Holt 7525-9 S15_IT

Study Guide for Chapter 1
Chapter Summary for Chapter 1
The basic economic problem is scarcity. Human wants are unlimited. Resources are limited.
Scarcity is the problem that human wants exceed the production possible with the limited
resources available. Economics is the study of how individuals and societies use their limited
resources to try to satisfy their unlimited wants. The basic goal in dealing with the problem of
scarcity is to produce as much consumer satisfaction as possible with the limited resources
available.
Resources are the inputs that make production possible. The four categories of resources are
labor, land, capital, and entrepreneurship. Most resources are owned by private persons. In
economics, people are assumed to behave rationally, which means that they will respond to
incentives in the pursuit of their own self-interest.
As resource owners pursue self-interest in the use of their resources, the best interest of society
will also generally be served. In a competitive market, resource owners will direct their resources
to the use that is most highly valued by consumers and will use their resources as efficiently as
possible. This serves society’s interest in producing as much consumer satisfaction as possible
with the limited resources available.
Opportunity cost is the value of the best alternative surrendered when a choice is made. Scarcity
creates the necessity to ration the limited resources to production and to ration the limited goods
to consumers. The primary rationing device is dollar price.
Economic decisions are made by comparing marginal benefits with marginal costs. The optimal
level of an activity occurs where marginal benefit and marginal cost are equal.
To make sound economic decisions, a person needs to think like an economist. This includes; (1)
realizing that association does not necessarily indicate causation, (2) avoiding the fallacy of
composition, (3) avoiding the zero-sum fallacy (4) avoiding the free lunch fallacy, (5)
distinguishing between positive statements and normative statements, (6) assuming ceteris
paribus when examining the relationship between variables, (7) realizing that people respond to
incentives, and (8) trying to anticipate unintended consequences.
Macroeconomics is the branch of economics that focuses on overall economic behavior.
Microeconomics is the branch of economics that focuses on components of the economy.
Graphs illustrate the relationship between two variables. An upward sloping curve indicates a
direct relationship between the variables. A downward sloping curve indicates an inverse
relationship between the variables. The slope of a curve is the ratio of the vertical change to the
horizontal change between two points on the curve.
Questions for Chapter 1
Fill-in-the-blanks:
1. ______________________ is the problem that human wants exceed the production possible
with the limited resources available.
2. ______________________ is the study of how individuals and societies use their limited
resources to try to satisfy their unlimited wants.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
3. ______________________ are the inputs that make production possible.
4. ______________________ refers to the physical and mental efforts that people contribute to
production.
Scarcity and Choices 1 - 12