Answer & Explanation:The Key Concepts in Economics
Write a three to four (3-4) page paper in which you:

Identify at least four (4) key points of a relevant economic article from
either the Library or a newspaper. The article must deal with any course
concepts covered in Weeks 1-8.
Apply one (1) of the following economic concepts (supply, demand, market
structures, elasticity, costs of production, GDP, Unemployment, inflation,
aggregate demand, and aggregate supply) to the key points that you highlighted
in Question 1.
Explain how the concept that you identified in Question 2 could affect the
U.S. economy.
In your concluding paragraph, state whether you agree or disagree with the
economic article identified in Question 1. Provide a rationale for the
Use at least three (3) quality resources in this assignment with one (1)
being your article.
Your assignment must follow these formatting requirements:

Be typed, double spaced, using Times New Roman font (size 12), with one-inch
margins on all sides; citations and references must follow APA or
school-specific format. Check with your professor for any additional
Include a cover page containing the title of the assignment, the student’s
name, the professor’s name, the course title, and the date. The cover page and
the reference page are not included in the required assignment page
The specific course learning outcomes associated with this assignment

Analyze the dynamics of supply and demand to anticipate market
Analyze the elasticity of demand and supply and its importance, and the
effect of taxes or other public policies.
Describe the impact of various forms of competition on business operations
with emphasis on perfect competition.
Use technology and information resources to research issues in principles of
Grading for this assignment will be based on answer quality,
logic/organization of the paper, and language and writing skills.

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Survey of Economics
Arthur O’Sullivan
Lewis and Clark College
Steven M. Sheffrin
Tulane University
Stephen J. Perez
ISBN 1-269-41073-3
California State University, Sacramento
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Survey of Economics: Principles, Applications, and Tools, Sixth Edition, by Arthur O’Sullivan, Steven M. Sheffrin, and Stephen J. Perez. Published by Prentice Hall.
Copyright © 2014 by Pearson Education, Inc.
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Library of Congress Cataloging-in-Publication Data
O’Sullivan, Arthur.
Survey of economics: principles, applications, and tools/Arthur O’Sullivan, Lewis and Clark College, Steven M.
Sheffrin Tulane University, Stephen J. Perez California State University, Sacramento. — Sixth Edition.
pages cm
ISBN 978-0-13-294885-2
1. Economics. I. Sheffrin, Steven M. II. Perez, Stephen J. III. Title.
HB171.5.O843 2013
10 9 8 7 6 5 4 3 2 1
Survey of Economics: Principles, Applications, and Tools, Sixth Edition, by Arthur O’Sullivan, Steven M. Sheffrin, and Stephen J. Perez. Published by Prentice Hall.
Copyright © 2014 by Pearson Education, Inc.
ISBN 1-269-41073-3
ISBN 10: 0-13-294885-0
ISBN 13: 978-0-13-294885-2
Introduction: What Is
Economics is the science of choice, exploring
the choices made by individuals and
Over the last few centuries, these choices have led to substantial
gains in the standard of living around the globe. In the United
States, the typical person today has roughly seven times the
income and purchasing power of a person 100 years ago. Our
prosperity is the result of choices made by all sorts of people,
including inventors, workers, entrepreneurs, and the people who
saved money and loaned it to others to invest in machines and
other tools of production. One reason we have prospered is
greater efficiency: We have discovered better ways to use our
resources—raw materials, time, and energy—to produce the
goods and services we value.
As an illustration of changes in the standard of living and our growing prosperity, let’s compare the way people
listened to music in 1891 with how we listen today. You can buy an iPod shuffle® for $49 and fill it with 500 songs
at $0.99 each. If you earn a wage of $15 per hour, it would take you about 36 hours of work to purchase and then
fill an iPod. Back in 1891, the latest technological marvel was Thomas Edison’s cylinder phonograph, which played
music recorded on 4-inch cylinders. Imagine that you lived back then and wanted to get just as much music as
you could fit on an iPod. Given the wages and prices in 1891, it would take you roughly 800 hours of work to earn
enough money to buy the phonograph and all the cylinders. And if you wanted to keep your music with you, you
would need 14 backpacks to carry the cylinders.
Although prosperity and efficiency are widespread, they are not universal. In some parts of the world, many
people live in poverty. For example, in sub-Saharan Africa 388 million people—about half the population—live
on less than $1.25 per day. And in all nations of the world, inefficiencies still exist, with valuable resources being
wasted. For example, each year the typical urban commuter in the United States wastes more than 47 hours
and $84 worth of gasoline trapped in rush hour traffic.
ISBN 1-269-41073-3

List the three key economic questions.

List three ways to use macroeconomics.

Discuss the insights from economics for a
real-world problem such as congestion.

List three ways to use microeconomics.

List the four elements of the economic way
of thinking.
MyEconLab helps you master each objective and
study more efficiently.
Survey of Economics: Principles, Applications, and Tools, Sixth Edition, by Arthur O’Sullivan, Steven M. Sheffrin, and Stephen J. Perez. Published by Prentice Hall.
Copyright © 2014 by Pearson Education, Inc.
conomics provides a framework to diagnose all sorts of problems faced by
society and then helps create and evaluate various proposals to solve them.
Economics can help us develop strategies to replace poverty with prosperity,
and to replace waste with efficiency. In this chapter, we explain what economics is
and how we all can use economic analysis to think about practical problems and
The resources we use to produce goods
and services are limited.
The study of choices when there is
What Is Economics?
Economists use the word scarcity to convey the idea that resources—the things we
use to produce goods and services—are limited, while human wants are unlimited.
Therefore, we cannot produce everything that everyone wants. As the old saying goes,
you can’t always get what you want. Economics studies the choices we make when
there is scarcity; it is all about trade-offs. Here are some examples of scarcity and the
trade-offs associated with making choices:
• You have a limited amount of time. If you take a part-time job, each hour on the
job means one fewer hour for study or play.
• A city has a limited amount of land. If the city uses an acre of land for a park,
it has one fewer acre for housing, retailers, or industry.
• You have limited income this year. If you spend $17 on a music CD, that’s
$17 fewer you have to spend on other products or to save.
factors of production
The resources used to produce goods and
services; also known as production inputs
or resources.
natural resources
Resources provided by nature and used to
produce goods and services.
Human effort, including both physical
and mental effort, used to produce goods
and services.
physical capital
The stock of equipment, machines, structures, and infrastructure that is used to
produce goods and services.
human capital
The knowledge and skills acquired by a
worker through education and experience
and used to produce goods and services.
The effort used to coordinate the factors
of production—natural resources, labor,
physical capital, and human capital—to
produce and sell products.
People produce goods (music CDs, houses, and parks) and services (the advice
of physicians and lawyers) by using one or more of the following five factors of
production, also called production inputs or simply resources:
• Natural resources are provided by nature. Some examples are fertile land,
mineral deposits, oil and gas deposits, and water. Some economists refer to all
types of natural resources as land.
• Labor is the physical and mental effort people use to produce goods and
• Physical capital is the stock of equipment, machines, structures, and
infrastructure that is used to produce goods and services. Some examples
are forklifts, machine tools, computers, factories, airports, roads, and fiberoptic cables.
• Human capital is the knowledge and skills acquired by a worker through
education and experience. Every job requires some human capital: To be
a surgeon, you must learn anatomy and acquire surgical skills. To be an
accountant, you must learn the rules of accounting and acquire computer skills.
To be a musician, you must learn to play an instrument.
• Entrepreneurship is the effort used to coordinate the factors of production—
natural resources, labor, physical capital, and human capital—to produce and
sell products. An entrepreneur comes up with an idea for a product, decides
how to produce it, and raises the funds to bring it to the market. Some examples
of entrepreneurs are Bill Gates of Microsoft, Steve Jobs of Apple Computer,
Howard Schultz of Starbucks, and Ray Kroc of McDonald’s.
Survey of Economics: Principles, Applications, and Tools, Sixth Edition, by Arthur O’Sullivan, Steven M. Sheffrin, and Stephen J. Perez. Published by Prentice Hall.
Copyright © 2014 by Pearson Education, Inc.
ISBN 1-269-41073-3
Given our limited resources, we make our choices in a variety of ways. Sometimes
we make our decisions as individuals, and other times we participate in collective
decision making, allowing the government and other organizations to choose for
us. Many of our choices happen within markets, institutions or arrangements that
enable us to buy and sell things. For example, most of us participate in the labor
market, exchanging our time for money, and we all participate in consumer markets,
exchanging money for food and clothing. But we make other choices outside
markets—from our personal decisions about everyday life to our political choices
about matters that concern society as a whole. What unites all these decisions is the
notion of scarcity: We can’t have it all; there are trade-offs.
Economists are always reminding us that there is scarcity—there are trade-offs in
everything we do. Suppose that in a conversation with your economics instructor you
share your enthusiasm about an upcoming launch of the space shuttle. The economist
may tell you that the resources used for the shuttle could have been used instead for
an unmanned mission to Mars.
By introducing the notion of scarcity into your conversation, your instructor is
simply reminding you that there are trade-offs, that one thing (a Mars mission) is
sacrificed for another (a shuttle mission). Talking about alternatives is the first step
in a process that can help us make better choices about how to use our resources. For
example, we could compare the scientific benefits of a shuttle mission to the benefits
of a Mars mission and choose the mission with the greater benefit.
Po si ti v e v e r su s Normat ive An alysis
Economics doesn’t tell us what to choose—shuttle mission or Mars mission—but simply
helps us to understand the trade-offs. President Harry S. Truman once remarked,
All my economists say, “On the one hand, . . . ; On the other hand, . . . .” Give me a onehanded economist!
An economist might say, “On the one hand, we could use a shuttle mission to do more
experiments in the gravity-free environment of Earth’s orbit; on the other hand, we
could use a Mars mission to explore the possibility of life on other planets.” In using
both hands, the economist is not being evasive, but simply doing economics, discussing the alternative uses of our resources. The ultimate decision about how to use our
resources—shuttle mission or Mars exploration—is the responsibility of citizens or
their elected officials.
Most modern economics is based on positive analysis, which predicts the
consequences of alternative actions by answering the question “What is?” or “What
will be?” A second type of economic reasoning is normative in nature. Normative
analysis answers the question “What ought to be?”
In Table 1.1, we compare positive questions to normative questions. Normative
questions lie at the heart of policy debates. Economists contribute to policy debates
by conducting positive analyses of the consequences of alternative actions. For
example, an economist could predict the effects of an increase in the minimum
wage on the number of people employed nationwide, the income of families
with minimum-wage workers, and consumer prices. Armed with the conclusions
of the economist’s positive analysis, citizens and policymakers could then make a
positive analysis
Answers the question “What is?” or
“What will be?”
normative analysis
Answers the question “What ought to be?”
ISBN 1-269-41073-3
TABLE 1.1 Comparing Positive and Normative Questions
Positive Questions
Normative Questions
• If the government increases the minimum
wage, how many workers will lose their jobs?
• If two office-supply firms merge, will the price
of office supplies increase?
• How does a college education affect a
person’s productivity and earnings?
• How do consumers respond to a cut in
income taxes?
• If a nation restricts shoe imports, who benefits
and who bears the cost?
• Should the government increase the
minimum wage?
• Should the government block the merger
of two office-supply firms?
• Should the government subsidize a college
• Should the government cut taxes to stimulate
the economy?
• Should the government restrict imports?
Survey of Economics: Principles, Applications, and Tools, Sixth Edition, by Arthur O’Sullivan, Steven M. Sheffrin, and Stephen J. Perez. Published by Prentice Hall.
Copyright © 2014 by Pearson Education, Inc.
normative decision about whether to increase the minimum wage. Similarly, an
economist could study the projects that could be funded with $1 billion in foreign
aid, predicting the effects of each project on the income per person in an African
country. Armed with this positive analysis, policymakers could then decide which
projects to support.
Economists don’t always reach the same conclusions in their positive analyses.
The disagreements often concern the magnitude of a particular effect. For example,
most economists agree that an increase in the minimum wage will cause unemployment, but disagree about how many people would lose their jobs. Similarly,
economists agree that spending money to improve the education system in Africa
will increase productivity and income, but disagree about the size of the increase
in income.
T h e T h ree Key Econom ic Questions:
Wh at , How, and Who?
We make economic decisions at every level in society. Individuals decide what
products to buy, what occupations to pursue, and how much money to save. Firms
decide what goods and services to produce and how to produce them. Governments
decide what projects and programs to complete and how to pay for them. The choices
of individuals, firms, and governments answer three questions:
1 What products do we produce? Trade-offs exist: If a hospital uses its resources to
perform more heart transplants, it has fewer resources to care for premature
2 How do we produce the products? Alternative means of production are available:
Power companies can produce electricity with coal, natural gas, or wind power.
Professors can teach in large lecture halls or small classrooms.
3 Who consumes the products? We must decide how to distribute the products of
society. If some people earn more money than others, should they consume more
goods? How much money should the government take from the rich and give to
the poor?
As we’ll see later in the book, most of these decisions are made in markets, where
prices play a key role in determining what products we produce, how we produce
them, and who gets the products.
E con o mic M od els
economic model
A simplified representation of
an economic environment, often
employing a graph.
Survey of Economics: Principles, Applications, and Tools, Sixth Edition, by Arthur O’Sullivan, Steven M. Sheffrin, and Stephen J. Perez. Published by Prentice Hall.
Copyright © 2014 by Pearson Education, Inc.
ISBN 1-269-41073-3
Economists use economic models to explore the choices people make and the consequences of those choices. An economic model is a simplified representation of
an economic environment, with all but the essential features of the environment
eliminated. An economic model is an abstraction from reality that enables us to focus
our attention on what really matters. As we’ll see throughout the book, most economic
models use graphs to represent the economic environment.
To see the rationale for economic modeling, consider an architectural model. An
architect builds a scale model of a new building and uses the model to show how the
building will fit on a plot of land and blend with nearby buildings. The model shows
the exterior features of the building, but not the interior features. We can ignore the
interior features because they are unimportant for the task at hand—seeing how the
building will fit into the local environment.
Economists build models to explore decision making by individuals, firms, and
other organizations. For example, we can use a model of a profit-maximizing firm
to predict how a firm will respond to increased competition. If a new car stereo
store opens up in your town, will the old firms be passive and simply accept smaller
market shares, or will they aggressively cut their prices to try to drive the new rival
out of business? The model of the firm includes the monetary benefits and costs of
doing business, and assumes that firms want to make as much money as possible.
Although there may be other motives in the business world—to have fun or to help
the world—the economic model ignores these other motives. The model focuses
our attention on the profit motive and how it affects a firm’s response to increased
Economi …
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