Chapter 1 - The challenge of Economics. After reading this chapter, you should be able to: Explain the meaning of scarcity, define opportunity cost, recite society’s three core economic questions, discuss how market and command economies differ, describe the nature of market and government failure. | Chapter 1 The Challenge of Economics Scarcity Lack of available resources to satisfy all desired uses of those resources. Central problem of economics. 1- Scarcity forces us to make choices. If there were no scarcity, there would be no need to study economics. Everyone could have everything they want. Economics Economics: The study of how best to allocate scarce resources among competing uses in the best possible way. 1- Everything you do has a cost associated with it – an opportunity cost. Opportunity Cost Opportunity Cost: The most desired goods and services that are foregone in order to obtain something else. The next best alternative that is sacrificed for the chosen alternative. 1- You must choose between A and B. If A is of higher value to you, you choose A. Thus, you can’t have B. The value you place on B is your opportunity cost of choosing A. Rational Action Weigh the benefits you expect to get from a choice against the opportunity cost and then decide whether or not to make the choice. 1- People act rationally almost all the time. They think through the issue before they take action. Factors of Production Resource inputs used to produce goods and services. These four resources are the basic ingredients of production: Land, labor, capital, and entrepreneurship. 1- These four resources--land, labor, capital, and entrepreneurship--are scarce or limited in amount. This is a good time to mention that economics, like all disciplines, use words in a specific way, and possibly not as they are casually used. Land, for example. Three Basic Questions WHAT to produce? HOW to produce? FOR WHOM to produce? 1- Any economy, no matter how big or small, must answer these three basic questions. Question 1: WHAT to Produce? There aren’t enough resources in an economy to produce all the goods and services desired by society. We have to decide what we want most. We have to sacrifice less-desired activities and goods. 1- | Chapter 1 The Challenge of Economics Scarcity Lack of available resources to satisfy all desired uses of those resources. Central problem of economics. 1- Scarcity forces us to make choices. If there were no scarcity, there would be no need to study economics. Everyone could have everything they want. Economics Economics: The study of how best to allocate scarce resources among competing uses in the best possible way. 1- Everything you do has a cost associated with it – an opportunity cost. Opportunity Cost Opportunity Cost: The most desired goods and services that are foregone in order to obtain something else. The next best alternative that is sacrificed for the chosen alternative. 1- You must choose between A and B. If A is of higher value to you, you choose A. Thus, you can’t have B. The value you place on B is your opportunity cost of choosing A. Rational Action Weigh the benefits you expect to get from a choice against the opportunity cost and then .
