifts left

Section 3: Production Possibilities

Law of increasing costs- as production shifts from
making one item to another, more and more
resources are necessary to increase production of
the second item
Opportunity cost increase
Some resources are better used for one thing and not
another- farming v. manufacturing
Why production possibilities curve is a curve and not just a straight
line

Section 3: Production Possibilities

Technology can increase a nations efficiency
May be a reason for a country to invest in education,
training, or a new technology