1.1.

2: 
Basic Economic
Principles
Unit 1: Fundamental Principles of Economics
Lesson 1.1: How the Economy Works

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Scarcity

 Individuals need resources — often money — in order to fulfill their wants and

needs. But resources in a society are limited. All societies lack the people and
materials it would take to create enough goods and services to satisfy
everyone's wants and needs.
 In other words, society cannot give people everything they would like to
have. This situation is called scarcity, and it is the underlying problem of
economics — one faced by individuals, businesses, and societies at large.

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Basic Economic Principles

 An economy is how a society, which includes people, businesses, and

governments, manages the distribution of goods and services that people buy
and sell.
 The economy has a huge impact on your life, affecting everything from where
you live to the after-school clubs your school can offer. In this activity, you
will study how an economy works.

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What You Want versus What You Can
Have
 The economy is affected by choices people make about what they want and
what they need.
 It would be great if people could have everything they want, but most of us
quickly learn that the world doesn't work that way. Instead, we have to make
choices based on the amount of money we have and what things are available
to buy.

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Scarcity

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Reviewing Wants, Needs, and Scarcity

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Reviewing Wants, Needs, and Scarcity

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Reviewing Wants, Needs, and Scarcity

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Reviewing Wants, Needs, and Scarcity

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Factors of Production

 Many forces influence the economy, but the factors of production are

especially important. These are the elements needed to create a good or
service. There are three factors of production: land, labor, and capital.
 These three factors of production are the limited resources in the scarcity
equation.

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Factors of Production

 land
 Any natural resource used to create a good or service.

 labor
 The effort that people contribute to the creation of a good or service.

 capital
 The equipment, tools, machinery, and so forth that are used in the
production of a good or service.

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Making Decisions Due to Scarcity

 Using an economy's factors of production — 

 land, labor, and capital — \
 a society tries to fulfill as many of its wants and needs as it can. But an
economy can't fulfill every want and need due to scarcity.

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What, How, and For Whom?

 Since countries have limited resources to produce goods and services, they

have to make some difficult choices. Those include what to produce with
their resources, how to produce those goods and services, and
finally, who gets what is produced.

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Reviewing Limited Resources

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Reviewing Limited Resources

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Human and Physical Capital

There are two kinds of capital businesses and entrepreneurs can utilize: physical
capital and human capital.

 Human capital
 The knowledge and skills individuals have acquired over their lifetimes that they
can use to produce goods and provide services.

 Physical capital
 physical capital: Human-made objects that assist the process of creating a
product or service
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Entrepreneurs

 entrepreneur
 An individual who organizes resources to produce goods and services

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Capital and Entrepreneurs

 Turning resources into goods and services requires businesses and

entrepreneurs to consider the factors of production.

 They must decide how to organize their land, labor, and capital in order to

be successful.

 There are two kinds of capital businesses and entrepreneurs can

utilize: physical capital and human capital.

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Reviewing Capital and Entrepreneurs

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Reviewing Capital and Entrepreneurs

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Reviewing Capital and Entrepreneurs

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Reviewing Capital and Entrepreneurs

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Final Review

 Every society must determine how its people, businesses, and governments
will manage the distribution of goods and services that
people want and need. This is called an economy. Since every society has
limited resources to fulfill people's unlimited wants and needs, it must deal
with the issue of scarcity.
 Scarcity influences an economy's factors of production, or what societies
need to create goods and services. One factor of production, capital, comes
in two forms: human and physical. Both are very important.

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