Economics

1. Ch 1 - Economics: The Core Issues “Economics is the study of mankind in the ordinary business of life.” Alfred Marshall

2. Ch 1 - Economics: The Core Issues “. . .it is a method rather than a doctrine, an apparatus of the mind, a technique which helps its possessor to draw correct conclusions.” John Maynard Keynes

3. Ch 1 - Economics: The Core Issues Economics is the study of how best to allocate scarce resources among competing uses.

4. Ch 1 - Economics: The Core Issues The study of how economic agents make choices. Consumers maximize utility Firms maximize profits Governments maximize welfare

5. Three core issues must be resolved: • WHAT to produce with our limited resources. • HOW to produce the goods and services we select. • FOR WHOM goods and services are produced; that is, who should get them.

6. The Economy Is Us • The economy is an abstraction that refers to the sum of all our individual production and consumption activities. • The economy is us — the aggregation of all of our supply and demand decisions.

7. Factors of Production • Factors of production are resource inputs used to produce goods and services. • Land - all natural resources such as crude oil, water, air, and minerals (anything NOT man made). • Labor - skills and abilities to produce goods and services.

8. Factors of Production • Factors of production are resource inputs used to produce goods and services. • Capital - goods produced for use in the production of other goods, e.g., equipment, structures. • Enterprise - assembling of resources to produce new or improved products and technologies.

9. Opportunity Costs • Opportunity cost - the most desired goods or services that are forgone in order to obtain something else. • It is what is given up in order to get something else.

10. Production Possibilities • Production possibilities - alternative combination of final goods and services that could be produced, assuming: • Fixed moment in time • Fixed amount of resources • Fixed technology

11. The Production Possibilities Curve

12. A 5 B 4 C 3 OUTPUT OF TRUCKS D 2 E 1 F 0 1 2 3 4 5 OUTPUT OF TANKS The Production Possibilities Curve

13. Production Possibilities Illustrates Two Essential Principles • Scarce resources– there’s a limit to the amount we can produce in a given time period with available resources and technology. • Opportunity costs – we can obtain additional quantities of any desired good only by reducing the potential production of another good.

14. Law of Increasing Opportunity Costs • Resources do not transfer perfectly from the production of one good to another. • Increasing quantities of any good can be obtained only by sacrificing ever-increasing quantities of other goods.

15. Law of Increasing Opportunity Costs A Step 1: give up one truck 5 B 4 Step 3: give up another truck Step 2: get twotanks C 3 OUTPUT OF TRUCKS Step 4: get one more tank D 2 E 1 F 0 1 2 3 4 5 OUTPUT OF TANKS

16. The Cost of North Korea’s Military • North Korea’s inability to feed itself is due in part to its large army. • Resources used for the military aren’t available for producing food.

17. The Cost of North Korea’s Military A P G Reduced food output N C FOOD OUTPUT Military buildup O H D B MILITARY OUTPUT

18. 16.3 12.0 4.1 3.8 3.4 2.8 2.7 1.5 1.2 1.0 0.9 0.5 India USA Japan China Bosnia Jamaica Mexico N. Korea Canada Germany S. Korea Saudi Arabia The Military Share of Output Percent of Output Allocated to Military

19. Efficiency • Efficiency - getting the maximum output of a good from the resources used in production. • Every point on a production possibilities curve is efficient.

20. Inefficiency • A production possibilities curves shows potential output, not necessarily actual output. • If we are inefficient, actual output will be less than the potential output. • Countries may end up inside their production possibilities curve if resources are inefficiently combined or not all used.

21. Unemployment A 5 B 4 C Y 3 OUTPUT OF TRUCKS 2 1 1 2 3 4 5 0 OUTPUT OF TANKS

22. Economic Growth • A point outside the production possibilities curve suggests that we could get more goods than we are capable of producing! • Economic growth is an increase in output (real GDP) — an expansion of production possibilities.

23. Currently not attainable Economic Growth A X 5 B 4 C 3 OUTPUT OF TRUCKS 2 1 1 2 3 4 5 0 OUTPUT OF TANKS

24. PP2 PP1 Economic Growth OUTPUT OF TRUCKS 0 OUTPUT OF TANKS

25. Basic Decisions • Production possibilities define the output choices confronting a nation: • WHAT to produce • HOW to produce • FOR WHOM to produce

26. The Invisible Hand of a Market Economy • The market mechanism is the use of market prices and sales to signal desired outputs (or resource allocations). • The market decides the mix of output in an economy. • Laissez faire = leave it alone —nonintervention by government in the market mechanism.

27. Continuing Debates • The core of most debates is some variation of the WHAT, HOW, or FOR WHOM questions. • Conservatives favor Adam Smith’s laissez-faire approach. • Liberals tend to think government intervention is likely to improve the answers.

28. A Mixed Economy • Mixed economy - uses both market signals and government directives to allocate goods and resources. • Most economies are mixed economies.

29. Macro Versus Micro • Macroeconomics - the study of aggregate economic behavior, of the economy as a whole. • Microeconomics - the study of individual behavior in the economy, of the components of the larger economy.

30. Ceteris Paribus assumption • Ceteris paribus “All other things held constant”