Chapter 1: What
Economics is a social science, that
deals with the fundamental economic problem of scarcitya
condition caused by the combination of seemingly unlimited
wants and limited resources. Because of this, choices and
decision making are the central focus of Chapter 1.
Section 1 introduces the concepts of needs
such as food, clothing, and shelterand wants, which
are ways of expressing needs. The notion of TINSTAAFL, which
stands for There Is No Such Thing As A Free Lunch, is often
used to remind us that resources are scarce and that we must
make careful economic decisions regarding WHAT, HOW, and FOR
WHOM to produce. Other concepts relevant to economics, such
as the four factors of production-land, capital, labor, and
entrepreneursalong with the meaning and scope of economics,
are also examined.
Section 2 introduces a number of key economic
concepts, including utility, value, and wealth. The concepts
of goods, services, consumers, markets, factor markets, product
markets, productivity, economic growth, and economic interdependence
are explained and are linked in the circular flow diagram.
Productivity is necessary for economic growth, and growth
takes place when specialization and the division of labor
are present. Human capital, the sum of our skills, abilities,
health, and motivations, is another important component of
Section 3 deals with the way economists
think about choices. Choices are explained in terms of trade-offs,
or alternatives that are available whenever a decision is
made. The cost of every decision is measured in terms of its
opportunity cost, which is the cost of the next best alternative
use of money, time, or resources when one choice is made rather
than another. Trade-offs can be analyzed with a decision-making
matrix, or illustrated with a production possibilities frontier.
The production possibilities frontier, the decision-making
matrix, and the circular flow diagram are some of the more
useful "tools" used by economists.