fundamentos de Economia.pdf

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To learn more about basic economic concepts

through information, activities, and links to other

sites, visit the Economics: Principles and Practices

Web site at epp.glencoe.com
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The study of economics

will help you become a

better decision makerit helps

you develop a way of thinking

about how to make the best

choices for you. To learn more

about the scope of economics,

view the Chapter 2 video lesson:

What Is Economics?

Chapter Overview Visit the Economics: Principles

and Practices Web site at epp.glencoe.com andclick on Chapter 1Chapter Overviews to preview

chapter information.

Consumers must make choicesfrom many alternatives.
http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://contents.pdf/


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CoverStory

HarrisPollShowsHighInteres

t

inEconomicsAmerican adults

have an exceptionally

keeninterestin eco-

nomics. More than

seveninten saythey

sharethe samehigh

level of interest in

economicsastheydo

politics,business and

finance. A full 96%

believebasiceconom-icsshouldbetaughtin

high school.Yet,half

ofthesesameadultsandtwooutofthreehighsch

ool

studentsflunkedanelementaryquizonbasiceconom

ic

concepts. Clearlythetimehas come [to]place ec

o-

nomicliteracyhigheronthenationaleducationagen

da.

April 27,1999pressrelease,TheNational Coun

cil

onEconomicEducation

Thefocusoneconomicseduca-

tionisgrowing.

Main Idea

Scarcity forces us to make choices. We cant haveeverything we want, so we are forced to choosewhat we want most.

Reading StrategyGraphic Organizer As you read the section, com-plete a graphic organizer like the one below by list-ing and describing the three economic choices everysociety must make.

Scarcity and the Scienceof Economics

Key Termsscarcity, economics, need, want, factors of productioland, capital, financial capital, labor, entrepreneur,production, Gross Domestic Product (GDP)

ObjectivesAfter studying this section, you will be able to:1. Explain the fundamental economic problem.2. Examine the three basic economic questions ever

society must decide.

Applying Economic ConceptsScarcity Read to find out why scarcity is the basiceconomic problem that faces everyone.

Economic choices

Do you think the study of economics is wyour time and effort? According to the Hpoll in the cover story, a huge percentag

Americans think it is. They must know what ecomists knowthat a basic understanding of economcan help make sense of the world around us.

The Fundamental Economic Proble

Have you ever noticed that very few peoare satisfied with the things they ha

Someone without a home may want a small osomeone else with a small home may want a laone; someone with a large home may want a msion. Others want things like expensive sports clavish jewelry, and exotic trips. Whether they are

or poor, most people seem to want more than talready have. In fact, if each of us were to make aof all the things we want, it would include mthings than we could ever hope to obtain.

The fundamental economic problem facingsocieties is that of scarcity. Scarcity is the condithat results from society not having enough resouto produce all the things people would like to ha

CHAPTER 1: WHAT IS ECONOMIC
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As shown in Figure 1.1, scarcity affects almostevery decision we make. This is where the study ofeconomics comes in. Economics is the study ofhow people try to satisfy what appears to be seem-ingly unlimited and competing wants through thecareful use of relatively scarce resources.

Needs and WantsEconomists often talk about peoples needs and

wants. A need is a basic requirement for survival

and includes food, clothing, and shelter. Awant isa way of expressing a need. Food, for example, is abasic need related to survival. To satisfy the needfor food, a person may want a pizza or otherfavorite meal. Because any number of foods willsatisfy the need for nourishment, the range ofthings represented by the term want is muchbroader than that represented by the term need.

There Is No Such Thing as a Free LunchBecause resources are limited, virtually every-

thing we do has a costeven when it seems as if weare getting something for free.

For example, you may think you are getting afree lunch when you use a buy one, get one free

coupon. However, while you may not pay for theextra lunch then and there, someone had to pay thefarmer for raising the food, the truck driver fordelivering the food, the chef for preparing thefood, and the server for serving the food.

How does business recover these costs? Chancesare that the price of the giveaway is usually hiddensomewhere in the prices the firm charges for itsproducts. As a result, the more a business givesaway free, the more it has to raise the prices forthe items it sells. In the end, someone always pays

for the supposedly free lunchand that someonemay be you!Unfortunately, most things in life are not free

because someone has to pay for the production inthe first place. Economic educators use the termTINSTAAFL to describe this concept. In short,this term means that There Is No Such Thing As AFree Lunch.

Three Basic QuestionsBecause we live in a world of relatively scarceresources, we have to make wise economic

choices. Figure 1.1 presents three of the basic ques-tions we have to answer. In so doing, we make deci-sions about the ways our limited resources will beused.

WHAT to ProduceThe first question is that of WHAT to produce.

Should a society direct most of its resources to the

production of military equipment or to otheritems such as food, clothing, or housing? Supposethe decision is to produce housing. Should its lim-ited resources be used for low-income, middle-income, or upper-income housing? How many ofeach will be needed? A society cannot have every-thing its people want, so it must decide WHAT toproduce.

E C O N O M I C SA T A G L A N C E

E C O N O M I C SA T A G L A N C E Figure 1.1Figure 1.1

Scarcity

Using ChartsUsing Charts Scarcity is the fundamentaleconomic problem that forces consumersand producers to use resources wisely. Whyis scarcity a universal problem?

UnlimitedWants

LimitedResources

Choices

Scarcity

Whatto Produce

Howto Produce

For Whomto Produce

6 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS
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HOW to ProduceA second question is that of HOW to produce.

Should factory owners use mass production meth-ods that require a lot of equipment and few work-ers, or should they use less equipment and moreworkers? If an area has many unemployed people,

the second method might be better. On the otherhand, mass production methods in countries wheremachinery and equipment are widely available canoften lower production costs. Lower costs makemanufactured items less expensive and, therefore,available to more people.

FOR WHOM to ProduceThe third question deals with FOR WHOM to

produce. After a society decides WHAT and HOWto produce, the things produced must be allocatedto someone. If the society decides to produce hous-ing, should it be distributed to workers, profes-sional people, or government employees? If thereare not enough houses for everyone, a choice mustbe made as to who will receive the existing supply.

These questions concerningWHAT, HOW, and FOR WHOMto produce are not easy for any soci-ety to answer. Nevertheless, theymust be answered as long as thereare not enough resources to satisfy

peoples seemingly unlimited wants.

The Factors of ProductionThe reason people cannot sat-isfy all their wants and needs is

the scarcity of productive resources.The factors of production, orresources required to produce thethings we would like to have, areland, capital, labor, and entrepre-

neurs. As shown in Figure 1.2, allfour are required if goods and serv-ices are to be produced.

LandIn economics, land refers to the

gifts of nature, or natural resources

not created by humans. Land includes desfertile fields, forests, mineral deposits, livestosunshine, and the climate necessary to grow crBecause only so many natural resources are avable at any given time, economists tend to thinland as being fixed, or in limited supply.

For example, there is not enough good faland to adequately feed all of the earths poption, nor enough sandy beaches for everyonenjoy, nor enough oil and minerals to meet expanding energy needs indefinitely. Becausesupply of a productive factor like land is relatifixed, the problem of scarcity is likely to becoworse as population grows in the future.

Capital

Another factor of production is capitaltools, equipment, machinery, and factories usethe production of goods and services. Such itare also called capital goods to distinguish thfrom financial capital, the money used to buytools and equipment used in production.

Economic Choices

Making Decisions If we cannot have everything we wanthen we have to choose what we want the most. Why must

society face the choices about what, how, and for whom produce?



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Capital is unique in that it is the result of pro-duction. A bulldozer, for example, is a capitalgood used in construction. It also was built in afactory, which makes it the result of earlier produc-tion. Like the bulldozer, the cash register in aneighborhood store is a capital good, as are thecomputers in your school that are used to producethe service of education.

LaborA third factor of production is laborpeople

with all their efforts, abilities, and skills. This cat-egory includes all people except for a unique

group of individuals called entrepreneurs, whichwe single out because of their special role in theeconomy.

Unlike land, labor is a resource that may varyin size over time. Historically, factors such as pop-ulation growth, immigration, famine, war, anddisease have had a dramatic impact on both thequantity and quality of labor.

EntrepreneursSome people are special because they are the inno-

vators responsible for much of the change in oureconomy. Such an individual is an entrepreneur, arisk-taker in search of profits who does somethingnew with existing resources. Entrepreneurs often arethought of as being the driving force in an economybecause they exhibit the ability to start new busi-nesses or bring new products to market. They pro-vide the initiative that combines the resources ofland, labor, and capital into new products.

ProductionWhen all factors of productionland, capital,labor, and entrepreneursare present, production, orthe process of creating goods and services, can takeplace. In fact, everything we produce requires thesefactors. For example, the chalkboards, desks, andaudiovisual equipment used in schools are capitalgoods. The labor is in the form of services supplied

E C O N O M I C SA T A G L A N C EE C O N O M I C SA T A G L A N C E Figure 1.2Figure 1.2

The Factors of Production

Synthesizing InformationSynthesizing Information The four factors of production are necessary for production to takeplace. What four factors of production are necessary to bring jewelry to consumers?

Landincludes the

gifts of nature, or

natural resources notcreated by human

effort.

Capitalincludes the

tools, equipment, and

factories used inproduction.

Laborincludes people

with all their efforts

and abilities.

Entrepreneursare

individuals who start a

new business or bringa product to market.

Land Capital Labor Entrepreneurs



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by teachers, administrators, and other employees.Land, such as the iron ore, granite, and timber usedto make the building and desks, as well as the landwhere the school is located, is also needed. Finally,entrepreneurs are needed to organize the other threefactors and make sure that everything gets done.

The Scope of EconomicsEconomics is the study of human efforts tosatisfy what appear to be unlimited and

competing wants through the careful use of rela-tively scarce resources. As such, it is a social sciencebecause it deals with the behavior of people asthey deal with this basic issue. There are four keyelements to this study: description, analysis, expla-nation, and prediction.

DescriptionEconomics deals with the description of eco-

nomic activity. For example, you will often hearabout the Gross Domestic Product (GDP)the

dollar value of all final goods and services, structures produced within a countrys borders 12-month period. GDP is the most comprehenmeasure of a countrys total output and is a measure of the nations economic heaEconomics is also concerned with what is p

duced and who gets how much, as well as with ics such as unemployment, inflation, internatiotrade, the interaction of business and labor, andeffects of government spending and taxes.

Description is important because we needknow what the world around us looks lHowever, description is only part of the picbecause it leaves many important why and hquestions unanswered.

Analysis

In order to answer such questions, econommust focus on the analysis of economic activitwell. Why, for example, are prices of some ithigh while others are low? Why do some peoearn higher incomes than others? How do taffect peoples desire to work and save?

UNITED STATES LEADSIN ENTREPRENEURSA vast majority of the owners of the nearly 20million businesses in the United States are entre-preneurs. Most either work for themselves orhave a few employees.

A 10-nation study found that the United Statesleads when it comes to entrepreneurs. According to

the survey, nearly 1 in 12 Americans is trying to starta new business. In second place is Canada. The studyalso shows a strong link between business start-uprates and overall economic growth. The graphshows the percentage of the adult population start-ing new businesses.

6.8%

8.5%

1.4%

1.8%

2.0%

2.2%

3.3%

3.4%ItalyBritainGermanyDenmarkFranceFinlandU.S.Canada

Source: 1999 Global Entrepreneurship Monitor

1. Analyzing Information In which nation isentrepreneurial activity strongest? Weakest?

2. Making Comparisons How does the levelof North Americas entrepreneurial activitycompare with Europes?

3. Drawing Conclusions Do you think there isa link between business start-up rates andoverall economic growth? Why or why not?

Critical Thinking



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The importance of analysis is that it helps us todiscover why things work and how things happen.This, in turn, will help us deal with problems thatwe would like to solve.

ExplanationEconomics is also concerned with the explana-

tion of economic activity. After economists under-stand why and how things work, it is useful andeven necessary to communicate this knowledge toothers. If we all have a common understanding ofthe way our economy works, some economic prob-lems will be much easier to address or even fix in

the future. When it comes to the GDP, you willsoon discover that economists spend much of theirtime explaining why the measure is, or is not, per-forming in the manner expected.

PredictionFinally, economics is concerned with prediction.

For example, we may want to know if peoplesincomes are going to rise or fall in the future,affecting their spending habits in the marketplace.Or, perhaps a community trying to choose betweenhigher taxes on homeowners or higher taxes onbusinesses needs to know the consequences of eachalternative before it makes its choice.

The study of economics can help to make thebest decision in both situations. Because econom-ics deals with the study of what is, or what tends tobe, it can help predict what may happen in thefuture, as well as the likely consequences of differ-ent courses of action.

Finally, it is also important to realize that theactual decisions about the economic choices to bemade are the responsibility of all citizens in a freeand democratic society. Therefore, the study ofeconomics helps all of us to become moreinformed citizens and better decision makers.

Checking for Understanding

1. Main Idea Using your notes from the graphicorganizer activity on page 5, explain why asociety must face the choices about WHAT,HOW, and FOR WHOM to produce.

2. Key Terms Define scarcity, economics, need,want, factors of production, land, capital,financial capital, labor, entrepreneur, produc-tion, Gross Domestic Product (GDP).

3. Describe the fundamental economic problem.4. List the three basic economic questions every

society must answer.

5. Describe the factors of production.

6. List the four key elements of economics.

Applying Economic Concepts

7. Scarcity How does scarcity affect your life?Provide several examples of items you had todo without because of limited resources.Explain how you adjusted to this situation.For example, were you able to substituteother items for those you could not have?

8.Synthesizing Information Give an exampleof a supposedly free item that you seeevery day. Explain why the item is not reallyfree by stating who or what actually paysfor it.

Practice and assess key social studies skills with

the Glencoe Skillbuilder Interactive Workbook,

Level 2.

CapitalCapital comprises the tools, equipment, and

factories used to produce goods and services.

As the economy changes, some economists are

adjusting the definition to include tools suchas knowledge and intellectual property. An

example of such knowledge and intellectual

property are databases and software.



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Alexis de Tocqueville, a French traveler,

wrote about his travels in the United

States during the 1830s. His book,

Democracy in America,a two-volume

study of the American people and their

institutions, is still relevant today.

The Role of theEntrepreneur

What astonishes me in the United States is

not so much the marvelous grandeur of such

undertakings as the innumerable multitude

of small ones.Alexis de Tocqueville, 1835

What [de Tocqueville noticed nearly 160

years ago]before the advent of AppleComputer, Genentech, Microsoft, or Nucoris

just as true today. The only difference is that thespirit of enterprise is more than ever a globalphenomenon with few bounds.

From the row of kiosks selling goods on nearlyevery block in Moscow to the cramped factories inTaiwan, Russian biznez-men and Chinese chang-shang are reshaping their nations economies inmuch the same way asthose ingenious old

Yankees created the basisfor Americas business cul-tures just after independ-ence was won.

Any [de Tocqueville ofmodern times] wouldnotice something elseabout this global shift:

Changes in the rules of thebusiness game are puttinga premium on theentrepreneurial quali-ties of [the smaller]companies. Todayssuccessful enterprisesare nimble, innova-tive, close to the cus-tomer, and quick to the

market. Theyre notbureaucratic, centrally con-trolled institutions that are slowto change. It adds us to a new manage-ment catechism with many of the hallmarks small business. . . .

Sure, some industries, such as auto making anpetrochemicals, still require size and scale. But thswift pace of technological change and the framentation of markets are eroding the traditioneconomies of scale. Indeed, some manageme

thinkers now speak of the diseconomies scale, the unresponsiveness, sluggishness, anhigh costs that come with bureaucracy. While thbehemoths try to adjust to new competitive reaties, younger and smaller companies havemerged as the agents of change in economiaround the world. . . .

Reprinted from Small Business Trends and Entrepreneurshby the editors of Business Week, copyright 1995 byThe McGraw-Hill Companies, Inc.

Examining the Newsclip1. Summarizing Information What are the

entrepreneurial qualities of small companies?

2. Finding the Main Idea What does the writer

mean by diseconomies of scale?

News c l i p


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12

Basic Economic Concepts

Main IdeaAn economic product is a good or service that is use-ful, relatively scarce, and exchangeable.

Reading StrategyGraphic Organizer As you read the section, describethree different transactions that could take place inthe factor market. Use a web like the one below tohelp you organize your answer.

Effect

EffectFactor market

Effect

Key Termseconomic product, good, consumer good, capitalgood, service, value, paradox of value, utility, wealth,market, factor market, product market, economicgrowth, productivity, division of labor, specialization,human capital, economic interdependence

ObjectivesAfter studying this section, you will be able to:1. Explain the relationship among scarcity, value,

utility, and wealth.2. Understand the circular flow of economic activity.

Applying Economic ConceptsSpecialization Read to discover how specializationincreases production.

CoverStory

OnSpecialization

Totake an example, . . . Onemandrawsoutthe

wire, another straightensit, athird cutsit, a fourth

pointsit,afifthgrindsitat

thetopforreceivingthe

head;tomakethehead

requirestwoorthree

distinct operations;

to put it on, is a

peculiarbusiness,to

whiten the pins is

another;itisevena

tradebyitselftoput

themintothepaper;

and[themakingof]a

pinis,inthis manner,

dividedintoabouteight-

eendistinctoperations.

AdamSmith,TheWealthof

Nations,1776

Economics, like any other social science, hasits own vocabulary. To understand econom-ics, a review of some key terms is necessary.

Fortunately, most economic terms are widely used,and many will already be familiar to you.

Goods, Services, and ConsumersEconomics is concerned with economicproductsgoods and services that are useful,

relatively scarce, and transferable to others.Economic products are scarce in an economicsense. That is, one cannot get enough to satisfyindividual wants and needs. Because of these char-acteristics, economic products command a price.

GoodsThe first type of economic product is agoodan item that is economically useful or satisfiesan economic want, such as a book, car, or com-pact disc player. A consumer good is intendedfor final use by individuals. When manufacturedgoods are used to produce other goods and serv-ices, they are called capital goods. An example

AdamSmith

12


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of a capital good would be a robot welder in a fac-tory, an oven in a bakery, or a computer in a highschool.

Any good that lasts three years or more whenused on a regular basis is called a durable good.Durable goods include both capital goods, such as

robot welders, and consumer goods such as auto-mobiles. A nondurable good is an item that lastsfor less than three years when used on a regularbasis. Examples of nondurable goods include food,writing paper, and most clothing items.

ServicesThe other type of economic product is a service,

or work that is performed for someone. Servicesinclude haircuts, home repairs, and forms of enter-tainment such as concerts. They also include the

work that doctors, lawyers, and teachers perform.The difference between a good and a service is thata service is intangible, or something that cannot betouched.

ConsumersThe consumer is a person who uses goods and

services to satisfy wants and needs. As consumers,people indulge in consumption, the process ofusing up goods and services in order to satisfy

wants and needs.

Value, Utility, and WealthIn economics, value refers to a worth thatcan be expressed in dollars and cents. Why,

however, does something have value, and why aresome things worth more than others? To answerthese questions, it helps to review an early problemfaced by economists.

Paradox of ValueAt first, early economists were puzzled by a con-

tradiction between necessities and value called theparadox of value. The paradox of value is the situa-tion where some necessities, such as water, have littlemonetary value, whereas some non-necessities, suchas diamonds, have a much higher value.

Economists knew that scarcity is requiredvalue. For example, water was so plentiful in mareas that it had little or no value. On the ohand, diamonds were so scarce that they had gvalue. The problem was that scarcity by itself isenough to create value.

UtilityIt turned out that for something to have valu

must also have utility, or the capacity to be usand provide satisfaction. Utility is not someththat is fixed or measurable, like weight or heiInstead, the utility of a good or service may vfrom one person to the next. One person maya great deal of satisfaction from a home compuanother may get very little. One person may en

a rock concert; another may not. A good or serdoes not have to have utility for everyone, outility for some.

For something to have value, economdecided, it must be scarce and have utility. Ththe solution to the paradox of value. Diamondsscarce and have utilityand therefore they posa value that can be stated in monetary terms. Whas utility, but is not scarce enough in most plto give it much value. Therefore, water is expensive, or has less value, than diamonds.

INFOBYTEINFOBYTE

Durable Goods Orders The Department of Commerces report on durable goods orders highlighthe number of new orders placed with domestmanufacturers for goods intended to last ovethree years. The report is divided into broad cate

gories; these include defense, nondefense, ancapital and noncapital goods. Noncapital goodare generally of the consumer spending varietand include automobiles and large applianceCapital goods tend to be of the investment spending nature, while defense goods indicate government spending.

CHAPTER 1: WHAT IS ECONOMICS


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WealthAnother concept is wealth. Wealth, in an eco-

nomic sense, is the accumulation of those productsthat are tangible, scarce, useful, and transferable fromone person to another. Consequently, a nationswealth is comprised of all items, including natural

resources, factories, stores, houses, motels, theaters,furniture, clothing, books, highways, video games,and even footballs.

While goods are counted as wealth, services arenot because they are intangible. However, this doesnot mean that services are not useful. Indeed, whenAdam Smith wrote The Wealth of Nations in 1776, hewas referring specifically to the ability and skills ofa nations people as the source of its wealth. Toillustrate, if a countrys material possessions weretaken away, its people, through their skilled efforts,

could restore these possessions. On the other hand,if a countrys people were taken away, its wealthwould deteriorate.

The Circular Flow of EconomicActivity

The wealth that an economy generates ismade possible by the circular flow of eco-

nomic activity. The key feature of this circular flow

is the market, a location or other mechanism thatallows buyers and sellers to exchange a certain eco-nomic product. Markets may be local, regional,national, or global. More recently, markets haveevolved in cyberspace, with buyers and sellers inter-acting through computer networks without leavingthe comfort of their homes.

Factor MarketsHow does this circular flow operate? As shown

in Figure 1.3, individuals earn their incomes infactor markets, the markets where productiveresources are bought and sold. This is where entre-preneurs hire labor for wages and salaries, acquireland in return for rent, and borrow money forinterest. The concept of a factor market is a sim-plified version of the real world, of course, but itis nevertheless realistic. To illustrate, you partici-pate in the factor market whenever you go to workand sell your labor to an employer.

Product MarketsAfter individuals receive their income from the

resources they sell, they spend it in product markets,markets where producers sell their goods and serv-ices to consumers. Thus, the money that individu-als receive from businesses in the factor marketsreturns to businesses in the product markets.Businesses then use this money to produce moregoods and servicesand the cycle, through eco-nomic activity, repeats itself.

As you can see from Figure 1.3, markets serve asthe main links between individuals and businesses.Note that money circulates on the outside, illus-trating payments for goods, services, and the fac-tors of production. The actual factors ofproduction, and the products made with these pro-ductive inputs, flow in the opposite direction onthe inside.

Wealth

Natural Resources Fertile land is a naturalresource and an item of wealth. Why are natu-ral resources considered part of the nationswealth?



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Productivity and Economic GrowthEconomic growth occurs when a nationstotal output of goods and services increases

over time. This means that the circular flow inFigure 1.3 becomes larger, with more factors of pro-

duction, goods, and services flowing in one direc-tion, and more payments flowing in the oppositedirection. A number of factors are responsible foreconomic growth, but productivity is the mostimportant.

ProductivityEveryone benefits when scarce resources

used efficiently. This is described by the tproductivity, which is a measure of the amounoutput produced by a given amount of inputs specific period of time. Productivity goes up wh

ever more output can be produced with the samount of inputs in the same amount of time.example, if a company produced 500 units oproduct in one period, and if it produced 510



The Circular Flow of Economic Activity

BusinessIncome

ConsumerSpending

Payments forResources

Income fromResources

GoodsServices

GoodsServices

BuyProductiveResources

LandCapitalLabor

Entrepreneurs

ProductMarkets

FactorMarkets

Individuals

$$

$$

$$$$

Businesses

Using Charts The circular flow diagram shows the high degree of economic interdependencein our economy. In the diagram, the factors of production and the products made from them flow inone direction. The payments for the factors, which consumers spend on goods and services, flowin the opposite direction. As a consumer, what role do you play in the circular flow ofeconomic activity?

Using Charts The circular flow diagram shows the high degree of economic interdependencein our economy. In the diagram, the factors of production and the products made from them flow inone direction. The payments for the factors, which consumers spend on goods and services, flowin the opposite direction. As a consumer, what role do you play in the circular flow ofeconomic activity?



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the next period with the same number of inputs,then productivity went up.

Productivity is often discussed in terms of labor,but it applies to all factors of production. For thisreason, business owners try to buy the most effi-cient capital goods, and farmers try to use the most

fertile land for their crops.

Division of Labor and SpecializationDivision of labor and specialization can improve

productivity. Division of labor takes place whenwork is arranged so that individual workers do fewertasks than before. In most cases, a worker who per-forms a few tasks many times every day is likely tobecome more proficient than a worker who performshundreds of different tasks in the same period.

Specialization takes place when factors of pro-duction perform tasks that they can do relativelymore efficiently than others. Note that specializa-tion is not limited to a single factor of productionsuch as labor. For example, complex industrialrobots are often built to perform just one or two

simple assembly line tasks. In regional specializa-tion, different regions of the country often special-ize in the things they can produce bestas whenIdaho specializes in potatoes, Iowa in corn, andTexas in oil, cotton, and cattle.

One of the best examples of the advantagesoffered by the division of labor and specialization isHenry Fords introduction of the assembly line intoautomobile manufacturing. This process cut the timenecessary to assemble a car from a day and a half to

just over 90 minutes. It also cut the price of a new carby more than 50 percent. The resultwas an improvement in productivity.

Another example of the changesthat can result from specialized toolscan be seen in American agriculture.In 1910 it took more than 13 millionfarmers to feed the U.S. population,at that time about 90 million. Today,2 million farmers can feed a popula-tion that is more than three times aslarge as it was in 1910.

Investing in Human CapitalOne of the main contributions to

productivity comes from investmentsin human capital, the sum of theskills, abilities, health, and motivationof people. Government can invest inhuman capital by helping to provideeducation and health care. Businessescan invest in training and other pro-grams that improve the skill andmotivation of its workers. Individuals

can invest in their own education bycompleting high school, going totechnical school, or going to college.

Figure 1.4 shows that investmentsin education can have substantialpayoffs. According to the data in thetable, high school graduates havesubstantially higher incomes than



Effect of Education on Income

Education

Source:U.S. Department of Commerce, Bureau of the Census, 2003

FemalesAverage Income For

Males

Less Than 9th Grade

9th to 12th Grade (no diploma)High School Graduate & Equivalency

Some College, no degree

Associate Degree

Bachelors Degree

Masters Degree

Professional Degree

Doctorate Degree

$25,112

$30,656$39,017

$46,696

$48,153

$71,361

$87,099

$130,764

$104,237

$18,227

$23,625$27,525

$33,002

$34,560

$45,778

$57,874

$72,689

$70,302

Using Tables Education isone way to invest in humancapital. How does this typeof invest-ment pay off forboth employers andemployees?

Using Tables Education isone way to invest in humancapital. How does this typeof investment pay off forboth employers and theiremployees?

Visit epp.glencoe.com and click onTextbook UpdatesChapter 1 for

an update of the data.

http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://contents.pdf/http://epp.glencoe.com/http://epp.glencoe.com/http://contents.pdf/


16/30


nongraduates, and college graduates make evenmore than high school graduates. Educationalinvestments require that we make a sacrifice today sowe can have a better life in the futureand fewinvestments generate higher returns.

Investing in the FutureBusinesses, government, and other organiza-

tions face many of the same choices that individu-als do. Investments in human capital and physicalcapital can eventually increase production and pro-mote economic growth. Faster economic growth,in turn, increases the amount of goods and servicesavailable to us.

Economic InterdependenceThe American economy has a remarkable degree

of economic interdependence. This means that werely on others, and others rely on us, to provide thegoods and services that we consume.

Events in one part of the country or the worldoften have a dramatic impact elsewhere. To illustrate,a labor dispute between several hundred professionalbasketball players and a handful of owners can affect

the lives of tens of thousands of people who pcars, sell tickets, serve food at the games, and NBA apparel and memorabilia all across the counOr, bad weather in countries where sugar cangrown can affect sugar prices in the United Stwhich in turn can affect the price of snack foods the demand for sugar substitutes elsewhere.

This does not mean that economic interdepdence is necessarily bad. The gain in productiand income as a result of increased specializatalmost always offsets the costs associated withloss in self-sufficiency. However, we need to unstand how all the parts fit together, which is reason why we study economics.

Checking for Understanding1. Main Idea Using your notes from the graphic

organizer activity on page 12, explain thedifferent transactions that take place in theproduct market.

2. Key Terms Define economic product, good,consumer good, capital good, service, value,paradox of value, utility, wealth, market,factor market, product market, economicgrowth, productivity, division of labor,specialization, human capital, economicinterdependence.

3. Discuss the relationship among scarcity, value,utility, and wealth.

4. Describe the circular flow of economic activity.

5. Explain why productivity is important to eco-nomic growth.

Applying Economic Concepts6. Specialization Provide at least three example

each of specialized workers and capital thatare used in your school to provide the serviceof education. Would productivity go up ordown if these specialized capital goods andworkers were not available to your school?Explain why or why not.



Level 2.

7. Making Comparisons What is the differ-ence between a durable good and a non-durable good?

8.Drawing Conclusions In what way do busi-nesses and households both supply anddemand in the circular flow model?

First and Biggest The worlds first programmabcomputer, the Electronic Numerical Integrator anComputer (ENIAC), was developed in 1946. Standinalmost 10 feet tall and 80 feet wide, ENIAC couperform up to 5,000 operations per second. Personcomputers today easily outperform ENIAC.



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The Father of ClassicalEconomics:

Adam Smith(17231790)

Take a look at a Scottish pennyand youll be surprised by whatyou see. The person pictured wasnot a political or military figure,

but an economist: Adam Smith.It is a fitting tribute to a man whocontributed so much to economics.

HIS L I FE

Smith was born in Kirkcaldy,Scotland. After graduating fromGlasgow University, he traveledto England and enrolled at OxfordUniversity. Six years later, Smith

returned to Scotland to lectureat Edinburgh University and athis alma mater, where he wasimmensely popular with his stu-dents. Smith became a tutor to ayoung duke, and traveled through-out Europe.

HIS IDEAS

Smith met and exchanged ideaswith French writer Voltaire,

Benjamin Franklin, and the Frencheconomist Quesnay. His travelshelped him formulate the ideas putforth in The Wealth of Nations (1776).In The Wealth of Nations, Smithobserved that labor becomes more

productive as each worker becomesmore skilled at a single job. He saidthat new machinery and the divi-sion of labor and specializationwould lead to an increase in produc-tion and greater wealth of nations.Smith also put forth what was then

a radical new idea: that the wealthof a nation should be defined as thesum of its labor-produced goods,not by who owned those goods.

Smiths most influential contri-bution, however, concerned com-petition in the marketplace. Everyindividual, Smith wrote, intendsonly his own gain, and he is in this. . . led by an invisible hand. . . .By pursuing his own interest he fre-

quently promotes that of the soci-ety. . . . Smith argued that a freemarket isnt chaotic, but that com-petition acts as an invisible handthat guides resources to their mostproductive uses. A truly free,

competitive marketoperating witha minimum of government inter-ventionwould bring about thegreatest good for society as a whole.

The English aristocracy ridiculedThe Wealth of Nations. Business peo-ple, however, were delighted to

have a moral justification for theirgrowing wealth and power. Soon,Smiths doctrine of laissez-faire(French, let it be), meaning mini-mal government intervention ineconomic affairs, became the eco-nomic watchword in Europe, and istoday the economic watchword ofmuch of the world.

Examining the Profile1. Summarizing Ideas Summarize

Smiths contribution to economic

thought.

2. Synthesizing Information Explain

how Smiths ideas are evident in the

workings of the American economy.



18/30

CoverStory

CostBenefitAnalysis

Research has

long demonstratedtheeducationalvalue

of early interven-

tion for Americas

at-riskchildren,but

a new study also

showsthe federal

programsareawise

publicinvestment.

[A] cost-benefit

analysisofthefed-

erally funded Chi-

cagoChild-Parent

Center program,

which serves chil-

drenfromlow-incomefamiliesinChicagosinner

city

[showsthat] an averageannual cost of $6,730p

er

childgeneratedatotalreturn tosocietyatlar

ge

of$47,759perparticipant.

-AScribeNewswire,June26,2001

Socialprogramsinvolvetrade-offs

andopportunitycosts.

Main Idea

Trade-offs are present whenever choices are made.

Reading StrategyGraphic Organizer As you read this section, completea graphic organizer similar to the one below byexplaining what you need to know to become agood decision maker.

Economic Choices andDecision Making

Key Termstrade-off, opportunity cost, production possibilitiesfrontier, cost-benefit analysis, free enterprise econ-omy, standard of living

ObjectivesAfter studying this section, you will be able to:1. Analyze trade-offs and opportunity costs.2. Explain decision-making strategies.

Applying Economic ConceptsOpportunity Costs Read to find out how your deci-sions are measured in terms of opportunity costs.

Making decisions

The process of making a choice is not alweasy. Still, individuals, businesses, and gernment agencies, like the Chicago Ch

Parent Center program, who try to satisfy peopwants and needs, must make decisions. Becaresources are scarce, consumers need to make w

choices. To become a good decision maker, need to know how to identify the problem then analyze your alternatives. Finally, you havmake your choice in a way that carefully consithe costs and benefits of each possibility.

Trade-Offs and Opportunity CostThere are alternatives and costs to evthing we do. In a world where there is

such thing as a free lunch, it pays to examine thconcepts closely.

Trade-OffsThe first thing we must recognize is that p

ple face trade-offs, or alternative choices, whever they make an economic decision. To hmake the decision, constructing a grid suchthat in Figure 1.5 shows one way to approach



19/30

problem. This grid summarizes a decision to bemade by Jesse, a newspaper carrier, whose dilemma ishow to spend a gift of $50 in the best way possible.

Jesse realizes that several alternatives are appeal-inga soccer ball, jeans, a portable CD player, sev-eral CDs, or concert tickets. At the same time, he

realizes that each item has advantages and disad-vantages. Some of these items are more durablethan others, and some might require his parentsconsent. Some even have additional costs whileothers do notthe CD player would require batter-ies and the concert tickets would require the use ofhis parents car.

To help with his decision, Jesse draws a grid thatlists his alternatives and several criteria by which tojudge them. Then he evaluates each alternativewith a yes or no. In the end, Jesse chooses thejeans because they satisfy more of his criteria thanany other alternative.

Using a decision-making grid is one way to ana-lyze an economic problem. Among other things, itforces you to consider a number of relevant alter-natives. For another, it requires you to identify thecriteria used to evaluate the alternatives. Finally, itforces you to evaluate each alternative based on thecriteria you selected.

Opportunity CostPeople often think of cost in terms of dollars

and cents. To an economist, however, cost oftenmeans more than the price tag placed on a goodor service. Instead, economists think broadly interms of opportunity costthe cost of the next

best alternative use of money, time, or resourceswhen one choice is made rather than another.When Jesse made his choice and decided to pur-chase the jeans, his opportunity cost was the nextbest choicethe soccer ball or the CD playerthathe gave up.

Suppose you spend $5,000 on a used car. Theopportunity cost of the purchase is the value of thestereo, apartment, vacation, or other items andactivities that you could have purchased with themoney spent on the car.

Even time has an opportunity cost, althoughyou cannot always put a monetary value on it. Theopportunity cost of taking an economics class, forexample, is the history or math class that you couldnot take at the same time. Thus, part of makingeconomic decisions involves recognizing and eval-uating the cost of the alternatives as well as makingchoices from among the alternatives.

E C O N O M I C SA T A G L A N C EE C O N O M I C SA T A G L A N C E Figure 1.5Figure 1.5

Jesses Decision-Making Grid

Using TablesUsing Tables A decision-making grid is a good way to list and then evaluate alternatives when adecision must be made. What do economists mean when they talk about costs?

Alternatives

Adapted fromA Framework for Teaching Basic Economics,Economics America National Council on Economic Education, 1996

Criteria

Costs $50or less?

Durable? Will parentsapprove?

Future expenseunnecessary?

Can useanytime?

Several CDs

Concert tickets

CD player

Soccer ball

Jeans

yes

yes

yes

yes

yes

yes

no

yes

yes

yes

yes

no

yes

yes

yes

yes

no

no

yes

yes

no

no

yes

no

yes



20/30

Production PossibilitiesA popular model economists use to illus-trate the concept of opportunity cost is the

production possibilities frontier, a diagram repre-senting various combinations of goods and/orservices an economy can produce when all pro-ductive resources are fully employed. In the classicexample shown in Figure 1.6, a mythical countrycalled Alpha produces two goodsguns and butter.

Identifying Possible AlternativesEven though Alpha only produces two goods,

the country has a number of alternatives available

to it. For example, it could choose to use all of itsresources to produce 70 units of guns and 300 unitsof butter, which is shown as point a in Panel A ofFigure 1.6. Or, it could shift some of its resources outof gun production and into butter, thereby mov-ing to pointb. Alpha could even choose to produceat point c, which represents all butter and no guns,or at point e, which is inside the frontier.

Alpha has many alternatives available towhich is why the figure is called a production psibilities frontier. Eventually though, Alpha

have to settle on a single combination suchpoint a, b, or any other point on or inside curve, because its resources are limited.

Fully Employed ResourcesAll points on the curve such as a, b, and c re

sent maximum combinations of output possiball resources are fully employed. To illustrate, pose that Alpha is producing at point a and people would like to move to point d, which resents the same amount of guns, but more bu

As long as all resources are fully employedpoint a, however, there are no extra resources avable to produce the extra butter. Therefore, poicannot be reached, nor can any other point outthe curve. This is why the figure is called a prodtion possibilities frontierto indicate the mmum combinations of goods and/or services can be produced.

Economic Choices

Trade-Offs In this cartoon, the king faces a trade-off between crops and catapults. What is the oppotunity cost of obtaining two more catapults?



21/30

Opportunity CostSuppose that Alpha was producing at point a

and that it wanted to move to point b. This isclearly possible so long as pointb is not outside thefrontier. As shown in Panel B of Figure 1.6, the

opportunity cost of producing the 100 additionalunits of butter is the 30 units of guns given up.

As you can see, opportunity cost is a generalconcept that is expressed in terms of trade-offs, orin terms of things given up to get something else.Opportunity cost is not always measured in termsof dollars and cents. For example, you need to bal-ance the time you spend studying and doing

homework and spending time with your friends. Ifyou decide to spend extra hours on your home-work, the opportunity cost of this action is lesstime with your friends.

The Cost of Idle ResourcesIf some resources were not fully employed, then

it would be impossible for Alpha to reach its poten-tial. To illustrate, suppose that Alpha was producingat pointb in Panel Aof Figure 1.6 when workers inthe butter industry went on strike. Butter productionwould fall, causing total output to change to point e.The opportunity cost of the unemployed resourceswould be the 100 units of lost production.

Production at e could also be the result of otheridle resources, such as factories or land that areavailable but are not being used. As long as some

resources are idle, the country cannot produce onits frontierwhich is another way of saying that itcannot reach its full production potential, althoughit can produce at some point inside it.

Economic GrowthThe production possibilities frontier represents

potential output at a given point in time.Eventually, however, population may grow, the cap-ital stock may grow, and productivity may increase.

If this happens, then Alpha will be able to producemore in the future than it can today.The effect of economic growth is shown in

Panel C of Figure 1.6. Economic growth made pos-sible by having more resources or increased pro-ductivity causes the production possibilitiesfrontier to move outward. Economic growth willeventually allow Alpha to produce at point d,which it could not do earlier.

Student Web Activity Visit the Economics: Principles

and Practices Web site at epp.glencoe.com and click

on Chapter 1Student Web Activities to learn more

about what economists do.

Opportunity Cost

Making Choices The nation incurs opportunitycosts when it makes choices. The money spent

on defense cannot at the same time be spent onhealth services; money spent on health servicescannot be spent on education, and so on. Whydoes every choice involve an opportunity cost?



22/30

Thinking Like an EconomistBecause economists study how people sat-isfy seemingly unlimited and competing

wants with the careful use of scarce resources, theyare also concerned with strategies that will help us

make the best choices. Some of these strategies arediscussed here; others will be discussed in laterchapters.

Build Simple ModelsOne of the most important strategies of econo-

mists is the economic model. A model is a simpli-fied theory or a simplified picture of whatsomething is like or how something works. Simplemodels can often be constructed that reduce com-

plex situations to their most basic elements. Toillustrate, the circular flow diagram in Figure 1.3 isan example of how complex economic activity canbe reduced to a simple model.

Another basic model is the production possibil-ities frontier illustrated in Figure 1.6. Realistically,of course, economies are able to produce morethan two goods or services, but the concepts oftrade-offs and opportunity costs are easier to illus-trate if only two products are examined. As a result,simple models such as these are sometimes all thateconomists need to analyze or describe an actualsituation.

It is important to remember that models arebased on assumptions, or things that we take forgranted as true. We use them as facts even thoughwe cant be sure that they are. For example, youmight assume that a restaurant is out of your pricerange. You might not even try it because youassume you cannot afford it. However, you mightbe wrongthe prices at the restaurant might bequite reasonable. The quality of a model is no bet-ter than the assumptions that it is based on.

It is also important to keep in mind that mod-els can be revised. Economists use models to betterunderstand the past or present and to predict thefuture. If an economic model results in a predic-tion that turns out to be right, the model can beused again. If the prediction is wrong, the modelmight be changed to make better predictions thenext time.

AA Alternative Possibilities


E C O N O M I C SA T A G L A N C E Figure 1.Figure 1.

The Production

Possibilities Frontier

Using GraphsUsing Graphs A production possibilitiefrontier shows the different combinations otwo products that can be produced. Whado points inside the frontier represent?

70

40

70

40

300 400

Butter

Increased productivityand additional factorsof production expand

production possibilities.

a

b

c

d

BB Opportunity Cost

Guns

Butter

300 400

a

b

c

Guns

CC Economic Growth

Guns

Butter

a

e

d

b

c

The opportunity costof producing 100 units

of butter is the 30 gunsgiven up.

Production can takeplace anywhere on or

inside the frontier.



23/30

Employ Cost-Benefit AnalysisMost economic decisions can be made by using

cost-benefit analysis, a way of thinking about aproblem that compares the costs of an action tothe benefits received. This is what Jesse did in thedecision-making matrix shown in Figure 1.5. This

decision can be made subjectively, as when Jesseselected the jeans. Or, the decision can be moreformal, especially if the costs of the various alter-natives are different.

To illustrate, suppose that you like choices A andB equally well. If B costs less, however, then itwould be the better choice because you would getmore satisfaction per dollar spent. Businesses makeinvestment decisions in exactly this manner, choos-ing to invest in projects which give the highestreturn per dollar spent. Cost-benefit studies, like

the one described in the cover story, can also beused to evaluate the effectiveness of many publicassistance programs.

Take Small, Incremental StepsFinally, and whenever possible, it also helps to

make decisions by taking small, incremental stepstoward the final goal. This is especially valuablewhenever we are unsure of the exact, or total, costinvolved. If the cost turns out to be larger than we

anticipated, then the resulting decision can bereversed, without too much being lost.

For example, if someone offers you a hot bev-erage, it might be best to take a small sip first. Thiswill allow you to find out if the beverage is coolenough to drink, without paying too high a priceif it is not. Few decisions are all-or-nothing deci-sionssometimes it helps to do a little bit at atime.

The Road AheadThe study of economics does more thanexplain how people deal with scarcity.

Economics also includes the study of how thingsare made, bought, sold, and used. It helps answersuch questions as, Where do these products comefrom? Who makes them? How are they made?How do they get to the stores? Who buys them?It provides insight as to how incomes are earnedand spent, how jobs are created, and how theeconomy works on a daily basis. It also provides amore detailed understanding of a free enterpriseeconomyone in which consumers and privatelyowned businesses, rather than the government,make the majority of the WHAT, HOW, and FORWHOM decisions.

Topics and IssuesThe study of economics will provide a working

knowledge of property rights, competition, supplyand demand, the price system, and the economic

incentives that make the American economy func-tion. Along the way, topics such as unemployment,the business cycle, inflation, productivity, and eco-nomic growth will be covered. The role of business,labor, and government in the American economyalso will be examined, along with the relationshipof the United States economy to the internationalcommunity. All of these have a bearing on our

Economists study the way society dis-

tributes scarce resources to produce

goods and services. They carry oninquiries, collect and analyze data,

and observe economic trends.

The Work

Economists in the private sector

advise businesses and other organi-

zations on such topics as energy

costs, inflation, imports, and employ-

ment levels. Those who work for var-

ious government agencies may study

economic conditions in the United

States or in other countries to estimate the economic

effects of new legislation or public policies.

Qualifications

Graduate training is required for most economists in the

private sector. Individuals who wish to secure an entry-

level job in the federal government must have a bache-

lors degree, with a focus on economics and on statistics,

accounting, or calculus.

Economist



24/30

standard of livingthe quality of life based on thepossession of the necessities and luxuries that makelife easier. You will learn how we measure the valueof our production and how productivity helpsdetermine our standard of living. You will find,however, that the way the American people make

economic decisions is not the only way to makethese decisions. Economists have identified threebasic kinds of economic systems. You will analyzethese systems in Chapter 2.

Economics for CitizenshipThe study of economics helps us to become bet-

ter decision makersboth in our personal lives andin the voting booths. Economic issues often aredebated during political campaigns, and we need to

understand the issues before deciding which candi-date to support. Most of todays political problemshave important economic aspects: How importantis it that we balance the federal budget? How can webest keep inflation in check? What methods can weuse to strengthen our economy? The study of eco-nomics will not provide you with clear-cut answersto all questions, of course, but it will give you a bet-ter understanding of the issues involved.

Making the Rational ChoiceYou have already learned in this chapter

economists study how decisions are made. Evtime a choice is made something is given Rational choice is taking the things with grevalue and giving up those with lesser value. Th

the rational thing to do.But which things have greater value? If every

felt the same about what they did and did want, deciding how to use our resources wouldsimple; the problem is we dont all agree. Wyou make a decision for yourself alone, it doemake much difference how others feel. But mof your decisions will affect other people who mnot share your ideas. Making the best choicesgroups of people is hard to do.

Textbook economics can be divided into

sections for study, but the real world is notorderly. Society is dynamic and things are alwchanging. In addition, people have different degof ambition, strength, and luck. Opinions also fer, and some issues never seem to be settled.

In practice, the world of economics is compand the road ahead is bumpy. Studying and unstanding economics, however, is vital to understanding of how the world around us wo


Checking for Understanding

1. Main Idea Using your notes from the graphicorganizer activity on page 19, explain whatpeople try to achieve when they make deci-sions or trade-offs.

2. Key Terms Define trade-offs, opportunitycost, production possibilities frontier, cost-benefit analysis, free enterprise economy,standard of living.

3. Describe the relationship between trade-offs

and opportunity costs.

4. List the decision-making strategies that econ-omists use.

5. Explain why the study of economics is impor-tant to the American free enterprise system.

Applying Economic Concepts

6. Opportunity Costs Identify several possibleuses of your time that will be available to youafter school today. What will you actually do,and what will be the opportunity cost of youdecision? Explain how your decision will orwill not affect your friends and members ofyour family.

7. Making Generalizations Study the decision-making grid on page 20. Explain the advan-tages of using such a grid to evaluatealternatives.



Level 2.


25/30

Find two print or internet articles about an impor-tant local economic issue. Sequence or categorizethe information on note cards or in a chart.

Practice and assess key social studies skills with the

Glencoe Skillbuilder Interactive Workbook, Level 2.

Sequencing and Categorizing InformationSequencing involves placing facts in the order in which they occur.Categorizing entails organizing information into groups of related facts andideas. Both actions help you deal with large quantities of information in anunderstandable way.

Excerpt A

In the 1950s and early 1960s, the United Statesdominated the world steel market. However, constructionof new facilities in other countries hurt the domestic steelindustry in the 1980s. During the next ten years, U.S. steel

firms improved production methods and reduced hourlywages. By 1990 the number of work-hours required to

produce a ton of steel fell from 10.5 in 1980 to just 5.3 in1990. Trade protection, beginning with the 1947 General

Agreement on Tariffs and Trades, and later agreementsprotected many American jobs.

Excerpt B

Competition is the rivalry among producers or sellers ofsimilar goods to win more business by offering the lowest

prices or best quality. In many industries effective

competition requires a large number of independent buyersand sellers. This large number of competitors means that noone company can noticeably affect the price of a particular

product. Competition also requires that companies canenter or exit any industry they choose. Those who feel theycould make more profit in another industry are free to getout of the industry they are in.

1. Which passages information can be organizedsequentially? List the main ideas in chronological order.

2. What categories can you use to organize theinformation in the other excerpt?

Learning the SkillFollow these steps to learn sequencing and

categorizing skills:

Look for dates or clue words that provide youwith a chronological order: in 2004, the late 1990s,

first, then, finally, and so on.

If the information does not happen in sequence,you may categorize it instead. To do so, look forinformation with similar characteristics.

List these characteristics, or categories, as theheadings on a chart.

As you read, fill in details under the proper cate-gory on the chart.

Practicing the SkillRead the excerpts that follow, compare the

information they contain, then answer the questions.

Steelworker tends blast furnace



26/30

S e c t i o n 1

Scarcity and the Science ofEconomics (pages 510) The basic economic problem of scarcity is due to

the combination of peoples seemingly unlimitedwants and relatively scarce resources.

In a world of scarce resources,There Is No SuchThingAsA Free Lunch (TINSTAAFL).

Because of scarcity, societyhas to decide WHAT, HOW,and FOR WHOM toproduce.

Land, capital, labor, andentrepreneurs are the fourfactors of productionrequired to produce the thingsthat people use.

Entrepreneurs are risk-taking individuals who go intobusiness in order to make a profit; they organize theother factors of production.

The scope of economics deals with description,analysis, explanation, and prediction.

S e c t i o n 2

Basic Economic Concepts (pages 1217)

Consumers usegoods and services to satisfy theirwants and needs.

Something hasvalue when it has utility and is rela-tively scarce.

Wealth consists of products that are scarce, useful,

and transferable to others, but wealth does notinclude services, which are intangible.

Markets link individuals and businesses in the circu-lar flow of economic activity; the factors of produc-tion are traded in factor markets; goods and servicesare traded in the product markets.

Productivity and investments in human capitaleconomic growth; investments in human capital among the most profitable of all investments.

Increases in specialization and division of labor

cause more economic interdependence.

S e c t i o n 3

Economic Choices and DecisionMaking (pages 1925)

The opportunity cost of doing something is the best alternative, or trade-off, that you give up.

A decision-making grid can be used to help evalualternatives.

A production possibilities frontier shows the varous possible combinations of output that can beproduced when all resources are fully employed;production inside the frontier occurs when someresources are idle or are not being used to theirmaximum capability.

When economic growth takes place, the productipossibilities frontier shifts outward, showing thatmore products are produced than before.

The economic way of thinking involves simplificawith model building, cost-benefit analysis to evalalternatives, and incremental decision making.

The study of economics will make youa better decision maker and willhelp you to understand theworld around you; however,the study of economicswill not tell you whichdecisions to make.

The study of economicshelps people understandhow a free enterpriseeconomy makes theWHAT, HOW, and FORWHOM decisions.

CHAPTER 1: WHAT IS ECONOMICS?


27/30

Identifying Key TermsWrite the key term that best completes the following sentences.

capital goods opportunity cost

consumer goods scarcity consumers servicesfactors of production utilityhuman capital value

1. Economic products designed to satisfy peopleswants and needs are called _____ .

2. The _____ of a CD player can be expressed in dol-lars and cents.

3. Haircuts, repairs to home appliances, and enter-tainment are examples of _____ .

4. _____ arises because society does not have enoughresources to produce all the things people wouldlike to have.

5. The _____ of going to a football game instead ofworking would include the money not earned atyour job.

6. _____ is the sum of the skills, abilities, health, andmotivation of people.

7. _____ is another name for the capacity of a prod-uct to be useful.

8. The only factors of production that are themselvesthe result of earlier production are _____ .

9. Land, capital, labor, and entrepreneurs are _____ .

10. People who use goods and services to satisfy theirwants and needs are called _____ .

Reviewing the FactsSection 1 (pages 510)

1. Identify the cause of scarcity.2. List the three basic economic questions that every

society must face.

3. Describe the factors of production required todeliver a service like education.

4. Explain why economics is considered a socialscience.

Section 2 (pages 1217)

5. Describe the relationship between goods, services,

and consumers.

6. Explain why services are excluded from the meas-ure of wealth.

7. Distinguish between product markets and factormarkets.

8. Explain why economists argue that productivity isimportant.

Section 3 (pages 1925)

9. Describe the nature of an opportunity cost.10. Identify the economic concept illustrated by the

production possibilities frontier.

11. Describe incremental decision making.

12. Explain why economic education is important.

Thinking Critically1. Understanding Cause and Effect Suppose that

Alpha, shown in Figure 1.6 on page 23, decided

to produce more guns and less butter. What wouldAlpha have to do to make the change? Whatwould be the opportunity cost of producing moreguns? What conditions would have to be met forthe new mix of guns and butter to be on the pro-duction possibilities frontier?

Self-Check Quiz Visit the Economics: Principles

and Practices Web site at epp.glencoe.com and

click on Chapter 1Self-Check Quizzes to prepare

for the chapter test.

28 UNIT 1 FUNDAMENTAL ECONOMICCONCEPTS
http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://epp.glencoe.com/http://contents.pdf/http://epp.glencoe.com/http://contents.pdf/


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2. Understanding Cause and Effect Copy the twodiagrams of the production possibilities frontiersshown below. Then, write captions that explainwhat each diagram is showing.

Applying Economic Concepts1. Scarcity What three choices must a society make

because of scarcity?

2. Utility How is a products utility related to itsvalue?

3. Cost-Benefit Analysis How would you apply theconcept of cost-benefit analysis to the decision tofinish high school? To further your education?

Math PracticeA city administrator with a $100,000 annual budgetis trying to decide between fixing potholes or direct-ing traffic at several busy intersections after school.Studies have shown that 15 cars hit potholes everyweek, causing average damages of $200. Collisions atthe intersections are less frequent, averaging one permonth at an average cost of $6,000, although nonehave ever caused injuries or deaths. Use this informa-tion to answer the following questions.

1. What are the annual costs from the pothole damage?

2. What are the annual costs due to damage fromcollisions?

3. Given the size of the annual budget, make yourrecommendation as to which project should beundertaken. Explain you answer in terms of dollarbenefits per dollar spent.

Thinking Like an EconomistUse a problem-solving process to gather informationabout the alternatives, trade-offs, and opportunitycosts facing the city administrator. List and considerpossible options the administrator may choose toimplement. Consider the advantages and disadvan-tages of implementing the possible solutions.

Technology SkillUsing a Spreadsheet Keep track of your economicdecisions for one week. Use your data to create aspreadsheet, highlighting your weekly spending habits.

1. In cells B1 through E1, type Food, Clothing,Entertainment, and Other. In cell F1, type Total.

2. In cells A2 through A8, type the days of the week,starting with Monday in cell A2. In cell A9, type Total

3. In cells B2 through E2, enter the amount spent ineach category on Monday.

4. In cell F2, use a formula such as =SUM(B2:E2) tocalculate total expenditures on Monday. Click anddrag this formula to cells F3 through F8 to find theother weekday sums.

5. Compute total expenditures for cells B9F9.



Level 2.

Guns

Butter

CAUSE

EFFECT

Guns

Butter

CAUSE

EFFECT

Decision-Making Grid

Criteria Criteria Criteria CriteriaAlternatives 1 2 3 4

Sequencing and Categorizing InformationIdentify a reasonably large purchase yourecently made or are about to make. Whatare the trade-offs involved, and what are thecriteria you use to evaluate the alternatives?On a separate sheet of paper, illustrate yourdecision in the form of a decision-makinggrid like the one below.

CHAPTER 1: WHAT IS ECONOMICS?


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Working withResource ScarcityFrom the classroom of . . .

Douglas IdeMt. Ararat High SchoolTopsham, Maine

Our resources are limited while our

wants are relatively unlimited. In thisworkshop, you will experiment with meth-ods to overcome the problem of scarcity.You will also answer the three fundamentalquestions of economics: what to produce,how to produce it, and how to distributewhat you produce. Finally, you will ana-lyze why it is important to determine theanswers to these questions.

Setting Up the WorkshopFor this activity you will need:

small paper lunch bags

miniature chocolate bars

marshmallows

graham crackers

Procedures

STEP 1

Review the conceptof scarcity with your

group. Remember that

scarcity is the economic

term that describes a situa-

tion where there are not

enough products available to

satisfy peoples needs or wants.

Discuss why scarcity always exists.

STEP 2

Review the concept of production. Note that

productionthe creation of goods and ser-vicesrequires four factors.

STEP 3

Your teacher will provide you with your groupsresources. Do not open the bag.

The Four Factors of Production:

Natural Resources

Labor

Capital

Entrepreneurship



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STEP 4

Read and discuss these instructions:

This bag contains your resources. You must use

these resources and no other, but you may usethem in any way you choose. The resources are

exactly what they appear to be: chocolate,

marshmallows, and graham crackers; they may

not be used to represent anything other than

that.

STEP 5

Open your bag and study the contents. Discuss

what item or items your group can produce

with these resources. Due to scarcity, your

group may have difficulty in producing onecomplete unit of product for each group

member.

STEP 6

Compare the available resources in your bag tothe demand for the finished product. How

many units can be produced? How will you

produce them? How will you distribute them?

(e.g. Will each member of the group receive a

completed unit, or will only some of the mem-

bers receive the product? If not everyone

receives one, how will you determine who

receives one?)

Summary Activity

Once youve produced the product, answer the

following questions. Take notes as you deter-

mine the answers.

1. What was your first thought when you

opened the bag and examined the amount

of resources?

2. What did you then have to decide?

3. Why did you have to think about how to

produce them, and how they would be

distributed?

4. Were each of the four factors of production

used in making your product?

5. What resources were used?

6. What type of skills and tools did the workers

need?

7. Create a chart showing the factors of pro-

duction that are combined into different

consumer products that the members of

your group buy.

Documents

fundamentos de Economia.pdf