Chapter One: Economic Issues and Concepts
1.1 The Complexity of the Modern Economy
Economy: a system in which scarce resources are allocated among competing uses.
The SelfOrganizing Economy: an economy based on freemarket transactions. Self
interest is the foundation of economic order.
Efficient Organization: efficiency means that the resources available to the nation are
organized to product all the goods and services that people want to purchase and to
product them with the least possible amount of resources.
Main Characteristics of Market Economies:
• Market prices and quantities
1.2 Scarcity, Choice, and Opportunity Cost
Economics is the study of the use of scarce resources to satisfy unlimited human wants.
Resources: there are three broad categories: land, labour, and capital (includes machines
and buildings). These are also known as factors of production.
Scarcity and Choice: scarcity implies a choice must be made. To choose to have more of
something requires the choice to have less of something else
• Opportunity Cost: the cost of using resources for a certain purpose, measured by
the benefit given up by not using them in their best alternative use
• Production Possibilities Boundary: a curve showing which alternative
combinations of products can be attained if all available resources are used
efficiently; it is the boundary between attainable and unattainable combinations
Four Key Economic Problems:
1. What is produced and how?
• Resource allocation: determines the quantity of various goods that are produced
2. What is consumed and by whom?
3. Why are resources sometimes idle?
4. Is productive capacity growing?
The first two questions deal with microeconomics, the second two deal with
1.3 Who Makes the Choices and How?
Factor Markets: where individuals sell the services of the factor that they own. A market
used to exchange the services of a factor of production.
Goods Markets: where producers sell their outputs of goods ad services
Maximizing decisions: consumers and producers are the basic decision makers in a
market economy. These people are assumed to want to maximize thei