Micro Economics Chapter 1
Chapter 1:
Limits, Alternatives and
Choices
The fundamental economic problem
Scarcity:
– The basic economic problem arises because resources are limited, but human wants are unlimited. – Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have.
What is economics?
• Economics is the study of how individuals and economies deal with the fundamental problem of scarcity. • Scarcity forces individuals, firms, governments and societies to make choices.
• Choice, therefore, is a direct result of scarcity.
• Because resources are both desirable and scarce, we must choose how we will allocate them among various uses.
Allocation of resources: 3 fundamental questions • Any individual, organization or nation has to make three fundamental types of choices about how to allocate the scarce resources available:
1. What to produce – food or industrial machinery, books or newspapers…
2. How to produce – how many workers will be used, with what machinery…
3. For whom to produce – will some people get a bigger share of resources than other?
Allocation of resources: 3 fundamental questions Production is the process that transforms scarce resources into useful goods and services.
Factors of production
The basic resources that are available to a society are factors of production: 1. Land: natural resources, the “free gifts of nature”
2. Labor: the contribution of human beings
3. Capital: plant and equipment
4. Entrepreneurial ability: takes initiatives, makes decisions, innovates, and takes risks
- Resources or factors of production are the inputs into the process of production.
- Goods and services are the outputs of the process of production. Resource payments
Economic Resource
Resource payment
land
rent
labor
wages
capital
interest
entrepreneurial ability
profit
Capital Goods and Consumer
Goods
• Capital goods
Limits, Alternatives and
Choices
The fundamental economic problem
Scarcity:
– The basic economic problem arises because resources are limited, but human wants are unlimited. – Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have.
What is economics?
• Economics is the study of how individuals and economies deal with the fundamental problem of scarcity. • Scarcity forces individuals, firms, governments and societies to make choices.
• Choice, therefore, is a direct result of scarcity.
• Because resources are both desirable and scarce, we must choose how we will allocate them among various uses.
Allocation of resources: 3 fundamental questions • Any individual, organization or nation has to make three fundamental types of choices about how to allocate the scarce resources available:
1. What to produce – food or industrial machinery, books or newspapers…
2. How to produce – how many workers will be used, with what machinery…
3. For whom to produce – will some people get a bigger share of resources than other?
Allocation of resources: 3 fundamental questions Production is the process that transforms scarce resources into useful goods and services.
Factors of production
The basic resources that are available to a society are factors of production: 1. Land: natural resources, the “free gifts of nature”
2. Labor: the contribution of human beings
3. Capital: plant and equipment
4. Entrepreneurial ability: takes initiatives, makes decisions, innovates, and takes risks
- Resources or factors of production are the inputs into the process of production.
- Goods and services are the outputs of the process of production. Resource payments
Economic Resource
Resource payment
land
rent
labor
wages
capital
interest
entrepreneurial ability
profit
Capital Goods and Consumer
Goods
• Capital goods