The Fundamental Economic Problem

1. The Fundamental Economic Problem

2. What is Economics? • Economics is the study of how we make decisions in a world where resources are limited. • It is sometimes called the science of decision making.

3. Needs vs. Wants • Needs are things we need for survival, such as food, clothing, and shelter. • Wants are things we would like to have. vs.

4. What is the Fundamental Economic Problem? • The fundamental economic problem is scarcity—we do not have enough resources to produce all the things we would like to have. • Because of scarcity, we must make choices among alternatives. Choose to Camp Out for an XBox 360, or Do Something Else

5. The Three Basic Economic Questions that Society Must Answer Who? What? How?

6. What to Produce? • Society must decide whatto produce with its limited resources. • For example, society may have to choose whether to produce goods for defense or services for poor people. MP3 Players Boombox OR

7. How to Produce? • Society must decide howto produce. • For example, should we accept more pollution from factories in exchange for greater output of products? Assembly Line Model T Ford

8. For Whom to Produce? • Society must decide for whomto produce. Who will receive the goods and services? • In the United States, most goods and services are distributed through the price system. Are Electronics Produced for All Ages to Enjoy?

9. Economic Models • To study a part of the economy, economists use economic models. • These are simplified representations of the real world, based on economic theories. • Business and government often base decisions on solutions that emerge from testing economic models.

10. The Circular Flow Model