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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 vari-
ous 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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iii
Economic Handbook xvi Chapter 6
Prices and Decision Making 136
Reading for Information xxvi
1 Prices as Signals . . . . . . . . . . . . . . . . . . . 137
Basic Concepts in Economics xxviii
2 The Price System at Work . . . . . . . . . . . . 142
3 Social Goals vs. Market Efficiency . . . . . . 150
Chapter 7
Market Structures 162
Fundamental Economic Concepts 2
1 Competition and Market Structures . . . . . 163
Chapter 1
2 Market Failures . . . . . . . . . . . . . . . . . . . . 173
What Is Economics? 4 3 The Role of Government . . . . . . . . . . . . . 178
1 Scarcity and the Science of Economics . . . . 5
2 Basic Economic Concepts . . . . . . . . . . . . . 12
3 Economic Choices and
Decision Making . . . . . . . . . . . . . . . . . . . 19
Macroeconomics: Institutions 190
Chapter 2
Chapter 8
Economic Systems and
Employment, Labor, and Wages 192
Decision Making 32
1 The Labor Movement . . . . . . . . . . . . . . . 193
1 Economic Systems . . . . . . . . . . . . . . . . . . 33
2 Resolving Union and Management
2 Evaluating Economic Performance . . . . . . . 41
Differences . . . . . . . . . . . . . . . . . . . . . . . 200
3 Capitalism and Economic Freedom . . . . . . 47
3 Labor and Wages . . . . . . . . . . . . . . . . . . 205
4 Employment Trends and Issues . . . . . . . . 211
Chapter 3
Business Organizations 56 Chapter 9
1 Forms of Business Organization . . . . . . . . 57 Sources of Government Revenue 222
2 Business Growth and Expansion . . . . . . . . 68
The Economics of Taxation . . . . . . . . . . . 223
1
3 Other Organizations . . . . . . . . . . . . . . . . . 75
The Federal Tax System . . . . . . . . . . . . . . 231
2
State and Local Tax Systems . . . . . . . . . . 238
3
Current Tax Issues . . . . . . . . . . . . . . . . . . 244
4
Chapter 10
Microeconomics 86 Government Spending 254
Chapter 4 1 The Economics of Government
Demand 88 Spending . . . . . . . . . . . . . . . . . . . . . . . . 255
2 Federal Government Expenditures . . . . . . 260
1 What Is Demand? . . . . . . . . . . . . . . . . . . . 89
3 State and Local Government
2 Factors Affecting Demand . . . . . . . . . . . . . 95
Expenditures . . . . . . . . . . . . . . . . . . . . . 267
3 Elasticity of Demand . . . . . . . . . . . . . . . . 101
4 Deficits, Surpluses, and the
Chapter 5
National Debt . . . . . . . . . . . . . . . . . . . . 272
Supply 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
Chapter 11
Money and Banking 284
1 The Evolution of Money . . . . . . . . . . . . . 285
International and Global Economics 464
2 Early Banking and Monetary Standards . . 292
Chapter 17
3 The Development of Modern Banking . . . 300
International Trade 466
Chapter 12
1 Absolute and Comparative Advantage . . . 467
Financial Markets 312 2 Barriers to International Trade . . . . . . . . . 472
1 Savings and the Financial System . . . . . . . 313 3 Financing and Trade Deficits . . . . . . . . . . 481
2 Investment Strategies and Financial Assets 318
Chapter 18
3 Investing in Equities, Futures,
Comparative Economic Systems 490
and Options . . . . . . . . . . . . . . . . . . . . . 328
The Spectrum of Economic Systems . . . . 491
1
The Rise and Fall of Communism . . . . . . 496
2
The Transition to Capitalism . . . . . . . . . . 501
3
The Various Faces of Capitalism . . . . . . . 509
4
Macroeconomics: Policies 338
Chapter 19
Chapter 13
Developing Countries 520
Economic Performance 340
1 Economic Development . . . . . . . . . . . . . 521
Measuring the Nation™s Output . . . . . . . . 341
1
2 A Framework for Development . . . . . . . . 528
GDP and Changes in the Price Level . . . . 350
2
3 Financing Economic Development . . . . . 533
GDP and Population . . . . . . . . . . . . . . . . 356
3
Economic Growth . . . . . . . . . . . . . . . . . . 363
4 Chapter 20
Global Economic Challenges 544
Chapter 14
1 The Global Demand for Resources . . . . . 545
Economic Instability 374
2 Economic Incentives and Resources . . . . 552
Business Cycles and Fluctuations . . . . . . . 375
1
3 Applying the Economic Way
Unemployment . . . . . . . . . . . . . . . . . . . . 382
2
of Thinking . . . . . . . . . . . . . . . . . . . . . . 558
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . 389
3
Poverty and the Distribution
4
Reference Atlas A1
of Income . . . . . . . . . . . . . . . . . . . . . . . 394
Chapter 15
The Fed and Monetary Policy 406
1 The Federal Reserve System . . . . . . . . . . . 407
2 Monetary Policy . . . . . . . . . . . . . . . . . . . 415
3 Monetary Policy, Banking, and Databank A14
the Economy . . . . . . . . . . . . . . . . . . . . 426
Life Skills A30
Glossary
Chapter 16 A40
Achieving Economic Stability 436 Spanish Handbook A54
The Cost of Economic Instability . . . . . . . 437
1 Index A91
Macroeconomic Equilibrium . . . . . . . . . . 442
2
Acknowledgments A106
Stabilization Policies . . . . . . . . . . . . . . . . 447
3
Economics and Politics . . . . . . . . . . . . . . 456
4




v
epp.glencoe.com
Visit the Economics The Role of the Entrepreneur . . . . . . . . . . . . . 11
The Internet and the Right of Privacy . . . . . . . 45
Principles and
The Beauty of Global Branding . . . . . . . . . . . . 74
Practices Holding the Fries “At the Border” . . . . . . . . . 100
Web site! 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




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vi
INFOBYTE
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Job Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Entrepreneurs of the New Economy . . . . . . . . 60
Durable Goods Orders . . . . . . . . . . . . . . . . . . 13
The Changing Workplace . . . . . . . . . . . . . . . . 78
Economic Indicators . . . . . . . . . . . . . . . . . . . . 42
Revolution in E-Commerce . . . . . . . . . . . . . 104
Business Inventories . . . . . . . . . . . . . . . . . . . . 59
Costs and Information Goods . . . . . . . . . . . . 129
Housing Starts . . . . . . . . . . . . . . . . . . . . . . . . . 93
The Internet and Prices . . . . . . . . . . . . . . . . . 144
Measures of Cost . . . . . . . . . . . . . . . . . . . . . 129
Consumer Protection . . . . . . . . . . . . . . . . . . . 179
Consumer Confidence . . . . . . . . . . . . . . . . . . 155
The End of Work? . . . . . . . . . . . . . . . . . . . . . 215
The SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
E-Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Personal Income . . . . . . . . . . . . . . . . . . . . . . 209
Using Technology . . . . . . . . . . . . . . . . . . . . . 261
Taxable Income . . . . . . . . . . . . . . . . . . . . . . . 226
The Future of Money . . . . . . . . . . . . . . . . . . 286
Budget Deficits . . . . . . . . . . . . . . . . . . . . . . . 276
Stock Trading on the Web . . . . . . . . . . . . . . . 330
Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . 303
Population Centers . . . . . . . . . . . . . . . . . . . . 366
Treasury Bonds . . . . . . . . . . . . . . . . . . . . . . . 325
Working in the New Economy . . . . . . . . . . . . 384
GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
Deregulation and New Growth . . . . . . . . . . . 454
The Business Cycle . . . . . . . . . . . . . . . . . . . . 378
Economic Espionage . . . . . . . . . . . . . . . . . . . 482
The Prime Rate . . . . . . . . . . . . . . . . . . . . . . . 428
An Emerging Latin American Market . . . . . . . 504
The Employment Report . . . . . . . . . . . . . . . . 449
Agricultural Development . . . . . . . . . . . . . . . 524
The Trade Balance . . . . . . . . . . . . . . . . . . . . . 473
Science . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550
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
A Classical Economist:
The Father of Modern Economics:
Thomas Malthus . . . . . . . . . . . . . . . . . . . . . . 551
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
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


$18.79 United States $28.14 Madrid, Spain
The cost for a market
basket of staple items varies
$23.19 London, England $30.10 Paris, France
widely around the world.
The prices shown are for
$27.38 Rome, Italy $74.23 Tokyo, Japan
capital cities.



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 Technology Skills
Applying the Writing Process . . . . . . . . . . . . . 441 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
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
Economist . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
On the Net . . . . . . . . . . . . . . . . . . . . . . . . . . 505
Law Enforcement Officer . . . . . . . . . . . . . . . . . 49
Population Explosion . . . . . . . . . . . . . . . . . . 529
Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Global Warming . . . . . . . . . . . . . . . . . . . . . . 556
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

xi
Charts, Graphs, and Maps Chapter 3
Corporations, Partnerships, and
Figure 3.1
Chapter 1 Sole Proprietorships . . . . . . . . . . 58
Scarcity . . . . . . . . . . . . . . . . . . . . . . 6 Stock Ownership . . . . . . . . . . . . . . 63
Figure 1.1 Figure 3.2
The Factors of Production . . . . . . . . 8 Ownership, Control, and
Figure 1.2 Figure 3.3
The Circular Flow of Economic Organization of a
Figure 1.3
Activity . . . . . . . . . . . . . . . . . . . . 15 Typical Corporation . . . . . . . . . . 65
Effect of Education on Income . . . 16
Figure 1.4 Business Growth Through
Figure 3.4
Jesse™s Decision-Making Grid . . . . 20
Figure 1.5 Reinvestment . . . . . . . . . . . . . . . 69
The Production Possibilities
Figure 1.6 Business Combinations . . . . . . . . . 71
Figure 3.5
Frontier . . . . . . . . . . . . . . . . . . . 23 Conglomerate Structure . . . . . . . . 72
Figure 3.6
Cooperatives in the
Figure 3.7
Chapter 2
United States . . . . . . . . . . . . . . . 76
Comparing Economic Systems . . . 38
Figure 2.1
Characteristics of Free Enterprise
Figure 2.2 Chapter 4
and Capitalism . . . . . . . . . . . . . . 47
The Demand for Compact
Figure 4.1
Digital Discs . . . . . . . . . . . . . . . 90
ECONOMICS Individual and Market Demand
Figure 4.2
Figure 3.7 Curves . . . . . . . . . . . . . . . . . . . . 92
AT A GLANCE
AT A GLANCE
A Change in Quantity Demanded . . 96
Figure 4.3
Cooperatives in the A Change in Demand . . . . . . . . . . 98
Figure 4.4
The Total Expenditures Test for
Figure 4.5
United States Demand Elasticity . . . . . . . . . . 103
Estimating the Elasticity of
Figure 4.6
Credit Unions Demand . . . . . . . . . . . . . . . . . . 106

Chapter 5
Memorial Societies
Supply of Compact Discs . . . . . . 114
Figure 5.1
Housing Individual and Market Supply
Figure 5.2
Policy
Curves . . . . . . . . . . . . . . . . . . . 115
Insurance A Change in Supply . . . . . . . . . . 117
Figure 5.3
Supply Elasticity . . . . . . . . . . . . . 119
Figure 5.4
Students The Law of Variable Proportions . . 124
Figure 5.5
Production, Costs, and Revenues . . 128
Figure 5.6
Farm Purchasing and Marketing
A Chapter 6
A Model of the CD Market . . . . 143
Preschool Education Figure 6.1
BC Dynamics of the Price
Figure 6.2
Adjustment Process . . . . . . . . . 145
Consumer Goods
Factors Affecting Price Changes
Figure 6.3
in Agriculture . . . . . . . . . . . . . . 146
Health
The Price of Gold When Supply
Figure 6.4
and Demand Change . . . . . . . . 147
Using Charts The cooperative is a volun-
Using The cooperative is a volun-
Distorting Market Outcomes
Figure 6.5
tary association of people formed to carry
formed to
with Price Ceilings and
on some kind of economic activity that will
Price Floors . . . . . . . . . . . . . . . 151
benefit its members. How do the three
How do the three
Agricultural Price Support
Figure 6.6
kinds of cooperatives differ?
differ?
Programs . . . . . . . . . . . . . . . . . . . 154

xii
Chapter 7 Government Spending as a
Figure 10.2
Percent of Total Output, 2000 . . 257
Perfect Competition: Market
Figure 7.1
The Federal Budget for Fiscal
Price and Profit Maximization . . 165 Figure 10.3
Year 2000 . . . . . . . . . . . . . . . . . 262
Characteristics of Market
Figure 7.2
Federal Government
Structures . . . . . . . . . . . . . . . . . 169 Figure 10.4
Expenditures, 1980“2000 . . . . . 263
Anti-Monopoly Legislation . . . . . 179
Figure 7.3
Expenditures by State and
Federal Regulatory Agencies . . . . 180 Figure 10.5
Figure 7.4
Local Governments . . . . . . . . . . 269
Effects of a Pollution Tax . . . . . . . 181
Figure 7.5
The Federal Deficit . . . . . . . . . . . 273
Figure 10.6
Chapter 8 Three Views of the Federal Debt . . 274
Figure 10.7
Employment and Union
Figure 8.1 How Big is the Public Debt? . . . . . 275
Figure 10.8
Affiliation . . . . . . . . . . . . . . . . . 194 The Crowding-Out Effect
Figure 10.9
Figure 8.2 Union Membership and Caused by Federal Spending . . . 277
Representation by Industry . . . . 195
Figure 8.3 Trade (Craft) and Industrial Chapter 11
Unions . . . . . . . . . . . . . . . . . . . 197 Figure 11.1 The 50 State Quarter Program . . . 294
Figure 8.4 Right to Work, State by State . . . 201 Figure 11.2 Number of State and
Figure 8.5 The Traditional Theory of Wage National Banks . . . . . . . . . . . . .302
Determination . . . . . . . . . . . . . 207
Figure 8.6 Median Weekly Earnings by Chapter 12
Occupation and Union Figure 12.1 Overview of the Financial
Affiliation . . . . . . . . . . . . . . . . . 208 System . . . . . . . . . . . . . . . . . . . 315
Figure 8.7 Union Membership . . . . . . . . . . . 212 Figure 12.2 The Relationship Between Risk
Figure 8.8 Median Female Income as a and Return . . . . . . . . . . . . . . . . 319
Percentage of Male Income . . . . 213 Figure 12.3 The Power of Compound
Figure 8.9 Distribution of Male and Interest . . . . . . . . . . . . . . . . . . . 320
Female Jobs by Occupation . . . . 214 Figure 12.4 How Much Will You Have at
Figure 8.10 The Minimum Wage . . . . . . . . . . 217 Retirement? . . . . . . . . . . . . . . . 321
Figure 12.5 Bond Classifications . . . . . . . . . . 322
Chapter 9
Figure 12.6 Financial Assets and Their
Total Government Receipts Per
Figure 9.1
Markets . . . . . . . . . . . . . . . . . . 325
Capita, Adjusted for Inflation . . . 224
Figure 12.7 The New York Stock Exchange . . 330
Figure 9.2 Shifting the Incidence of a Tax . . . 225
Figure 12.8 Tracking Stocks with the DJIA
Figure 9.3 Three Types of Taxes . . . . . . . . . . 228
and the S&P 500 . . . . . . . . . . . . 331
Figure 9.4 Federal Government Revenues
by Source . . . . . . . . . . . . . . . . . 232
Chapter 13
Figure 9.5 Individual Income Tax Rates, 2000 233
Figure 13.1 Estimating Gross Domestic
Figure 9.6 Average Individual and FICA
Product . . . . . . . . . . . . . . . . . . 342
Taxes, Single Individuals . . . . . . 234
Figure 13.2 The National Income and
Figure 9.7 Sources of State and Local
Product Accounts . . . . . . . . . . . 345
Government Revenue . . . . . . . . 239
Figure 13.3 Circular Flow of Economic
Figure 9.8 State and Local Taxes as a
Activity . . . . . . . . . . . . . . . . . . . 347
Percentage of State Income . . . . 240
Figure 13.4 Estimating Gross Domestic
Figure 9.9 Biweekly Paycheck and
Product . . . . . . . . . . . . . . . . . . 351
Withholding Statement . . . . . . . 241
Figure 13.5 Constructing the Consumer
Figure 9.10 The Value-Added Tax . . . . . . . . . . 247
Price Index . . . . . . . . . . . . . . . . 352
Chapter 10 Figure 13.6 Projected Distribution of
Population by Region,
Figure 10.1 Total Government Expenditures Per
1988 to 2010 . . . . . . . . . . . . . . 358
Capita, Adjusted for Inflation . . 256

xiii
Distribution of the Population Monetizing the Debt . . . . . . . . . 428
Figure 13.7 Figure 15.8
Major Components of the
by Age and Gender, 2000 . . . . . 359 Figure 15.9
Money Supply . . . . . . . . . . . . . 430
Projected Change in U.S.
Figure 13.8
Population by Race
Chapter 16
and Ethnic Origin,
The GDP Gap and the
Figure 16.1
1990“2050 . . . . . . . . . . . . . . . 360
Production Possibilities
Real GDP vs. Real GDP
Figure 13.9
Frontier . . . . . . . . . . . . . . . . . . 438
Per Capita . . . . . . . . . . . . . . . . 364
The Misery Index . . . . . . . . . . . . 439
Figure 16.2
Annual Growth Rates of
Figure 13.10
The Aggregate Supply Curve . . . 443
Figure 16.3
Real GDP Per Capita . . . . . . . . 365
The Aggregate Demand Curve . . 444
Figure 16.4
Labor Productivity, 1959“1999 . . 367
Figure 13.11
Macroeconomic Equilibrium . . . 445
Figure 16.5
Fiscal Policy and the Aggregate
Chapter 14 Figure 16.6
Demand Curve . . . . . . . . . . . . 449
Phases of the Business Cycle . . . . 376
Figure 14.1
Supply-Side and Demand-Side
Figure 16.7
The Index of Leading
Figure 14.2
Economics . . . . . . . . . . . . . . . 450
Economic Indicators . . . . . . . . 379
The Laffer Curve . . . . . . . . . . . . 451
Figure 16.8
The Unemployment Rate . . . . . . 383
Figure 14.3
Supply-Side Policies and the
Figure 16.9
The Fastest-Growing Occupations,
Figure 14.4
Aggregate Supply Curve . . . . . . 452
1998“2008 . . . . . . . . . . . . . . . . 387
The Rate of Inflation . . . . . . . . . 390
Figure 14.5
Chapter 17
The Declining Value of the
Figure 14.6
United States Merchandise
Figure 17.1
Dollar . . . . . . . . . . . . . . . . . . . 391
Trade by Area . . . . . . . . . . . . . 468
The Distributions of Income
Figure 14.7
The Gains from Trade . . . . . . . . 469
Figure 17.2
by Families . . . . . . . . . . . . . . . 395
The North American Free
Figure 17.3
Poverty in the United States:
Figure 14.8
Trade Agreement . . . . . . . . . . . 478
Total Number and Rate . . . . . . 397 Foreign Exchange Rates . . . . . . . 482
Figure 17.4
Per Capita Personal Income
Figure 14.9
Flexible Exchange Rates . . . . . . . 483
Figure 17.5
by State . . . . . . . . . . . . . . . . . . 399
Chapter 18
Chapter 15
The Spectrum of Economic
Figure 18.1
Structure of the Federal
Figure 15.1
Systems . . . . . . . . . . . . . . . . . . 493
Reserve System . . . . . . . . . . . . 408 Figure 18.2 New and Emerging Stock
Clearing a Check . . . . . . . . . . . . 412
Figure 15.2
Markets . . . . . . . . . . . . . . . . . . 503
Balance Sheet Entries for a
Figure 15.3
Hypothetical Commercial Chapter 19
Bank . . . . . . . . . . . . . . . . . . . . 417 Gross National Product and
Figure 19.1
Fractional Reserves and the
Figure 15.4 Gross National Product
Money Supply . . . . . . . . . . . . . 419 Per Capita . . . . . . . . . . . . . . . . 522
The Reserve Requirement as
Figure 15.5 Figure 19.2 The European Union . . . . . . . . . 536
a Tool of Monetary Policy . . . . 421
Chapter 20
Summary of Monetary
Figure 15.6
Policy Tools . . . . . . . . . . . . . . . . 423 World Population Growth Rates . . 547
Figure 20.1
The Most Dangerous
Short-Run Impact of Figure 20.2
Figure 15.7
Nuclear Reactors . . . . . . . . . . . 549
Monetary Policy . . . . . . . . . . . 427




xiv
The Government Sector
Reference Atlas
Federal Government Expenditures,
1949“1999 . . . . . . . . . . . . . . . . . . . . . . . . . A21
World Political . . . . . . . . . . . . . . . . . . . . . . . . A2
Total Government Expenditures,
United States Political . . . . . . . . . . . . . . . . . . . A4
1949“1999 . . . . . . . . . . . . . . . . . . . . . . . . . A21
World Land Use . . . . . . . . . . . . . . . . . . . . . . . A6
United States Land Use . . . . . . . . . . . . . . . . . . A8 Federal Government Net Receipts and Net
World GDP Cartogram . . . . . . . . . . . . . . . . A10 Outlays, 1950“2000 . . . . . . . . . . . . . . . . . . A22
World Population Cartogram . . . . . . . . . . . . A12 Federal Debt, Total Outstanding, 1960“2000 . A22
National Debt Per Capita, 1940“2000 . . . . . . A22
Federal Budget Receipts, 1980“1999 . . . . . . . A23

Databank The Financial Sector
Interest Rates, 1929“2000 . . . . . . . . . . . . . . . A24
Consumer Credit Outstanding, 1980“2000 . . A24
The American People
Personal Saving, 1960“2000 . . . . . . . . . . . . . A25
U.S. Population Projections, 2000“2050 . . . . . A15
Money Stock, 1970“2000 . . . . . . . . . . . . . . . A25
Civilian Labor Force, 1950“2000 . . . . . . . . . A15
Hours and Earnings in Private Industries,
The Global Economy
1960“1999 . . . . . . . . . . . . . . . . . . . . . . . . . A16
Economic Groups: Population, Exports,
The U.S. Economy and GDP, 1998 . . . . . . . . . . . . . . . . . . . . . A26
Gross Domestic Product, 1950“2000 . . . . . . . A17 Growth Rates in Real GDP, 1980“1998 . . . . . A26
Annual Changes in Consumer Price Indexes, World Population by Age, 2000“2050 . . . . . . A27
1940“2000 . . . . . . . . . . . . . . . . . . . . . . . . . A17 Countries Ranked by Population,
Personal Consumption Expenditures,
2000 and 2050 . . . . . . . . . . . . . . . . . . . . . . A27
1960“2000 . . . . . . . . . . . . . . . . . . . . . . . . . A18
Aging Index in Selected Nations
Personal Consumption Expenditures,
of the Americas, 1997 and 2025 . . . . . . . . . A28
Nondurable Goods, 1960“2000 . . . . . . . . . A18
Median Age, World, 1975“2025 . . . . . . . . . . A28
Average Prices of Selected Goods, 1989“1999 . A19
U.S. Exports and Imports, 1950“2000 . . . . . . A29
Business Sector: Changes in Productivity &
Employment and Unemployment,
Related Data . . . . . . . . . . . . . . . . . . . . . . . A20
Selected Economies . . . . . . . . . . . . . . . . . . A29
Inflation in Consumer Prices, 1915“2000 . . . . A20



Percentage of Total Receipts
49% Individual Income Taxes
9% 10%
45%
13% 47% 10% 11%
14%
Employment Taxes
Corporate Income Taxes
Other Receipts
32%
26% 34%
1980 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 alterna-
tive when scarce resources are used for one purpose rather than another. Trade-offs involve choos-
ing 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 coop-
eratives. 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 reli-
able 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 ser-
vices 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 econ-
omy. 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 tar-
iffs, quotas, import licenses, and cartels.
20. Exchange Rates and the Balance of Payments An exchange rate is the price of one nation™s cur-
rency 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 gov-
ernments 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 The factors of production”land,
labor, capital, and entrepreneur-
item at a specialty shop? ship”make production possible.

2 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS
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?



Consumers must make choices
from many alternatives.
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.
Scarcity and the Science
of Economics
Main Idea Key Terms
Scarcity forces us to make choices. We can™t have scarcity, economics, need, want, factors of production,
everything we want, so we are forced to choose land, capital, financial capital, labor, entrepreneur,
what we want most. production, Gross Domestic Product (GDP)
Reading Strategy
Objectives
Graphic Organizer As you read the section, com-
After studying this section, you will be able to:
plete a graphic organizer like the one below by list-
1. Explain the fundamental economic problem.
ing and describing the three economic choices every
2. Examine the three basic economic questions every
society must make.
society must decide.

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




D
o you think the study of economics is worth
Cover Stor y 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 econo-
terest
Harris Poll Shows High In mists know”that a basic understanding of economics
in Economics can help make sense of the world around us.

American adults
The Fundamental Economic Problem
have an exceptionally
keen interest in eco- Have you ever noticed that very few people
nomics. More than are satisfied with the things they have?
seven in ten say they
Someone without a home may want a small one;
share the same high
someone else with a small home may want a larger
level of interest in
one; someone with a large home may want a man-
economics as they do
sion. Others want things like expensive sports cars,
politics, business and
finance. A full 96% lavish jewelry, and exotic trips. Whether they are rich
uca-
The focus on economics ed
believe basic econom- or poor, most people seem to want more than they
tion is growing.
ics should be taught in already have. In fact, if each of us were to make a list
high school. Yet, half of all the things we want, it would include more
school
d two out of three high
of these same adults an omic things than we could ever hope to obtain.
entary quiz on basic econ
students flunked an elem eco-
e has come [to] place The fundamental economic problem facing all
concepts. Clearly the tim l education agenda. societies is that of scarcity. Scarcity is the condition
acy higher on the nationa
nomic liter
that results from society not having enough resources
cil
ease, The National Coun
”April 27, 1999 press rel
on Economic Education to produce all the things people would like to have.

CHAPTER 1: WHAT IS ECONOMICS? 5
ECONOMICS “There Is No Such Thing as a Free Lunch”
Figure 1.1
AT A GLANCE
AT A GLANCE
Because resources are limited, virtually every-
thing we do has a cost”even when it seems as if we
Scarcity are getting something “for free.”
For example, you may think you are getting a
Unlimited Limited
free lunch when you use a “buy one, get one free”
Wants Resources
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
Scarcity 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
Choices
the items it sells. In the end, someone always pays
for the supposedly “free” lunch”and that someone
may be you!
What How For Whom Unfortunately, most things in life are not free
to Produce to Produce to Produce
because someone has to pay for the production in
the first place. Economic educators use the term
TINSTAAFL to describe this concept. In short,
Using Charts Scarcity is the fundamental
this term means that There Is No Such Thing As A
economic problem that forces consumers
Free Lunch.
and producers to use resources wisely. Why
is scarcity a universal problem?


Three Basic Questions
As shown in Figure 1.1, scarcity affects almost Because we live in a world of relatively scarce
every decision we make. This is where the study of resources, we have to make wise economic
economics comes in. Economics is the study of choices. Figure 1.1 presents three of the basic ques-
how people try to satisfy what appears to be seem- tions we have to answer. In so doing, we make deci-
ingly unlimited and competing wants through the sions about the ways our limited resources will be
careful use of relatively scarce resources. used.


Needs and Wants WHAT to Produce
Economists often talk about people™s needs and The first question is that of WHAT to produce.
wants. A need is a basic requirement for survival Should a society direct most of its resources to the
and includes food, clothing, and shelter. A want is production of military equipment or to other
a way of expressing a need. Food, for example, is a items such as food, clothing, or housing? Suppose
basic need related to survival. To satisfy the need the decision is to produce housing. Should its lim-
for food, a person may “want” a pizza or other ited resources be used for low-income, middle-
favorite meal. Because any number of foods will income, or upper-income housing? How many of
satisfy the need for nourishment, the range of each will be needed? A society cannot have every-
things represented by the term want is much thing its people want, so it must decide WHAT to
broader than that represented by the term need. produce.

6 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS
HOW to Produce not created by humans. “Land” includes deserts,
fertile fields, forests, mineral deposits, livestock,
A second question is that of HOW to produce.
sunshine, and the climate necessary to grow crops.
Should factory owners use mass production meth-
Because only so many natural resources are avail-
ods that require a lot of equipment and few work-
able at any given time, economists tend to think of
ers, or should they use less equipment and more
land as being fixed, or in limited supply.
workers? If an area has many unemployed people,
For example, there is not enough good farm-
the second method might be better. On the other
land to adequately feed all of the earth™s popula-
hand, mass production methods in countries where
tion, nor enough sandy beaches for everyone to
machinery and equipment is widely available can
enjoy, nor enough oil and minerals to meet our
often lower production costs. Lower costs make
expanding energy needs indefinitely. Because the
manufactured items less expensive and, therefore,
supply of a productive factor like land is relatively
available to more people.
fixed, the problem of scarcity is likely to become
worse as population grows in the future.
FOR WHOM to Produce
The third question deals with FOR WHOM to
Capital
produce. After a society decides WHAT and HOW
to produce, the things produced must be allocated Another factor of production is capital”the
to someone. If the society decides to produce hous- tools, equipment, machinery, and factories used in
ing, should it be distributed to workers, profes- the production of goods and services. Such items
sional people, or government employees? If there also are called capital goods to distinguish them
are not enough houses for everyone, a choice must from financial capital, the money used to buy the
be made as to who will receive the existing supply. tools and equipment used in production.
These questions concerning
WHAT, HOW, and FOR WHOM
to produce are not easy for any soci- Economic Choices
ety to answer. Nevertheless, they
must be answered as long as there
are not enough resources to satisfy
people™s seemingly unlimited wants.


The Factors of Production
The reason people cannot sat-
isfy 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 entrepre-
neurs. As shown in Figure 1.2, all
four are required if goods and serv-
ices are to be produced.
Making Decisions If we cannot have everything we want,
Land then we have to choose what we want the most. Why must a
society face the choices about what, how, and for whom to
In economics, land refers to the produce?
“gifts of nature,” or natural resources

CHAPTER 1: WHAT IS ECONOMICS? 7
ECONOMICS
Figure 1.2
AT A GLANCE
AT A GLANCE

The Factors of Production

Land Capital Labor Entrepreneurs




Land includes the Capital includes the Labor includes people Entrepreneurs are
“gifts of nature,” or tools, equipment, and with all their efforts individuals who start a
natural resources not factories used in and abilities. new business or bring
created by human production. a product to market.
effort.


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 pro- Entrepreneurs
duction. A bulldozer, for example, is a capital Some people are special because they are the inno-
good used in construction. It also was built in a vators responsible for much of the change in our
factory, which makes it the result of earlier produc- economy. Such an individual is an entrepreneur, a
tion. Like the bulldozer, the cash register in a risk-taker in search of profits who does something
neighborhood store is a capital good, as are the new with existing resources. Entrepreneurs often are
computers in your school that are used to produce thought of as being the driving force in an economy
the service of education. because they exhibit the ability to start new busi-
nesses or bring new products to market. They pro-
vide the initiative that combines the resources of
Labor
land, labor, and capital into new products.
A third factor of production is labor”people
with all their efforts, abilities, and skills. This cat-
egory includes all people except for a unique
Production
group of individuals called entrepreneurs, which
When all factors of production”land, capital,
we single out because of their special role in the
labor, and entrepreneurs”are present, production, or
economy.
the process of creating goods and services, can take
Unlike land, labor is a resource that may vary
place. In fact, everything we produce requires these
in size over time. Historically, factors such as pop-
factors. For example, the chalkboards, desks, and
ulation growth, immigration, famine, war, and
audiovisual equipment used in schools are capital
disease have had a dramatic impact on both the
goods. The labor is in the form of services supplied
quantity and quality of labor.

8 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS
by teachers, administrators, and other employees. dollar value of all final goods and services, and
Land, such as the iron ore, granite, and timber used structures produced within a country™s borders in a
to make the building and desks, as well as the land 12-month period. GDP is the most comprehensive
where the school is located, is also needed. Finally, measure of a country™s total output and is a key
entrepreneurs are needed to organize the other three measure of the nation™s economic health.
factors and make sure that everything gets done. Economics is also concerned with what is pro-
duced and who gets how much, as well as with top-
ics such as unemployment, inflation, international
The Scope of Economics trade, the interaction of business and labor, and the
effects of government spending and taxes.
Economics is the study of human efforts to Description is important because we need to
satisfy what appear to be unlimited and know what the world around us looks like.
competing wants through the careful use of rela- However, description is only part of the picture
tively scarce resources. As such, it is a social science because it leaves many important “why” and “how”
because it deals with the behavior of people as questions unanswered.
they deal with this basic issue. There are four key
elements to this study: description, analysis, expla-
Analysis
nation, and prediction.
In order to answer such questions, economics
must focus on the analysis of economic activity as
Description well. Why, for example, are prices of some items
Economics deals with the description of eco- high while others are low? Why do some people
nomic activity. For example, you will often hear earn higher incomes than others? How do taxes
about the Gross Domestic Product (GDP)”the affect people™s desire to work and save?




Italy 3.4%
Britain 3.3%

UNITED STATES LEADS Germany 2.2%
Denmark 2.0%
IN ENTREPRENEURS France 1.8%
Finland 1.4%
A vast majority of the owners of the nearly 20 U.S. 8.5%
Canada
million businesses in the United States are entre- 6.8%
preneurs. Most either work for themselves or Source: 1999 Global Entrepreneurship Monitor
have a few employees.
A 10-nation study found that the United States
Critical Thinking
leads when it comes to entrepreneurs. According to
the survey, nearly 1 in 12 Americans is trying to start 1. Analyzing Information In which nation is
a new business. In second place is Canada. The study entrepreneurial activity strongest? Weakest?
also shows a strong link between business start-up 2. Making Comparisons How does the level
rates and overall economic growth. The graph of North America™s entrepreneurial activity
shows the percentage of the adult population start- compare with Europe™s?
ing new businesses.
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
the future. When it comes to the GDP, you will
soon discover that economists spend much of their
time explaining why the measure is, or is not, per-
Capital
forming in the manner expected.
“Capital” comprises the tools, equipment, and
factories used to produce goods and services.
As the economy changes, some economists are
Prediction
adjusting the definition to include “tools” such
Finally, economics is concerned with prediction.
as knowledge and intellectual property. An
For example, we may want to know if people™s
example of such knowledge and intellectual
incomes are going to rise or fall in the future,
property are databases and software.
affecting their spending habits in the marketplace.
Or, perhaps a community trying to choose between
higher taxes on homeowners or higher taxes on
businesses needs to know the consequences of each
The importance of analysis is that it helps us to
alternative before it makes its choice.
discover why things work and how things happen.
The study of economics can help to make the
This, in turn, will help us deal with problems that
best decision in both situations. Because econom-
we would like to solve.
ics deals with the study of what is, or what tends to
be, it can help predict what may happen in the
Explanation future, as well as the likely consequences of differ-
ent courses of action.
Economics is also concerned with the explana-
Finally, it is also important to realize that the
tion of economic activity. After economists under-
actual decisions about the economic choices to be
stand why and how things work, it is useful and
made are the responsibility of all citizens in a free
even necessary to communicate this knowledge to
and democratic society. Therefore, the study of
others. If we all have a common understanding of
economics helps all of us to become more
the way our economy works, some economic prob-
informed citizens and better decision makers.
lems will be much easier to address or even fix in




Checking for Understanding Applying Economic Concepts
7. Scarcity How does scarcity affect your life?
1. Main Idea Using your notes from the graphic
Provide several examples of items you had to
organizer activity on page 5, explain why a
do without because of limited resources.
society must face the choices about WHAT,
Explain how you adjusted to this situation.
HOW, and FOR WHOM to produce.
For example, were you able to substitute
2. Key Terms Define scarcity, economics, need,

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