What’s in This Chapter?

In this unit, we define economics and describe fundamental economic concepts.

We study economics to explain important economic relationships and to determine how to best improve a nation’s standard of living and citizens’ happiness. In this definition, improving a nation’s standard of living includes increasing tangible (cars, houses, food), as well as intangible goods and services (protection from violence, clean air, entertainment, leisure time).

The production possibilities curve in this unit shows us the production choices we face given a certain amount of resources. No matter how abundant our resources are, they are limited, and we have to make choices regarding what and how much we want to produce and for whom.

In section 4, we look at the circular flow model. This model paints a picture of the main economic activities and groups in a country.

In free market economies, the decision as to what and how much to produce is made by the buyers and sellers of the products. Governments in free market economies play an important role in setting certain rules and protecting people and private properties, but exert relatively little control over prices of products and factors of production. Section 5 discusses the three main economic systems, which reflect the various degrees of government involvement: capitalism, socialism, and communism.

Section 6 defines and explains important fundamental economic concepts, such as the fallacy of composition, the fallacy of cause and effect, economic growth, opportunity cost, positive and normative economics, and real and nominal prices.

Section 7 discusses the increasingly important role of critical thinking, and suggests ways that you can increase your critical thinking skills in economics.