APPLIED ECONOMICS LESSON 1, CHAPTER 1

WHAT IS ECONOMICS?
• The study of how individuals, business firms, governments, and societies as a whole make choices
under conditions of scarcity.
FUNDAMENTAL PROBLEM
SCARCITY - A limited amount of resources to meet unlimited wants and needs. EVERYTHING is
scarce!
CAUSES OF SCARCITY
1. PERSONAL PERSPECTIVE - your own feelings of what is needed or wanted.
2. POOR DISTRIBUTION OF RESOURCES - not using your resources to their potential.
Example: “I never have any time- yet I watch 6 hours of television a day!!”
3. RAPID INCREASE IN DEMAND - A sudden rush to use resources can cause a shortage. A
sudden rush/high rate of demand.
Example: Your store has only 50 pieces of bags for school but the number of students who needs
bag was 70.
WHAT IS APPLIED ECONOMICS?
• The study of economics in world situations as opposed to the theory of economics. It is the
application of economic and theories to real situations, and trying to predict the outcomes.
FOUR SPECIFIC QUESTIONS IN ECONOMICS
1. What goods are being produced/make
2. How much to produce (quantity)
3. How are these goods produced?
4. How is society’s output of goods divided among its members?
5. How efficient is society’s production and distribution?
REAL COSTS - All of the resources used to produce a good or service. Most resources can be used
for only one thing at a time.
EXAMPLE: Real cost of building a bridge instead of a building.
-Construction workers (cannot work on building a new building)
-A crane (cannot be used to build a new building.
-Steel (used in the bridge, cannot be used in a new building)
TRADE OFFS - When you choose between two possible uses for a resource, giving up one
alternative for another. You have to choose how to spend your money, time, energy. These
decisions involve picking one thing over all the possibilities.
Example: I can either buy this book or pizza, but not both.
OPPORTUNITY COSTS – When you make a trade off, there are costs. The value of time, money,
goods, and services given up in an economic choice.
Example: By doing THIS, I give up the opportunity to do THAT.
-If we build the bridge, we can’t build the building.
-If I buy the pizza, I can’t buy the book.
PRODUCTION – is how much stuff an individual, business, country, even the world makes.
STUFF – goods and services
GOOD - tangible products we can buy
SERVICES – work that is performed for others
4 FACTORS OF PRODUCTION
LAND – natural resources
LABOR – physical and intellectual
CAPITAL – tools, machinery, factories, etc.
ENTREPRENEURSHIP – investment
3 PARTS TO THE PRODUCTION PROCESS
FACTORS OF PRODUCTION – what we need to make goods and services.
PRODUCER – company that makes goods and/or deliver services.
CONSUMER – people who buy goods and services.
SCARCITY AND THE APPLICATION OF ECONOMICS
-Economics provides you with tools for understanding the world around you and for making sense of
the daily news.
-Help you predict the likely effects of events and government action.
-Economics can be used as a guide in making personal or business decisions, as well as decisions
about matters that concern society as a whole.