Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition

1. Contemporary Economics:An Applications ApproachBy Robert J. Carbaugh1st Edition Chapter 1: Scarcity and Choice

2. Scarcity and Opportunity Cost Opportunity cost and choice A Car wash possibilities B C Number of compacts D E Number of minivans Carbaugh, Chap. 1

3. Opportunity Cost Production possibilities curve Attainable and unattainable production combinations Computers (mill.) Computers (mill.) Possible combinations of computers and VCRs A A Production possibilities curve (PPC) B B Production possibilities curve (PPC) F unattainable Points along PPC imply no unemployed resources and efficient production C C Foregone output E inefficient D D Carbaugh, Chap. 1

4. Opportunity Cost Law of increasing opportunity cost Computers (mill.) A A bowed outward PPC illustrates increasing opportunity costs B C D Carbaugh, Chap. 1

5. Changes in the PPC Economic growth Computers (mill.) E Economic growth is illustrated by an outward shift in a nation’s PPC F G C PPC0 PPC1 Carbaugh, Chap. 1

6. Economic Growth Consumption trade-offs Consumer goods (hamburgers) Consumer goods (hamburgers) United States Japan Next year’s production possibilities Next year’s production possibilities Japan’s choice to favor capital goods (point A) will shift its future PPC farther out The US choice to produce more consumer goods (point A) limits future production growth A PPC0 PPC1 PPC0 A This year’sproduction possibilities PPC1 This year’sproduction possibilities Carbaugh, Chap. 1

7. Economic Growth Investment and consumption Investment and consumption as a share of Gross Domestic Product, 1998 Investment as a Consumption as a Nation percentage of GDP percentage of GDP Brazil 19.6% 63.2% Canada 18.7 58.8 China 33.8 47.5 Germany 21.7 56.9 Japan 28.3 60.6 Mexico 19.5 65.2 Russia 19.3 51.2 Singapore 36.9 40.6 South Korea 35.3 56.5 Sweden 13.7 53.1 United Kingdom 15.4 64.3 United States 14.7 67.7 Investment defined as gross fixed capital formation. Source: IMF Carbaugh, Chap. 1

8. Economic Growth Economic sanctions Iraq Machines PPC0 (before sanctions) A PPC1 (after sanctions) Carbaugh, Chap. 1

9. Economic Systems Fundamental economic questions Scarcity Answered by Imposes Type of economic system: - Market economy - Command economy - Mixed economy Fundamental economic questions: - What to produce? - How to produce? - For whom to produce? Carbaugh, Chap. 1

10. Economic Systems Market economy: circular flow model Resource markets Land, labor, capital and entrepreneurship Rent, wages, interest and profits Business firms Households Consumption expenditures Goods and services Product markets Carbaugh, Chap. 1

11. Economic Systems Role of government in a mixed economy Government interventions:- minimum wage law- collective bargaining legislation- worker health & safety regulations- anti-discrimination legislation Resource markets Government interventions:- laws promoting competition- business taxes and subsidies- public utility regulation Government interventions:- household income taxes- public welfare programs- job retraining programs Households Business firms Product markets Government interventions:- purchases of goods and services- trade barriers protecting domestic firms and workers- product safety laws protecting consumers Carbaugh, Chap. 1