Economics: Principles and Practices © 2008
Chapter 1: What Is Economics?
Section 1: Scarcity and the Science of Economics
Economics is a social science that deals with the fundamental economic problem of scarcity—a
condition caused by the combination of seemingly unlimited wants and limited resources.
Because of this, people are forced to make choices and decisions about how they will use their
resources. People have needs such as food, clothing, and shelter; people have wants, which are
nonessential 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 are the four factors of production: land, capital, labor, and
entrepreneurs. And the four key elements to this study are description, analysis, explanation, and
Section 2: Basic Economic Concepts
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. In addition, human capital, the sum of
our skills, abilities, health, and motivations are other important components of growth.
Section 3: Economic Choices and Decision Making
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 production possibilities frontier, a diagram
representing various combinations of goods and services an economy can produce when all its
resources are in use. Furthermore, economists use cost-benefit analysis to evaluate choices.
Chapter 2: Economic Systems and Decision Making
Section 1: Economic Systems
Economic systems help societies provide for the wants and needs of their people. Three major
economic systems have evolved over the years: traditional, command, and market economies. In
the traditional economy, the WHAT, HOW, and FOR WHOM questions are answered by
tradition, customs, and even habits handed down from generation to generation. In a command
economy, a central authority answers the three basic questions. In a market economy, decision