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Chapter 1

ECO-2013 Chapter Notes - Chapter 1: Marginal Cost, Guideposts, Marginal Utility

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Joseph Calhoun

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Chapter 1: The Economic Approach
The Importance of Adam Smith, The Father of Economic Science
o Foundation: originated in 1776 w/ Smith’s publication of An Inquiry Into the
Nature and Causes of the Wealth of Nations
o Revolutionary view: the wealth of a nation does not lie in gold and silver, but in
goods and services
o Order and efficiency could exist without central authority
o He was a lecturer at the University of Glasgow in his native Scotland
o Free exchange and competitive markets were good
o People are directed by the “invisible hand” of market prices
What Is Economics About?
o Choices of individuals corporations
o Scarcity means having to make choices
Scarcity- fundamental concept of economics that indicates that there is
less of a good freely available from nature
Refrain from using scarcity to describe availability or abundance
Unlimited desires + limited goods = choices
Choice- the act of selecting among alternatives
Resources- ingredients, or inputs, people use to produce goods and
services (e.g. technology or skill, talents of humans, knowledge)
Capital- human-made resources; physical resources (e.g. machines, tools)
Natural resources include: the ocean, land, mineral deposits
People will always face scarcity choices economics
o Scarcity and poverty are not the same
Scarcity is an objective concept that describes a factual situation in which
the nature of our resources keeps us from being able to completely fulfill
our desire for goods and services
Poverty is subjective; means different things to different people
Needs vs. wants
o Scarcity necessitates rationing
Rationing is necessary when there is scarcity
Deciding who gets the good and who doesn’t will have an influence on
human behavior
For example, choosing a political party based on how many food
stamps you will receive, or
Imagine if football tickets were given out to those with the
highest GPA…
If you have to pay for something, it’s scarce
o Scarcity leads to competitive behavior
When the rationing criterion is price, individuals will engage in income-
generating activities that enhance their ability to pay the price needed to
buy the goods/services they want
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