Chapter 1 1 Every nation confronts the three basic economic questions of WHAT to produce, HOW, and FOR WHOM.

2 The need to select a single mix of output (WHAT) is necessitated by our limited capacity to produce. Scarcity results when our wants exceed our resources.

3 The production possibilities curve illustrates the limits to output dictated by available factors of production and technology. Points on the production possibilities curve represent the menu of different output mixes from which we may choose.

4 All production entails an opportunity cost: We can produce more of output A only if we produce less of output B. The implied reduction in output B is the opportunity cost of output A.

A B. B A

5 The HOW question focuses on the choice of what inputs to use in production. It also encompasses choices made about environmental protection.

6 The FOR WHOM question concerns the distribution of output among members of society.

7 The goal of every society is to select the best possible (optimal) answers to the WHAT, HOW, and FOR WHOM questions. The optimal answers will vary with social values and production capabilities.

8 The three questions can be answered by the market mechanism, by a system of central planning, or by a mixed system of market signals and government intervention.

9 Price signals are the key feature of the market mechanism. Consumers signal their desires for specific goods by paying a price for these goods. Producers respond to the price signal by assembling factors of production to produce the desired output.

10 Market failure occurs when the market mechanism generates the wrong mix of output, undesirable methods of production, or an inequitable distribution of income. Government intervention may fail, too, however, by not improving (or even worsening) economic outcomes.

11 The study of economics focuses on the broad question of resource allocation. Macroeconomics is concerned with allocating the resources of an entire economy to achieve broad economic goals (e.g., full employment). Microeconomics focuses on the behavior and goals of individual market participants.