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Chapter 1.

What Economics is About

1. Economics- is the study of how individuals, business firms, governments, and

societies as a whole make choices under conditions of scarcity.
2. Goods- are physical objects such as shoes and computers.
3. Services- are work done for people such as shoe repair and computer
4. Scarcity- is a situation in which people cannot have everything that they want
because of limited resources.
5. Resources- are the most basic elements that people use to produce the goods
and services that they want.
6. Choices- making a choice means selecting one thing over another.
7. Trade offs- situations in which they have to choose between two things or
activities that cannot be had or done at the same time.
8. Land- refers to resources provided by nature such as fertile soil, forests, water,
and mineral deposits.
9. Labor- is the physical and mental effort human beings use to produce goods and
10. Time- the ultimate source of labor is a more fundamental resource.
11. Capital- is anything that we produce factory, buildings, skill, and knowledge of
workers and then use in the production of other goods and services.
12. Entrepreneurship- refers to the ability that some people have for organizing the
other resources land, labor, and capital to produce goods and services.
13. Inputs- which refers to all the things that are used to produce goods and
A. Three ways the fundamental lessons of economics can be applied to
the world in which you live.
1. Economics provides you with the tools for
understanding the world around you and for making sense of the
daily news.
2. Economics can help you predict the likely effects of
events and government actions.
3. The lessons of economics can be used as a guide in
making personal and business decisions, as well as decisions about
matters that concern society as a whole.
B. Branches of Economics
Micro- from the Greek word mikros, meaning "small"
Macro- from the Greek word makros, meaning "large"
1. Microeconomics- takes a close up view of the
economy and analyzes individual parts of an economy a consumer,
a business firm, an industry, a single market rather than the whole
2. Macroeconomics- stands back from individual parts of
an economy and takes an overall view of the economy.
Positive economics- attempts to determine how the world is.
Normative economics- goes beyond how the world is and considers how
the world ought to be.
C. Theory and Application
1. Business firm- employs resources to produce goods
and services to be sold in the market.
2. Entrepreneurs- seek new business opportunities and
develop new ways of doing things.
3. Economic theory- is a statement or set of related
statements of a presumed relationship between two or more economic variables
price, quantity demanded, quantity supplied, and so on.
4. Economic model- is a formal statement of an
economic theory.
a) Economic theory- suggests a general
statement of cause and effect.
b) Economic model- suggests a more specific
statement of cause and effects.