1.01 The Basic Language of Economics

Vocabulary

Read the definitions of the vocabulary introduced in this lesson.

Glossary text version | Open Glossary in a new tab

Scarcity

Economists believe that all four factors of production are needed for the creation of goods and services. These factors of production are:

1. land,
2. labor,
3. capital, and
4. entrepreneurship.

These may be referred to as inputs (that are needed to produce outputs). These also may be referred to as resources. If all were plentiful, no choices would have to be made about the allocation of resources in an economy. All productive resources can be scarce. Can resources that are "free" be scarce?

Do you think air and water are free?

Economists believe in TINSTAFL: There is no such thing as a free lunch. This means there is a cost associated with everything, even though your family does not get a bill from the government for the air you breathe or the water you see in the lakes, rivers, and oceans. We do know that there is a cost associated with clean air and clean water, however, and our government seeks to regulate both for our safety. Other nations spend less on clean air and clean water, and their economy and people may suffer because of this choice.

Do you think clean air and clean water are scarce? At first blush, you may say you have plenty, but that may not be true in other communities and nations.

What about time?

• Is it free?
• Is it scarce?

You may have plenty of time on your hands; but, unless there is a way to create more than 24 hours in a day, time is scarce.

Decision Making and Benefit-Cost Analysis

You may not know it, but you use marginal analysis to make everyday decisions, even though you may have never heard of the term. Marginal analysis is an examination of the additional benefits of an activity, compared to the additional costs of that activity.

• Companies use marginal analysis as a decision-making tool to help them maximize their profits.
• Individuals unconsciously use marginal analysis to make a host of everyday decisions.

We all want the most from our money and time. The resources below will help you start quantifying the process. You will learn that you already were practicing the principles of economics.

Think about the question How is Benefit-Cost Analysis used by policymakers to make decisions regarding the environment? as you read the article Benefit-Cost Analysis from The Library of Economics and Liberty.

Next, listen to the audio clip "Weighing The Costs And Benefits Of TSA Delays" from the NPR station WBUR. As you listen, think about the question, How is Benefit-Cost Analysis used by policymakers to make decisions regarding airport security?

Airport Security: A Cost or a Benefit?

1. Read each item below and determine if it's a cost or a benefit in regards to airport security. Choose one.
   1. Increased security.
      • Cost
      • Benefit
   2. Missed flights and lost luggage.
      • Cost
      • Benefit
   3. Reduced productivity in the workplace for travelers missing work.
      • Cost
      • Benefit
2. True or False: It is challenging for economists to calculate the benefits and costs of airport security.
   • True
   • False

PACED Method

When you have to make a choice, how do you decide what to do? Your choices will work out better for you if you think about them instead of just letting them happen.

Read PACED Decision Making to learn more about the PACED decision-making process.

Let's review.

1. What does the acronym PACED stand for? Check Answer
2. Describe the PACED decision making chart and how it's used.

   Check Answer

Next, watch the video below for examples of how a PACED decision-making model can be used in microeconomic and macroeconomic decisions.

Open PACED Decision Making Model (5:08) in a new tab