This chapter begins with a discussion of the meaning and importance of economics. In this first chapter, however, we will not plunge into problems and issues; instead we consider some important preliminaries. We first look at the economic perspective–how economists think about problems. Next, we examine the specific methods economists use to examine economic behavior and the economy, including distinguishing between macroeconomics and microeconomics. We then look at the economizing problem from both an individual and societal perspective. For the individual we develop the budget line, for society the production possibilities model. In our discussion of production possibilities, the concepts of opportunity costs and increasing opportunity costs, unemployment, growth, and present vs. future possibilities are all demonstrated. Finally, in the Last Word (see chapter one), some of the problems, limitations, and pitfalls that hinder sound economic reasoning are examined. Class, what is the definition of economics (distinguish between microeconomics and macroeconomics). What is the role of economic theory in economics? Take a look at the last word in this chapter. What explains why millions of economic resources tend to get arranged logically and productively rather than haphazardly and unproductively. What is the invisible hand and what is the significance? What is consumer sovereignty and why is it important? This chapter begins with a brief comparison of the command and market systems, transitioning quickly to a discussion of the institutional framework of the American market system. Brief explanations are given for these characteristics of the market system: private property, freedom of enterprise and choice, the role of self-interest, competition, markets and prices, the reliance on technology and capital goods, specialization, use of money, and the active, but limited role of government. The authors then address the Five Fundamental Questions faced by every economy and explain how a market economy answers each one. A discussion of Adam Smith’s “invisible hand” leads into an explanation of why command systems have failed. The final part of the chapter introduces the circular flow model as an overview of how resources and goods move through a market system. Class, what is the difference between a command system and a market system? How does self-interest help achieve society’s economic goals? Why is there such a wide variety of desired goods and services in a market system? In what way are entrepreneurs and businesses at the helm of the economy but commanded by consumers? This chapter provides an introduction to demand and supply concepts. Both demand and supply are defined and illustrated; determinants of demand and supply are listed and explained. The concept of equilibrium and the effects of changes in demand and supply on equilibrium price and quantity are explained and illustrated. The chapter also includes brief discussions of efficiency (productive and allocative), and price controls (floors and ceilings). Class based on what you have read in this chapter, explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves? What are price floors and ceilings? What do economists mean when they say that “price floors and ceilings stifle the rationing function of prices and distort resource allocation”?