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C hapter 1. Introduction. Economic Principles. The earth’s resources Renewable vs. nonrenewable resources Insatiable wants Scarcity and choice. Economic Principles. Economic model building Microeconomic and macroeconomic analysis Positive and normative economics . Natural Resources.

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Chapter 1

Introduction


Economic Principles

  • The earth’s resources

  • Renewable vs. nonrenewable resources

  • Insatiable wants

  • Scarcity and choice

Gottheil - Principles of Economics, 4e


Economic Principles

  • Economic model building

  • Microeconomic and macroeconomic analysis

  • Positive and normative economics

Gottheil - Principles of Economics, 4e


Natural Resources

A natural resource is a gift of nature.

Gottheil - Principles of Economics, 4e


Natural Resources

Examples of natural resources include:

  • Land

  • The uncultivated produce of land

  • Water

  • Minerals

Gottheil - Principles of Economics, 4e


Natural Resources

There are two kinds of natural resources:

  • Renewable

  • Nonrenewable

Gottheil - Principles of Economics, 4e


Natural Resources

  • A renewable natural resource is one that can be replenished.

Gottheil - Principles of Economics, 4e


Natural Resources

Renewable natural resources include:

  • Forests

  • Sea and land animals

  • Water

  • Grasses and forage on rangelands

Gottheil - Principles of Economics, 4e


Natural Resources

  • A nonrenewable natural resource is one that cannot be replenished.

Gottheil - Principles of Economics, 4e


Natural Resources

Nonrenewable natural resources include:

  • Metals and ores

  • Oil and natural gas

Gottheil - Principles of Economics, 4e


Natural Resources

Are we running out of natural resources?

  • We live in a finite world

Gottheil - Principles of Economics, 4e


Natural Resources

Are we running out of natural resources?

  • Our knowledge of a resource’s relative scarcity, particularly when considering its availability in the not-too-distant future, is less than exact.

Gottheil - Principles of Economics, 4e


Natural Resources

Are we running out of natural resources?

  • Even though some resources are renewable, the overproduction of lands and overharvesting of resources to meet the needs of a rapidly growing human population can destroy our living resources.

Gottheil - Principles of Economics, 4e


Natural Resources

Are we running out of natural resources?

  • Properly managed conservation of resources can both protect natural resources and even increase their supply.

Gottheil - Principles of Economics, 4e


Scarcity

Scarcity is the perpetual state of insufficiency of resources to satisfy people’s unlimited wants.

Gottheil - Principles of Economics, 4e


Scarcity

Two competing facts create scarcity:

  • Because we live on planet earth, the supple of resources available to us is limited.

  • Our wants for goods that are produced by the limited resources is unlimited.

Gottheil - Principles of Economics, 4e


Scarcity

Examples of things that are scarce:

  • Super Bowl tickets

Gottheil - Principles of Economics, 4e


Scarcity

Examples of things that are scarce:

  • Meals at a fine restaurant

Gottheil - Principles of Economics, 4e


Scarcity

Examples of things that are scarce:

  • Admission to an elite university

Gottheil - Principles of Economics, 4e


Scarcity

Examples of things that are not scarce:

  • Snow and ice in Alaska

Gottheil - Principles of Economics, 4e


Scarcity

Examples of things that are not scarce:

  • Sand in a desert

Gottheil - Principles of Economics, 4e


Scarcity

Some things that are not scarce can become scarce.

  • Air in the atmosphere is not scarce.

  • Clean, unpolluted air is scarce in many metropolitan areas, however.

Gottheil - Principles of Economics, 4e


Scarcity and Consumers

No one will knowingly pay a positive price for something that is not scarce.

If something is not scarce, there is enough to satisfy everyone’s wants and the price system is not necessary to decide who can have it and who cannot.

Gottheil - Principles of Economics, 4e


The Study of Economics

Economics is the study of how people work together to transform resources into goods and services to satisfy their wants.

Gottheil - Principles of Economics, 4e


The Study of Economics

Four central questions of economics:

  • Who decides what goods to produce?

  • How are goods produced?

  • Who gets the goods produced?

  • Who produces what?

Gottheil - Principles of Economics, 4e


Consumer Sovereignty

Consumer sovereignty

  • The Freedom of consumers to determine what goods and services they will buy.

Gottheil - Principles of Economics, 4e


Consumer Sovereignty

Consumer sovereignty affects the economy in several ways.

  • Consumer decisions ultimately determine what goods and services the economy will produce.

Gottheil - Principles of Economics, 4e


Consumer Sovereignty

Consumer sovereignty affects the economy in several ways.

  • Consumer decisions determine who gets what goods.

Gottheil - Principles of Economics, 4e


Economic Models

Economic models

  • Economic models are simplified abstractions of the real world.

Gottheil - Principles of Economics, 4e


Economic Models

1. How can economic models be expressed?

  • Pictorially

  • Graphically

  • Algebraically

  • Verbally

Gottheil - Principles of Economics, 4e


Economic Models

Economists use models because the world is too complex to fully and comprehensively consider at one time.

Gottheil - Principles of Economics, 4e


Economic Models

Ceteris paribus

  • Ceteris Paribus is a Latin phrase meaning “everything else being equal.”

Gottheil - Principles of Economics, 4e


Economic Models

The ceteris paribus assumption allows economists to develop one-to-one, cause-and-effect relationships in isolation.

Gottheil - Principles of Economics, 4e


Economic Models

The role of ceteris paribus:

  • Isolates one factor at a time in an experiment or study.

  • Allows researchers to identify cause-and-effect relationships removed from other factors.

Gottheil - Principles of Economics, 4e


EXHIBIT 1THE CIRCULAR FLOW MODEL


Circular Flow Model

There are two principal players in the circular flow model

  • Households

  • Firms

Gottheil - Principles of Economics, 4e


Circular Flow Model

Households

  • A household is an economic unit of one or more persons, living under one roof, that has a source of income and uses it in whatever way it deems fit.

Gottheil - Principles of Economics, 4e


Circular Flow Model

Firms

  • A firm is an economic unit that produces goods and services in the expectation of selling them to households, other firms, or the government.

Gottheil - Principles of Economics, 4e


Circular Flow Model

Resource market

  • The resource market is the market in which households supply resources to firms.

Gottheil - Principles of Economics, 4e


Circular Flow Model

These resources can include:

  • Land

  • Labor

  • Capital

  • Entrepreneurship

Gottheil - Principles of Economics, 4e


Circular Flow Model

Firms pay for these resources with:

  • Wages

  • Rent

  • Interest

  • Profit

Gottheil - Principles of Economics, 4e


Circular Flow Model

Product market

  • The product market is the market in which firms supply goods and services to households.

Gottheil - Principles of Economics, 4e


Circular Flow Model

Product market

  • Households pay for goods and services they buy in the product market with the income they received from supplying resources in the resource market.

Gottheil - Principles of Economics, 4e


Circular Flow Model

Circular flow model

  • In this model, households supply resources to firms, and firms supply goods and services to households.

Gottheil - Principles of Economics, 4e


Micro vs. Macro

The study of economics is divided into two areas

  • Microeconomics

  • Macroeconomics

Gottheil - Principles of Economics, 4e


Micro vs. Macro

Macroeconomics

  • Macroeconomics analyzes the behavior of the market as a whole.

Gottheil - Principles of Economics, 4e


Micro vs. Macro

Microeconomics

  • Microeconomics analyzes individual and firm behavior, especially in market conditions.

Gottheil - Principles of Economics, 4e


Positive vs. Normative Economics

There are two different approaches to the study of economics

  • Positive economics

  • Normative economics

Gottheil - Principles of Economics, 4e


Positive vs. Normative Economics

Positive economics

  • Positive economics is a subset of economics that analyzes the way the economy actually operates.

Gottheil - Principles of Economics, 4e


Positive vs. Normative Economics

Normative economics

  • Normative economics is a subset of economics founded on value judgments and leading to assertions of what ought to be.

Gottheil - Principles of Economics, 4e


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