Chapter 1 Financial Literacy

Chapter 1: Welcome to Economics
Section 1: What Is Economics?
 Economics studies how people make decisions under scarcity,
balancing limited resources against unlimited wants.
 Scarcity applies to all resources including labor, land, capital, and time.
 Due to scarcity, people face trade-offs — choosing one thing means
giving up another.
 Division of labor increases productivity by allowing individuals to
specialize.
 Specialization leads to economies of scale, lowering costs and
increasing output.
 Trade enables people to consume beyond their individual production
capacity.
Section 2: Microeconomics vs. Macroeconomics
 Microeconomics focuses on individuals, households, firms, and
specific markets (e.g., pricing, supply, demand).
 Macroeconomics looks at the economy as a whole, studying inflation,
unemployment, growth, and fiscal and monetary policy.
 Both perspectives are interconnected and essential for a full
understanding of economics.
Section 3: Economic Theories and Models
 Economists build theories to simplify and explain complex real-world
behaviors.
 Models help in making predictions and analyzing economic
phenomena.
 These are abstractions designed to isolate key relationships.
Section 4: Economic Systems and How Economies Are Organized
 Traditional economies rely on customs and are typically agricultural,
slow to change.
 Command economies have government control over production,
pricing, and distribution (examples include Cuba and North Korea).
 Market economies depend on decentralized decision-making and
private ownership, driven by supply and demand.
 Most countries operate mixed economies combining elements of
both command and market systems.
Section 5: Globalization
 Globalization describes the increasing economic interdependence
between countries through trade and capital flows.
 Advances in transportation, communication, and trade agreements
have accelerated globalization.

 It brings both opportunities for growth and challenges like job
displacement and inequality.
 The degree of global integration varies by country, with smaller
countries often having higher trade-to-GDP ratios.
Key Terms Summary
 Scarcity: Limited resources versus unlimited wants.
 Division of labor: Specialization in specific tasks to increase
efficiency.
 Economies of scale: Cost advantages from larger production scales.
 Microeconomics: Study of individual economic units.
 Macroeconomics: Study of overall economy.
 Market economy: Economic system driven by private ownership and
markets.
 Command economy: Government-controlled economic system.
 Globalization: Integration of world economies.
 Fiscal policy: Government taxation and spending decisions.
 Monetary policy: Central bank regulation of money supply and
interest rates