Economics principles practices

interactive student edition

GLENCOE

Principles & Practices

With Features From

Gary E. Clayton, Ph.D.


About the Author
Gary E. Clayton teaches economics at Northern Kentucky University in Highland Heights, Kentucky. Dr.
Clayton received his Ph.D. in economics from the University of Utah, has taught economics and finance at several
universities, and has authored textbooks, including several at the college level, as well as a number of articles in various educational, professional, and technical journals.
Dr. Clayton has also appeared on a number of radio and television programs, and was a guest commentator
specializing in economic statistics for Marketplace, which is broadcast on American Public Radio.
Dr. Clayton has a long-standing interest in economic education. He has participated in and directed numerous
economic education workshops. He received the Outstanding Citizen Certificate of Recognition from the state
of Arkansas for his work in economic education. He has served as vice president for the Kentucky Council on
Economic Education and received the state’s highest honor when he received a commission as an honorary
Kentucky colonel. More recently, Dr. Clayton was the year 2000 Leavey Awards Winner for Excellence in Private
Enterprise Education, which is presented annually by the Freedoms Foundation, in Valley Forge, Pennsylvania.
During the summer months he participates in various study-abroad programs that take college students to Europe.

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Associate Professor of Economics
Northern Kentucky University
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Baylor University
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University of Michigan—Flint
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iii


Economic Handbook
Reading for Information
Basic Concepts in Economics

xvi
xxvi
xxviii

Chapter 6

Prices and Decision Making

136

1 Prices as Signals . . . . . . . . . . . . . . . . . . . 137
2 The Price System at Work . . . . . . . . . . . . 142
3 Social Goals vs. Market Efficiency . . . . . . 150
Chapter 7

Fundamental Economic Concepts

2

Market Structures

1 Competition and Market Structures . . . . . 163
2 Market Failures . . . . . . . . . . . . . . . . . . . . 173
3 The Role of Government . . . . . . . . . . . . . 178

Chapter 1

What Is Economics?

4

1 Scarcity and the Science of Economics . . . . 5
2 Basic Economic Concepts . . . . . . . . . . . . . 12
3 Economic Choices and
Decision Making . . . . . . . . . . . . . . . . . . . 19
Chapter 2

Economic Systems and
Decision Making

Macroeconomics: Institutions

32

Employment, Labor, and Wages

56

1 Forms of Business Organization . . . . . . . . 57
2 Business Growth and Expansion . . . . . . . . 68
3 Other Organizations . . . . . . . . . . . . . . . . . 75

86

Chapter 9

Sources of Government Revenue
1
2
3
4

88

Chapter 5

112

1 What Is Supply? . . . . . . . . . . . . . . . . . . . 113
2 The Theory of Production . . . . . . . . . . . . 122
3 Cost, Revenue, and Profit
Maximization . . . . . . . . . . . . . . . . . . . . 127
The forces of supply and demand
are at work in the stock market.
iviv

The Economics of Taxation . . . . . . . . . . . 223
The Federal Tax System . . . . . . . . . . . . . . 231
State and Local Tax Systems . . . . . . . . . . 238
Current Tax Issues . . . . . . . . . . . . . . . . . . 244

Government Spending

1 What Is Demand? . . . . . . . . . . . . . . . . . . . 89
2 Factors Affecting Demand . . . . . . . . . . . . . 95
3 Elasticity of Demand . . . . . . . . . . . . . . . . 101

Supply

222

Chapter 10

Chapter 4

Demand

192

1 The Labor Movement . . . . . . . . . . . . . . . 193
2 Resolving Union and Management
Differences . . . . . . . . . . . . . . . . . . . . . . . 200
3 Labor and Wages . . . . . . . . . . . . . . . . . . 205
4 Employment Trends and Issues . . . . . . . . 211

Chapter 3

Microeconomics

190

Chapter 8

1 Economic Systems . . . . . . . . . . . . . . . . . . 33
2 Evaluating Economic Performance . . . . . . . 41
3 Capitalism and Economic Freedom . . . . . . 47

Business Organizations

162

254

1 The Economics of Government
Spending . . . . . . . . . . . . . . . . . . . . . . . . 255
2 Federal Government Expenditures . . . . . . 260
3 State and Local Government
Expenditures . . . . . . . . . . . . . . . . . . . . . 267
4 Deficits, Surpluses, and the
National Debt . . . . . . . . . . . . . . . . . . . . 272


Chapter 11

Money and Banking

284

1 The Evolution of Money . . . . . . . . . . . . . 285
2 Early Banking and Monetary Standards . . 292
3 The Development of Modern Banking . . . 300

Chapter 12

Financial Markets

312

1 Savings and the Financial System . . . . . . . 313
2 Investment Strategies and Financial Assets 318
3 Investing in Equities, Futures,
and Options . . . . . . . . . . . . . . . . . . . . . 328

Macroeconomics: Policies

338

Chapter 13

Economic Performance
1
2
3
4

340

Measuring the Nation’s Output . . . . . . . . 341
GDP and Changes in the Price Level . . . . 350
GDP and Population . . . . . . . . . . . . . . . . 356
Economic Growth . . . . . . . . . . . . . . . . . . 363

1
2
3
4

Chapter 17

International Trade

466

1 Absolute and Comparative Advantage . . . 467
2 Barriers to International Trade . . . . . . . . . 472
3 Financing and Trade Deficits . . . . . . . . . . 481
Chapter 18

Comparative Economic Systems
1
2
3
4

490

The Spectrum of Economic Systems . . . . 491
The Rise and Fall of Communism . . . . . . 496
The Transition to Capitalism . . . . . . . . . . 501
The Various Faces of Capitalism . . . . . . . 509

Chapter 19

Developing Countries

520

1 Economic Development . . . . . . . . . . . . . 521
2 A Framework for Development . . . . . . . . 528
3 Financing Economic Development . . . . . 533
Chapter 20

Global Economic Challenges

Chapter 14

Economic Instability

International and Global Economics 464

374

Business Cycles and Fluctuations . . . . . . . 375
Unemployment . . . . . . . . . . . . . . . . . . . . 382
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . 389
Poverty and the Distribution
of Income . . . . . . . . . . . . . . . . . . . . . . . 394

544

1 The Global Demand for Resources . . . . . 545
2 Economic Incentives and Resources . . . . 552

3 Applying the Economic Way
of Thinking . . . . . . . . . . . . . . . . . . . . . . 558

Reference Atlas

A1

Chapter 15

The Fed and Monetary Policy

406

1 The Federal Reserve System . . . . . . . . . . . 407
2 Monetary Policy . . . . . . . . . . . . . . . . . . . 415
3 Monetary Policy, Banking, and
the Economy . . . . . . . . . . . . . . . . . . . . 426
Chapter 16

Achieving Economic Stability
1
2
3
4

436

The Cost of Economic Instability . . . . . . . 437
Macroeconomic Equilibrium . . . . . . . . . . 442
Stabilization Policies . . . . . . . . . . . . . . . . 447

Economics and Politics . . . . . . . . . . . . . . 456

Databank
Life Skills
Glossary
Spanish Handbook
Index
Acknowledgments

A14
A30
A40
A54
A91
A106

v


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vi

The Role of the Entrepreneur . . . . . . . . . . . . . 11
The Internet and the Right of Privacy . . . . . . . 45
The Beauty of Global Branding . . . . . . . . . . . . 74
Holding the Fries “At the Border” . . . . . . . . . 100
New Directions for PC Makers . . . . . . . . . . . . 126
Doctors: Charting New Territory . . . . . . . . . . 156
Cola Wars . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
The Disabled and the Marketplace . . . . . . . . 210
Do Taxes Spell Good News? . . . . . . . . . . . . . . 243
Dialing for Dollars . . . . . . . . . . . . . . . . . . . . . 271
The Battle to Be Your Online Bill Collector . . 306
A Penny Earned is a Penny Saved . . . . . . . . . . 327
Immigrants and the Job Market . . . . . . . . . . . 362
What Is the Impact of Lay-Offs? . . . . . . . . . . 388

Bank Mergers: Who Benefits? . . . . . . . . . . . . . 425
Unequal Pay Strikes Out . . . . . . . . . . . . . . . . 455
NAFTA and Change in Mexico . . . . . . . . . . 480
China’s Web Masters . . . . . . . . . . . . . . . . . . . 508
Whiz Kids . . . . . . . . . . . . . . . . . . . . . . . . . . . 532
They’re Here, and They’re Taking Over . . . . . 557


Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Job Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Entrepreneurs of the New Economy . . . . . . . . 60
The Changing Workplace . . . . . . . . . . . . . . . . 78
Revolution in E-Commerce . . . . . . . . . . . . . 104
Costs and Information Goods . . . . . . . . . . . . 129
The Internet and Prices . . . . . . . . . . . . . . . . . 144
Consumer Protection . . . . . . . . . . . . . . . . . . . 179
The End of Work? . . . . . . . . . . . . . . . . . . . . . 215
E-Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Using Technology . . . . . . . . . . . . . . . . . . . . . 261
The Future of Money . . . . . . . . . . . . . . . . . . 286
Stock Trading on the Web . . . . . . . . . . . . . . . 330
Population Centers . . . . . . . . . . . . . . . . . . . . 366
Working in the New Economy . . . . . . . . . . . . 384
Deregulation and New Growth . . . . . . . . . . . 454
Economic Espionage . . . . . . . . . . . . . . . . . . . 482
An Emerging Latin American Market . . . . . . . 504
Agricultural Development . . . . . . . . . . . . . . . 524
Science . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550

INFOBYTE

Durable Goods Orders . . . . . . . . . . . . . . . . . . 13
Economic Indicators . . . . . . . . . . . . . . . . . . . . 42
Business Inventories . . . . . . . . . . . . . . . . . . . . 59
Housing Starts . . . . . . . . . . . . . . . . . . . . . . . . . 93
Measures of Cost . . . . . . . . . . . . . . . . . . . . . 129
Consumer Confidence . . . . . . . . . . . . . . . . . . 155
The SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Personal Income . . . . . . . . . . . . . . . . . . . . . . 209
Taxable Income . . . . . . . . . . . . . . . . . . . . . . . 226
Budget Deficits . . . . . . . . . . . . . . . . . . . . . . . 276
Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . 303
Treasury Bonds . . . . . . . . . . . . . . . . . . . . . . . 325
GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
The Business Cycle . . . . . . . . . . . . . . . . . . . . 378
The Prime Rate . . . . . . . . . . . . . . . . . . . . . . . 428
The Employment Report . . . . . . . . . . . . . . . . 449
The Trade Balance . . . . . . . . . . . . . . . . . . . . . 473
Brady Bonds . . . . . . . . . . . . . . . . . . . . . . . . . 534
Economic Forecasts . . . . . . . . . . . . . . . . . . . . 560

Working With Resource Scarcity . . . . . . . . . . . 30
Developing a Training Manual . . . . . . . . . . . 160
Buying a Home . . . . . . . . . . . . . . . . . . . . . . . 310
Using Factors of Production . . . . . . . . . . . . . . 372
Simulating Trade in Various Economies . . . . . 518
vii


A Powerful Economic Voice:

Alice Rivlin . . . . . . . . . . . . . . . . . . . . . . . . . . 237
A New Economics:

John Maynard Keynes . . . . . . . . . . . . . . . . . . 266
A Fingertip Fortune:

Dineh Mohajer . . . . . . . . . . . . . . . . . . . . . . . 291
Managing Money:

Helen Young Hayes . . . . . . . . . . . . . . . . . . . . 317
Building a Business:

Edward T. Lewis . . . . . . . . . . . . . . . . . . . . . . 317
Succeeding in a “Man’s” Business:

Linda Alvarado . . . . . . . . . . . . . . . . . . . . . . . 355
Championing Economic Freedom:

Walter E. Williams . . . . . . . . . . . . . . . . . . . . . 381
Enormous Power:

Alan Greenspan . . . . . . . . . . . . . . . . . . . . . . . 414
From Rags to Riches:

E.I. du Pont & Henry John Heinz . . . . . . . . . 446
Marketing Savvy:

Bill Gates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471
Reshaping the World:

Karl Marx . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Opening Doors:

W. Arthur Lewis . . . . . . . . . . . . . . . . . . . . . . . 527
The Father of Modern Economics:

Adam Smith . . . . . . . . . . . . . . . . . . . . . . . . . . 18
More Than Star Wars:

George Lucas . . . . . . . . . . . . . . . . . . . . . . . . . . 52
A Household Name:

Walt Disney . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
A Pioneer in Corporate America:

Kenneth I. Chenault . . . . . . . . . . . . . . . . . . . . 67
Wealth and Influence:

Oprah Winfrey . . . . . . . . . . . . . . . . . . . . . . . . 94
Enterprising Entrepreneurs:

Richard Sears, Milton Hershey, John Johnson 121
Society and Economics:

Gary Becker . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Monetarism Man:

Milton Friedman . . . . . . . . . . . . . . . . . . . . . . 141
“I Love the Challenge“:

Charles Wang . . . . . . . . . . . . . . . . . . . . . . . . 172
Labor Giant:

John L. Lewis . . . . . . . . . . . . . . . . . . . . . . . . 204
Acts of Courage:

Cesar Chavez . . . . . . . . . . . . . . . . . . . . . . . . 204
Adviser to a President:

Janet Yellen . . . . . . . . . . . . . . . . . . . . . . . . . . 237
viii

A Classical Economist:

Thomas Malthus . . . . . . . . . . . . . . . . . . . . . . 551


United States Leads in Entrepreneurs . . . . . . . . . 9
Teaching Capitalism in Russia . . . . . . . . . . . . . 35
When You Say Profits, Smile . . . . . . . . . . . . . . 70
Trading Gold for Salt . . . . . . . . . . . . . . . . . . . 102
Master Marketer . . . . . . . . . . . . . . . . . . . . . . 130
Comparing Food Prices . . . . . . . . . . . . . . . . . 138
Marketing in China . . . . . . . . . . . . . . . . . . . . 167
Percent of Income Spent on Food . . . . . . . . . 206
High Taxes? Are You Sure? . . . . . . . . . . . . . . . 248
Government Spending . . . . . . . . . . . . . . . . . . 264
Why Isn’t There Just One Currency? . . . . . . . 297
Investing Globally . . . . . . . . . . . . . . . . . . . . . 323
World Output . . . . . . . . . . . . . . . . . . . . . . . . 352

Rubles? Who Needs Rubles? . . . . . . . . . . . . . . 377
The Euro: Today and in the Future . . . . . . . . 420
Stabilizing Efforts in Africa . . . . . . . . . . . . . . 453
The Art of Communication . . . . . . . . . . . . . . 476
The World’s Largest Cities by 2015 . . . . . . . . . 502
The New Peace Corps . . . . . . . . . . . . . . . . . . 530
The Information Revolution . . . . . . . . . . . . . 559

Issues in Free Enterprise
Are Megamergers Harmful? . . . . . . . . . . . . . . . 84
The Future of Social Security . . . . . . . . . . . . . 188
Protecting the Environment:
Is Enough Being Done? . . . . . . . . . . . . . . . . 282
Is Income Inequality Really a Problem? . . . . . 404
Should Child Labor Be Abolished? . . . . . . . . 542

The cost for a market
basket of staple items varies
widely around the world.
The prices shown are for
capital cities.

$18.79 United States

$28.14 Madrid, Spain

$23.19 London, England

$30.10 Paris, France

$27.38 Rome, Italy

$74.23 Tokyo, Japan

ix


Critical Thinking Skills
Sequencing and Categorizing Information . . . . 26
Making Comparisons . . . . . . . . . . . . . . . . . . . . 40
Understanding Cause and Effect . . . . . . . . . . 108
Synthesizing Information . . . . . . . . . . . . . . . . 149
Finding the Main Idea . . . . . . . . . . . . . . . . . . 184
Evaluating Primary and Secondary Sources . . . 199
Distinguishing Fact from Opinion . . . . . . . . . 334
Making Generalizations . . . . . . . . . . . . . . . . . 432
Drawing Inferences and Conclusions . . . . . . . 486
Summarizing Information . . . . . . . . . . . . . . . 538
Making Predictions . . . . . . . . . . . . . . . . . . . . 562
Study and Writing Skills
Taking Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Outlining . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Using Library Resources . . . . . . . . . . . . . . . . . 230
Applying the Writing Process . . . . . . . . . . . . . 441

Technology Skills
Using E-Mail . . . . . . . . . . . . . . . . . . . . . . . . . 259
Developing Multimedia Presentations . . . . . . 299
Using a Spreadsheet . . . . . . . . . . . . . . . . . . . . 349
Using the Internet . . . . . . . . . . . . . . . . . . . . . 393

Using a Database . . . . . . . . . . . . . . . . . . . . . . 495
Life Skills
Planning Your Career . . . . . . . . . . . . . . . . . . A30
Financing Your College Education . . . . . . . . . A31
Preparing a Resume . . . . . . . . . . . . . . . . . . . A32
Preparing a Budget . . . . . . . . . . . . . . . . . . . . A33
Maintaining a Checking Account . . . . . . . . . A34
Filing an Income Tax Return . . . . . . . . . . . . A35
Borrowing Money . . . . . . . . . . . . . . . . . . . . A36
Buying Insurance . . . . . . . . . . . . . . . . . . . . . A37
Analyzing Your Saving
and Investing Options . . . . . . . . . . . . . . . . A38
Renting an Apartment . . . . . . . . . . . . . . . . . A39


Economist . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Law Enforcement Officer . . . . . . . . . . . . . . . . . 49
Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Statistician . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Real Estate Agent . . . . . . . . . . . . . . . . . . . . . . 118
Sales Clerk . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Market Researcher . . . . . . . . . . . . . . . . . . . . . 166
Labor Relations Specialist . . . . . . . . . . . . . . . 202
Public Accountant . . . . . . . . . . . . . . . . . . . . . 249
Budget Analyst . . . . . . . . . . . . . . . . . . . . . . . 268
Bank Teller . . . . . . . . . . . . . . . . . . . . . . . . . . 304
Stockbroker . . . . . . . . . . . . . . . . . . . . . . . . . . 324
Urban Planner . . . . . . . . . . . . . . . . . . . . . . . 398
Actuary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429
Credit Manager . . . . . . . . . . . . . . . . . . . . . . . 457

Sociologist . . . . . . . . . . . . . . . . . . . . . . . . . . . 484
Customs Inspector . . . . . . . . . . . . . . . . . . . . . 498
Peace Corps Volunteer . . . . . . . . . . . . . . . . . . 529
EPA Inspector . . . . . . . . . . . . . . . . . . . . . . . . 554

First and Biggest . . . . . . . . . . . . . . . . . . . . . . . 17
Worth its Weight . . . . . . . . . . . . . . . . . . . . . . . 39
Internet Commerce . . . . . . . . . . . . . . . . . . . . . 61
What’s in a Name? . . . . . . . . . . . . . . . . . . . . . 78
Shelling Out . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Internet Shopping . . . . . . . . . . . . . . . . . . . . . 105
Economic Efficiency . . . . . . . . . . . . . . . . . . . 116
Gender Pricing . . . . . . . . . . . . . . . . . . . . . . . . 153
Competing in the Market . . . . . . . . . . . . . . . 167
Big Macroeconomics . . . . . . . . . . . . . . . . . . . 216
Tax Freedom Day . . . . . . . . . . . . . . . . . . . . . 246
All Those Pages! . . . . . . . . . . . . . . . . . . . . . . . 278
Why the Notches? . . . . . . . . . . . . . . . . . . . . . 296
A Growing Female Workforce . . . . . . . . . . . . 346
Job Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . 385
Employment Trends . . . . . . . . . . . . . . . . . . . 386
Commercial Banks . . . . . . . . . . . . . . . . . . . . 413
Private Property . . . . . . . . . . . . . . . . . . . . . . . 458
A Safety Net . . . . . . . . . . . . . . . . . . . . . . . . . 474
Frozen Treasures . . . . . . . . . . . . . . . . . . . . . . 497
On the Net . . . . . . . . . . . . . . . . . . . . . . . . . . 505
Population Explosion . . . . . . . . . . . . . . . . . . 529
Global Warming . . . . . . . . . . . . . . . . . . . . . . 556

xi

Charts, Graphs, and Maps
Chapter 1
Scarcity . . . . . . . . . . . . . . . . . . . . . . 6
The Factors of Production . . . . . . . . 8
The Circular Flow of Economic
Activity . . . . . . . . . . . . . . . . . . . . 15
Effect of Education on Income . . . 16
Jesse’s Decision-Making Grid . . . . 20
The Production Possibilities
Frontier . . . . . . . . . . . . . . . . . . . 23

Figure 1.1
Figure 1.2
Figure 1.3
Figure 1.4
Figure 1.5
Figure 1.6

Chapter 2
Comparing Economic Systems . . . 38
Characteristics of Free Enterprise
and Capitalism . . . . . . . . . . . . . . 47

Figure 2.1
Figure 2.2

ECONOMICS
AT A GLANCE

Chapter 3
Figure 3.1
Figure 3.2
Figure 3.3

Figure 3.4
Figure 3.5
Figure 3.6
Figure 3.7

Chapter 4
Figure 4.1
Figure 4.2

Figure 3.7

AT A GLANCE

Cooperatives in the
United States

Figure 4.3
Figure 4.4
Figure 4.5
Figure 4.6

Credit Unions

The Demand for Compact

Digital Discs . . . . . . . . . . . . . . . 90
Individual and Market Demand
Curves . . . . . . . . . . . . . . . . . . . . 92
A Change in Quantity Demanded . . 96
A Change in Demand . . . . . . . . . . 98
The Total Expenditures Test for
Demand Elasticity . . . . . . . . . . 103
Estimating the Elasticity of
Demand . . . . . . . . . . . . . . . . . . 106

Chapter 5

Memorial Societies
Housing

Corporations, Partnerships, and
Sole Proprietorships . . . . . . . . . . 58
Stock Ownership . . . . . . . . . . . . . . 63
Ownership, Control, and
Organization of a
Typical Corporation . . . . . . . . . . 65
Business Growth Through
Reinvestment . . . . . . . . . . . . . . . 69
Business Combinations . . . . . . . . . 71
Conglomerate Structure . . . . . . . . 72
Cooperatives in the
United States . . . . . . . . . . . . . . . 76

Policy

Insurance

Figure 5.1
Figure 5.2
Figure
Figure
Figure
Figure

Students

5.3
5.4
5.5
5.6

Supply of Compact Discs . . . . . . 114
Individual and Market Supply
Curves . . . . . . . . . . . . . . . . . . . 115
A Change in Supply . . . . . . . . . . 117
Supply Elasticity . . . . . . . . . . . . . 119
The Law of Variable Proportions . . 124
Production, Costs, and Revenues . . 128

Farm Purchasing and Marketing
Preschool Education

A
B C

Chapter 6
Figure 6.1
Figure 6.2

Consumer Goods
Figure 6.3

Health
Figure 6.4

Using
Using Charts
Charts The
The cooperative
cooperative is
is aa volunvoluntary association of
of people
people formed
formed to
to carry
carry
on some kind of economic activity that will
benefit its members.
members. How
How do
do the
the three
three
kinds
kinds of

of cooperatives
cooperatives differ?
differ?
xii

Figure 6.5

Figure 6.6

A Model of the CD Market . . . . 143
Dynamics of the Price
Adjustment Process . . . . . . . . . 145
Factors Affecting Price Changes
in Agriculture . . . . . . . . . . . . . . 146
The Price of Gold When Supply
and Demand Change . . . . . . . . 147
Distorting Market Outcomes
with Price Ceilings and
Price Floors . . . . . . . . . . . . . . . 151
Agricultural Price Support
Programs . . . . . . . . . . . . . . . . . . . 154


Chapter 7
Figure 7.1
Figure 7.2
Figure 7.3
Figure 7.4
Figure 7.5

Figure 10.2

Perfect Competition: Market
Price and Profit Maximization . . 165
Characteristics of Market
Structures . . . . . . . . . . . . . . . . . 169
Anti-Monopoly Legislation . . . . . 179
Federal Regulatory Agencies . . . . 180
Effects of a Pollution Tax . . . . . . . 181

Chapter 8
Employment and Union
Affiliation . . . . . . . . . . . . . . . . . 194
Figure 8.2 Union Membership and
Representation by Industry . . . . 195
Figure 8.3 Trade (Craft) and Industrial
Unions . . . . . . . . . . . . . . . . . . . 197
Figure 8.4 Right to Work, State by State . . . 201
Figure 8.5 The Traditional Theory of Wage
Determination . . . . . . . . . . . . . 207
Figure 8.6 Median Weekly Earnings by
Occupation and Union
Affiliation . . . . . . . . . . . . . . . . . 208
Figure 8.7 Union Membership . . . . . . . . . . . 212
Figure 8.8 Median Female Income as a
Percentage of Male Income . . . . 213
Figure 8.9 Distribution of Male and
Female Jobs by Occupation . . . . 214
Figure 8.10 The Minimum Wage . . . . . . . . . . 217
Figure 8.1

Chapter 9
Total Government Receipts Per
Capita, Adjusted for Inflation . . . 224
Figure 9.2 Shifting the Incidence of a Tax . . . 225
Figure 9.3 Three Types of Taxes . . . . . . . . . . 228
Figure 9.4 Federal Government Revenues
by Source . . . . . . . . . . . . . . . . . 232
Figure 9.5 Individual Income Tax Rates, 2000 233
Figure 9.6 Average Individual and FICA
Taxes, Single Individuals . . . . . . 234
Figure 9.7 Sources of State and Local
Government Revenue . . . . . . . . 239
Figure 9.8 State and Local Taxes as a
Percentage of State Income . . . . 240
Figure 9.9 Biweekly Paycheck and
Withholding Statement . . . . . . . 241
Figure 9.10 The Value-Added Tax . . . . . . . . . . 247
Figure 9.1

Chapter 10
Figure 10.1 Total Government Expenditures Per
Capita, Adjusted for Inflation . . 256

Figure 10.3
Figure 10.4
Figure 10.5
Figure
Figure
Figure

Figure

10.6
10.7
10.8
10.9

Government Spending as a
Percent of Total Output, 2000 . . 257
The Federal Budget for Fiscal
Year 2000 . . . . . . . . . . . . . . . . . 262
Federal Government
Expenditures, 1980–2000 . . . . . 263
Expenditures by State and
Local Governments . . . . . . . . . . 269
The Federal Deficit . . . . . . . . . . . 273
Three Views of the Federal Debt . . 274
How Big is the Public Debt? . . . . . 275
The Crowding-Out Effect
Caused by Federal Spending . . . 277

Chapter 11
The 50 State Quarter Program . . . 294
Number of State and
National Banks . . . . . . . . . . . . .302

Figure 11.1
Figure 11.2

Chapter 12

Overview of the Financial
System . . . . . . . . . . . . . . . . . . . 315
Figure 12.2 The Relationship Between Risk
and Return . . . . . . . . . . . . . . . . 319
Figure 12.3 The Power of Compound
Interest . . . . . . . . . . . . . . . . . . . 320
Figure 12.4 How Much Will You Have at
Retirement? . . . . . . . . . . . . . . . 321
Figure 12.5 Bond Classifications . . . . . . . . . . 322
Figure 12.6 Financial Assets and Their
Markets . . . . . . . . . . . . . . . . . . 325
Figure 12.7 The New York Stock Exchange . . 330
Figure 12.8 Tracking Stocks with the DJIA
and the S&P 500 . . . . . . . . . . . . 331
Figure 12.1

Chapter 13
Figure 13.1 Estimating Gross Domestic
Product . . . . . . . . . . . . . . . . . . 342
Figure 13.2 The National Income and
Product Accounts . . . . . . . . . . . 345
Figure 13.3 Circular Flow of Economic
Activity . . . . . . . . . . . . . . . . . . . 347
Figure 13.4 Estimating Gross Domestic
Product . . . . . . . . . . . . . . . . . . 351
Figure 13.5 Constructing the Consumer
Price Index . . . . . . . . . . . . . . . . 352
Figure 13.6 Projected Distribution of
Population by Region,
1988 to 2010 . . . . . . . . . . . . . . 358

xiii


Figure 13.7
Figure 13.8

Figure 13.9
Figure 13.10
Figure 13.11

Distribution of the Population
by Age and Gender, 2000 . . . . . 359
Projected Change in U.S.
Population by Race
and Ethnic Origin,
1990–2050 . . . . . . . . . . . . . . . 360
Real GDP vs. Real GDP
Per Capita . . . . . . . . . . . . . . . . 364
Annual Growth Rates of
Real GDP Per Capita . . . . . . . . 365
Labor Productivity, 1959–1999 . . 367

Chapter 14
Figure 14.1
Figure 14.2
Figure 14.3
Figure 14.4
Figure 14.5
Figure 14.6
Figure 14.7

Figure 14.8
Figure 14.9

Phases of the Business Cycle . . . . 376
The Index of Leading
Economic Indicators . . . . . . . . 379
The Unemployment Rate . . . . . . 383
The Fastest-Growing Occupations,
1998–2008 . . . . . . . . . . . . . . . . 387
The Rate of Inflation . . . . . . . . . 390
The Declining Value of the
Dollar . . . . . . . . . . . . . . . . . . . 391
The Distributions of Income
by Families . . . . . . . . . . . . . . . 395
Poverty in the United States:
Total Number and Rate . . . . . . 397
Per Capita Personal Income
by State . . . . . . . . . . . . . . . . . . 399

Figure 15.2
Figure 15.3

Figure 15.4
Figure 15.5
Figure 15.6
Figure 15.7

xiv

Monetizing the Debt . . . . . . . . . 428

Major Components of the
Money Supply . . . . . . . . . . . . . 430

Chapter 16
Figure 16.1

Figure
Figure
Figure
Figure
Figure

16.2
16.3
16.4
16.5
16.6

Figure 16.7
Figure 16.8
Figure 16.9

The GDP Gap and the
Production Possibilities
Frontier . . . . . . . . . . . . . . . . . . 438
The Misery Index . . . . . . . . . . . . 439
The Aggregate Supply Curve . . . 443
The Aggregate Demand Curve . . 444
Macroeconomic Equilibrium . . . 445
Fiscal Policy and the Aggregate

Demand Curve . . . . . . . . . . . . 449
Supply-Side and Demand-Side
Economics . . . . . . . . . . . . . . . 450
The Laffer Curve . . . . . . . . . . . . 451
Supply-Side Policies and the
Aggregate Supply Curve . . . . . . 452

Chapter 17
Figure 17.1
Figure 17.2
Figure 17.3
Figure 17.4
Figure 17.5

United States Merchandise
Trade by Area . . . . . . . . . . . . . 468
The Gains from Trade . . . . . . . . 469
The North American Free
Trade Agreement . . . . . . . . . . . 478
Foreign Exchange Rates . . . . . . . 482
Flexible Exchange Rates . . . . . . . 483

Chapter 18

Chapter 15
Figure 15.1

Figure 15.8
Figure 15.9

Structure of the Federal
Reserve System . . . . . . . . . . . . 408
Clearing a Check . . . . . . . . . . . . 412
Balance Sheet Entries for a
Hypothetical Commercial
Bank . . . . . . . . . . . . . . . . . . . . 417
Fractional Reserves and the
Money Supply . . . . . . . . . . . . . 419
The Reserve Requirement as
a Tool of Monetary Policy . . . . 421
Summary of Monetary
Policy Tools . . . . . . . . . . . . . . . . 423
Short-Run Impact of
Monetary Policy . . . . . . . . . . . 427

The Spectrum of Economic
Systems . . . . . . . . . . . . . . . . . . 493
Figure 18.2 New and Emerging Stock
Markets . . . . . . . . . . . . . . . . . . 503
Figure 18.1

Chapter 19
Gross National Product and
Gross National Product
Per Capita . . . . . . . . . . . . . . . . 522
Figure 19.2 The European Union . . . . . . . . . 536
Figure 19.1

Chapter 20
Figure 20.1

Figure 20.2

World Population Growth Rates . . 547
The Most Dangerous
Nuclear Reactors . . . . . . . . . . . 549


Reference Atlas
World Political . . . . . . . . . . . . . . . . . . . . . . . . A2
United States Political . . . . . . . . . . . . . . . . . . . A4
World Land Use . . . . . . . . . . . . . . . . . . . . . . . A6
United States Land Use . . . . . . . . . . . . . . . . . . A8
World GDP Cartogram . . . . . . . . . . . . . . . . A10
World Population Cartogram . . . . . . . . . . . . A12

Databank
The American People
U.S. Population Projections, 2000–2050 . . . . . A15
Civilian Labor Force, 1950–2000 . . . . . . . . . A15
Hours and Earnings in Private Industries,
1960–1999 . . . . . . . . . . . . . . . . . . . . . . . . . A16
The U.S. Economy
Gross Domestic Product, 1950–2000 . . . . . . . A17
Annual Changes in Consumer Price Indexes,
1940–2000 . . . . . . . . . . . . . . . . . . . . . . . . . A17
Personal Consumption Expenditures,
1960–2000 . . . . . . . . . . . . . . . . . . . . . . . . . A18
Personal Consumption Expenditures,
Nondurable Goods, 1960–2000 . . . . . . . . . A18
Average Prices of Selected Goods, 1989–1999 . A19

Business Sector: Changes in Productivity &
Related Data . . . . . . . . . . . . . . . . . . . . . . . A20
Inflation in Consumer Prices, 1915–2000 . . . . A20

The Government Sector
Federal Government Expenditures,
1949–1999 . . . . . . . . . . . . . . . . . . . . . . . . . A21
Total Government Expenditures,
1949–1999 . . . . . . . . . . . . . . . . . . . . . . . . . A21
Federal Government Net Receipts and Net
Outlays, 1950–2000 . . . . . . . . . . . . . . . . . . A22
Federal Debt, Total Outstanding, 1960–2000 . A22
National Debt Per Capita, 1940–2000 . . . . . . A22
Federal Budget Receipts, 1980–1999 . . . . . . . A23
The Financial Sector
Interest Rates, 1929–2000 . . . . . . . . . . . . . . . A24
Consumer Credit Outstanding, 1980–2000 . . A24
Personal Saving, 1960–2000 . . . . . . . . . . . . . A25
Money Stock, 1970–2000 . . . . . . . . . . . . . . . A25
The Global Economy
Economic Groups: Population, Exports,
and GDP, 1998 . . . . . . . . . . . . . . . . . . . . . A26
Growth Rates in Real GDP, 1980–1998 . . . . . A26
World Population by Age, 2000–2050 . . . . . . A27
Countries Ranked by Population,
2000 and 2050 . . . . . . . . . . . . . . . . . . . . . . A27
Aging Index in Selected Nations
of the Americas, 1997 and 2025 . . . . . . . . . A28
Median Age, World, 1975–2025 . . . . . . . . . . A28
U.S. Exports and Imports, 1950–2000 . . . . . . A29

Employment and Unemployment,
Selected Economies . . . . . . . . . . . . . . . . . . A29

Percentage of Total Receipts
14%

13%

47%

10% 11%

45%

9% 10%

49%

Individual Income Taxes
Employment Taxes
Corporate Income Taxes

26%
1980

34%

Other Receipts

32%

1990

1999

xv


Economics: Principles and Practices incorporates the 21 basic concepts established in A Framework for
Teaching Basic Economic Concepts, published by the National Council on Economic Education.

1. Scarcity and Choice Scarcity is the universal problem that faces all societies because there are not
enough resources to produce everything people want. Scarcity requires people to make choices
about the goods and services they use.

2. Opportunity Cost and Trade-Offs Opportunity cost is the foregone benefit of the next best alternative when scarce resources are used for one purpose rather than another. Trade-offs involve choosing less of one thing to get more of something else.

3. Productivity Productivity is a measure of the amount of output (goods and services) produced per
unit of input (productive resources) used.

4. Economic Systems Economic systems are the ways in which people organize economic life to deal
with the basic economic problem of scarcity.

5. Economic Institutions and Incentives Economic institutions include households and families and
formal organizations such as corporations, government agencies, banks, labor unions, and cooperatives. Incentives are factors that motivate and influence human behavior.

6. Exchange, Money, and Interdependence Exchange is a voluntary transaction between buyers and
sellers. It is the trading of a good or service for another good or service, or for money. Money is
anything that is generally accepted as final payment for goods and services, and thus serves as a
medium of exchange. Interdependence means that decisions or events in one part of the world or in
one sector of the economy affect decisions and events in other parts of the world or sectors of

the economy.

7. Markets and Prices Markets are arrangements that enable buyers and sellers to exchange goods
and services. Prices are the amounts of money that people pay for a unit of a particular good or
service.

8. Supply and Demand Supply is defined as the different quantities of a resource, good, or service that
will be offered for sale at various possible prices during a specific time period. Demand is defined
as the different quantities of a resource, good, or service that will be purchased at various possible
prices during a specific time period.

9. Competition and Market Structure Competition is the struggle between businesses that strive for
the same customer or market. Competition depends on market structure—the number of buyers
and sellers, the extent to which firms can control price, the nature of the product, the accuracy
and timeliness of information, and the ease with which firms can enter and exit the market.

10. Income Distribution Income distribution refers to the way the nation’s income is distributed by
function—to those who provide productive resources—and by recipient, primarily individuals and
families.
xxviii BASIC CONCEPTS IN ECONOMICS


11. Market Failures Market failures occur when there is inadequate competition, lack of access to reliable information, resource immobility, externalities, and the need for public goods.

12. The Role of Government The role of government includes establishing a framework of law and order
in which a market economy functions. The government plays a direct and an indirect role in the
economy as both a producer and a consumer of goods and services.

13. Gross Domestic Product Gross Domestic Product (GDP) is defined as the market value of the total
output of all final goods and services produced within a country’s boundaries during one year.

14. Aggregate Supply and Aggregate Demand Aggregate supply is the total amount of goods and services produced by the economy during a period of time. Aggregate demand is the total amount of
spending on goods and services in the economy during a period of time.

15. Unemployment Unemployment is defined as the number of people without jobs who are actively
seeking work. This is also expressed as a rate when the number of unemployed is divided by the
number of people in the labor force.

16. Inflation and Deflation Inflation is a sustained increase in the average price level of the entire economy. Deflation is a sustained decrease in the average price level of an entire economy.

17. Monetary Policy Monetary policy consists of actions initiated by a nation’s central bank that affect
the amount of money available in the economy and its cost (interest rates).

18. Fiscal Policy Fiscal policy consists of changes in taxes, in government expenditures on goods and
services, and in transfer payments that are designed to affect the level of aggregate demand in the
economy.

19. Absolute and Comparative Advantage and Barriers to Trade Absolute advantage and comparative
advantage are concepts that are used to explain why trade takes place. Barriers to trade include tariffs, quotas, import licenses, and cartels.

20. Exchange Rates and the Balance of Payments An exchange rate is the price of one nation’s currency in terms of another nation’s currency. The balance of payments of a country is a statistical
accounting that records, for a given period, all payments that the residents, businesses, and governments of one country make to the rest of the world as well as the receipts that they receive
from the rest of the world.

21. International Aspects of Growth and Stability International aspects of growth and stability are more
important today than in the past because all nations are much more interdependent.
BASIC CONCEPTS IN ECONOMICS 1


CHAPTER 1

What Is Economics?
CHAPTER 2

Economic Systems and Decision
Making
CHAPTER 3

Business Organizations

As you read this unit, learn how the study of
economics helps answer the following questions:

How do you make the decision
between buying gas for your car
or taking your friend out for pizza?
Why is your friend from Russia
stunned by all the shoes available
at your local shoe store?
Why is an item at a department
store less expensive than that same
item at a specialty shop?
2 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS

The factors of production—land,
labor, capital, and entrepreneurship—make production possible.


To learn more about basic economic concepts
through information, activities, and links to other

sites, visit the Economics: Principles and Practices
Web site at epp.glencoe.com


The study of economics
will help you become a
better decision maker—it helps
you develop a way of thinking
about how to make the best
choices for you. To learn more
about the scope of economics,
view the Chapter 2 video lesson:

What Is Economics?

Chapter Overview Visit the Economics: Principles
and Practices Web site at epp.glencoe.com and
click on Chapter 1—Chapter Overviews to preview
chapter information.

Consumers must make choices
from many alternatives.


Scarcity and the Science
of Economics
Main Idea

Key Terms

Scarcity forces us to make choices. We can’t have
everything we want, so we are forced to choose
what we want most.

scarcity, economics, need, want, factors of production,
land, capital, financial capital, labor, entrepreneur,
production, Gross Domestic Product (GDP)

Reading Strategy
Graphic Organizer As you read the section, complete a graphic organizer like the one below by listing and describing the three economic choices every
society must make.
Economic choices

Objectives
After studying this section, you will be able to:
1. Explain the fundamental economic problem.
2. Examine the three basic economic questions every
society must decide.

Applying Economic Concepts
Scarcity Read to find out why scarcity is the basic
economic problem that faces everyone.

Cover Story
terest
Harris Poll Shows High In
in Economics
American adults
have an exceptionally
keen interest in economics. More than

seven in ten say they
share the same high
level of interest in
economics as they do
politics, business and
finance. A full 96%
caThe focus on economics edu
believe basic economg.
win
tion is gro
ics should be taught in
f
hal
,
Yet
.
ool
high sch
ool
two out of three high sch
of these same adults and
c
mi
no
eco
ic
ntary quiz on bas
students flunked an eleme
eco
ce

pla
]
[to
e has come
concepts. Clearly the tim
a.
nd
age
ion
cat
edu
the national
nomic literacy higher on

ase, The National Council
—April 27, 1999 press rele
on Economic Education

D

o you think the study of economics is worth
your time and effort? According to the Harris
poll in the cover story, a huge percentage of
Americans think it is. They must know what economists know—that a basic understanding of economics
can help make sense of the world around us.

The Fundamental Economic Problem
Have you ever noticed that very few people
are satisfied with the things they have?
Someone without a home may want a small one;

someone else with a small home may want a larger
one; someone with a large home may want a mansion. Others want things like expensive sports cars,
lavish jewelry, and exotic trips. Whether they are rich
or poor, most people seem to want more than they
already have. In fact, if each of us were to make a list
of all the things we want, it would include more
things than we could ever hope to obtain.
The fundamental economic problem facing all
societies is that of scarcity. Scarcity is the condition
that results from society not having enough resources
to produce all the things people would like to have.
CHAPTER 1: WHAT IS ECONOMICS? 5


ECONOMICS
AT A GLANCE

Figure 1.1

AT A GLANCE

Scarcity
Unlimited
Wants

Limited
Resources

Scarcity

Choices

What
to Produce

How
to Produce

For Whom
to Produce

Using Charts Scarcity is the fundamental
economic problem that forces consumers
and producers to use resources wisely. Why
is scarcity a universal problem?

“There Is No Such Thing as a Free Lunch”
Because resources are limited, virtually everything we do has a cost—even when it seems as if we
are getting something “for free.”
For example, you may think you are getting a
free lunch when you use a “buy one, get one free”
coupon. However, while you may not pay for the
extra lunch then and there, someone had to pay the
farmer for raising the food, the truck driver for
delivering the food, the chef for preparing the
food, and the server for serving the food.
How does business recover these costs? Chances
are that the price of the giveaway is usually hidden
somewhere in the prices the firm charges for its
products. As a result, the more a business gives

away “free,” the more it has to raise the prices for
the items it sells. In the end, someone always pays
for the supposedly “free” lunch—and that someone
may be you!
Unfortunately, most things in life are not free
because someone has to pay for the production in
the first place. Economic educators use the term
TINSTAAFL to describe this concept. In short,
this term means that There Is No Such Thing As A
Free Lunch.

Three Basic Questions
As shown in Figure 1.1, scarcity affects almost
every decision we make. This is where the study of
economics comes in. Economics is the study of
how people try to satisfy what appears to be seemingly unlimited and competing wants through the
careful use of relatively scarce resources.

Because we live in a world of relatively scarce
resources, we have to make wise economic
choices. Figure 1.1 presents three of the basic questions we have to answer. In so doing, we make decisions about the ways our limited resources will be
used.

Needs and Wants

WHAT to Produce

Economists often talk about people’s needs and
wants. A need is a basic requirement for survival
and includes food, clothing, and shelter. A want is

a way of expressing a need. Food, for example, is a
basic need related to survival. To satisfy the need
for food, a person may “want” a pizza or other
favorite meal. Because any number of foods will
satisfy the need for nourishment, the range of
things represented by the term want is much
broader than that represented by the term need.

The first question is that of WHAT to produce.
Should a society direct most of its resources to the
production of military equipment or to other
items such as food, clothing, or housing? Suppose
the decision is to produce housing. Should its limited resources be used for low-income, middleincome, or upper-income housing? How many of
each will be needed? A society cannot have everything its people want, so it must decide WHAT to
produce.

6 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS


HOW to Produce
A second question is that of HOW to produce.
Should factory owners use mass production methods that require a lot of equipment and few workers, or should they use less equipment and more
workers? If an area has many unemployed people,
the second method might be better. On the other
hand, mass production methods in countries where
machinery and equipment is widely available can
often lower production costs. Lower costs make
manufactured items less expensive and, therefore,
available to more people.

FOR WHOM to Produce
The third question deals with FOR WHOM to
produce. After a society decides WHAT and HOW
to produce, the things produced must be allocated
to someone. If the society decides to produce housing, should it be distributed to workers, professional people, or government employees? If there
are not enough houses for everyone, a choice must
be made as to who will receive the existing supply.
These questions concerning
WHAT, HOW, and FOR WHOM
to produce are not easy for any society to answer. Nevertheless, they
must be answered as long as there
are not enough resources to satisfy
people’s seemingly unlimited wants.

not created by humans. “Land” includes deserts,
fertile fields, forests, mineral deposits, livestock,
sunshine, and the climate necessary to grow crops.
Because only so many natural resources are available at any given time, economists tend to think of
land as being fixed, or in limited supply.
For example, there is not enough good farmland to adequately feed all of the earth’s population, nor enough sandy beaches for everyone to
enjoy, nor enough oil and minerals to meet our
expanding energy needs indefinitely. Because the
supply of a productive factor like land is relatively
fixed, the problem of scarcity is likely to become
worse as population grows in the future.

Capital
Another factor of production is capital—the
tools, equipment, machinery, and factories used in
the production of goods and services. Such items

also are called capital goods to distinguish them
from financial capital, the money used to buy the
tools and equipment used in production.

Economic Choices

The Factors of Production
The reason people cannot satisfy all their wants and needs is
the scarcity of productive resources.
The factors of production, or
resources required to produce the
things we would like to have, are
land, capital, labor, and entrepreneurs. As shown in Figure 1.2, all
four are required if goods and services are to be produced.

Land
In economics, land refers to the
“gifts of nature,” or natural resources

Making Decisions If we cannot have everything we want,
then we have to choose what we want the most. Why must a
society face the choices about what, how, and for whom to
produce?

CHAPTER 1: WHAT IS ECONOMICS? 7


ECONOMICS
AT A GLANCE

Figure 1.2

AT A GLANCE

The Factors of Production
Land

Capital

Labor

Entrepreneurs

Land includes the
“gifts of nature,” or
natural resources not
created by human
effort.

Capital includes the
tools, equipment, and
factories used in
production.

Labor includes people
with all their efforts
and abilities.

Entrepreneurs are
individuals who start a

new business or bring
a product to market.

Synthesizing Information The four factors of production are necessary for production to take
place. What four factors of production are necessary to bring jewelry to consumers?

Capital is unique in that it is the result of production. A bulldozer, for example, is a capital
good used in construction. It also was built in a
factory, which makes it the result of earlier production. Like the bulldozer, the cash register in a
neighborhood store is a capital good, as are the
computers in your school that are used to produce
the service of education.

Labor
A third factor of production is labor—people
with all their efforts, abilities, and skills. This category includes all people except for a unique
group of individuals called entrepreneurs, which
we single out because of their special role in the
economy.
Unlike land, labor is a resource that may vary
in size over time. Historically, factors such as population growth, immigration, famine, war, and
disease have had a dramatic impact on both the
quantity and quality of labor.
8 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS

Entrepreneurs
Some people are special because they are the innovators responsible for much of the change in our
economy. Such an individual is an entrepreneur, a
risk-taker in search of profits who does something
new with existing resources. Entrepreneurs often are

thought of as being the driving force in an economy
because they exhibit the ability to start new businesses or bring new products to market. They provide the initiative that combines the resources of
land, labor, and capital into new products.

Production
When all factors of production—land, capital,
labor, and entrepreneurs—are present, production, or
the process of creating goods and services, can take
place. In fact, everything we produce requires these
factors. For example, the chalkboards, desks, and
audiovisual equipment used in schools are capital
goods. The labor is in the form of services supplied


by teachers, administrators, and other employees.
Land, such as the iron ore, granite, and timber used
to make the building and desks, as well as the land
where the school is located, is also needed. Finally,
entrepreneurs are needed to organize the other three
factors and make sure that everything gets done.

The Scope of Economics
Economics is the study of human efforts to
satisfy what appear to be unlimited and
competing wants through the careful use of relatively scarce resources. As such, it is a social science
because it deals with the behavior of people as
they deal with this basic issue. There are four key
elements to this study: description, analysis, explanation, and prediction.

Description

Economics deals with the description of economic activity. For example, you will often hear
about the Gross Domestic Product (GDP)—the

UNITED STATES LEADS
IN ENTREPRENEURS
A vast majority of the owners of the nearly 20
million businesses in the United States are entrepreneurs. Most either work for themselves or
have a few employees.
A 10-nation study found that the United States
leads when it comes to entrepreneurs. According to
the survey, nearly 1 in 12 Americans is trying to start
a new business. In second place is Canada. The study
also shows a strong link between business start-up
rates and overall economic growth. The graph
shows the percentage of the adult population starting new businesses.

dollar value of all final goods and services, and
structures produced within a country’s borders in a
12-month period. GDP is the most comprehensive
measure of a country’s total output and is a key
measure of the nation’s economic health.
Economics is also concerned with what is produced and who gets how much, as well as with topics such as unemployment, inflation, international
trade, the interaction of business and labor, and the
effects of government spending and taxes.
Description is important because we need to
know what the world around us looks like.
However, description is only part of the picture
because it leaves many important “why” and “how”
questions unanswered.

Analysis
In order to answer such questions, economics
must focus on the analysis of economic activity as
well. Why, for example, are prices of some items
high while others are low? Why do some people
earn higher incomes than others? How do taxes
affect people’s desire to work and save?

Italy
Britain
Germany
Denmark
France
Finland
U.S.
Canada

3.4%
3.3%
2.2%
2.0%
1.8%
1.4%
8.5%
6.8%

Source: 1999 Global Entrepreneurship Monitor

Critical Thinking
1. Analyzing Information In which nation is

entrepreneurial activity strongest? Weakest?
2. Making Comparisons How does the level
of North America’s entrepreneurial activity
compare with Europe’s?
3. Drawing Conclusions Do you think there is
a link between business start-up rates and
overall economic growth? Why or why not?
CHAPTER 1: WHAT IS ECONOMICS? 9