Chapter 2 Decisions

1. Chapter 2Decisions These slides supplement the textbook, but should not replace reading the textbook

2. Opinion? • ethanol in gasoline? • interest rates? • coal? • constitution? • equality? • Safety?

3. Who are the decision makers? • households • business • government • foreign

4. What is an economic system? A set of social institutions and mechanisms organized to answer the three economic questions

5. What are the three basic questions? • What? • For whom? • How?

6. Democracy vs. Republic vs. the Rule of Man? • Majority rules in a democracy • Republic adheres to the rule of law • Power dictates the rule of man in oligarchy

7. What is acommand economy? An economic system characterized by public ownership of resources and centralized economic planning

8. What ispure capitalism? An economic system characterized by private ownership of resources and the use of prices to coordinate economic activity in unregulated markets

9. Who was Adam Smith? Father of modern day economics who wrote The Wealth of Nations in 1776 about the invisible hand of the free market

10. What is amixed capitalist economy? An economic system characterized by private ownership of some resources and public ownership of others; some markets are regulated, others are not

11. Why have we modified the free market system? • A free market cannot provide us with everything we need • Satisfy political goals • Fairness

12. 8 basic goals? • Growth • Full employment • Stable prices • Economic efficiency • Fairness • Reduce negative externalities • Economic freedom • Economic security

13. What leads to growth? • Decrease costs • Decrease price • Increase sales • Increase profits • Increase jobs

14. What two opinions concerning growth? The Keynesians believe in macroeconomic policies of stimulating demand and the Austrians believe in microeconomic policies to encourage saving and private investing to promote growth

15. What is the Full Employment Act of 1946? The Federal government was mandated to do everything in its authority to achieve full employment, it set goals

16. What were the objections to the Full Employment Act of 1946? • business cycles are natural • lag effects • difficulty in forecasting

17. What is the Full Employment and Balanced Growth Act of 1978? Among other things the Federal Reserve was mandated to do everything in its authority to achieve full employment and stable prices

18. What is wrong with inflation? Diminishes buying power Distorts price signals Destroys confidence Leads to economic decline

19. Why is efficiency so important? • High costs lead to higher prices • Higher prices lead to decline in demand • Lower demand leads to unemployment

20. What is the downside of fairness? An emphasis on fairness detracts from economic efficiency – it is a goal that can lead to economic decline

21. Why can’t the free market reduce negative externalities? Businesses with a social conscience would be at an economic disadvantage

22. What is the danger in too much government involvement? Government agencies can overreach their influence and can cause economic stagnation

23. What is economic freedom? You reach economic freedom when you have money to do what you want, when you want, and with whom

24. What are limitations to economic freedom? • Personal debt • National debt • Lack of jobs • Fewer opportunities

25. Student Loans Students owe more on their loans than all credit card debt, over one trillion dollars, the average per student graduate is $24,000 while 93% is owed to the federal government

26. Economic Security Governments cannot create jobs, growth, or economic security. Governments can only take what the economy produces and redistribute it

27. Conflicting goals? Money is scarce, the more for government the less for private use, we always have opportunity costs

28. Where does the money come from to pay for business losses? The government gets money from three sources: taxes, borrow, or creates

29. If the government borrows money do we pay for it now or later ? A dollar spent today is paid for today regardless of where the money comes from

30. What does it mean that the U.S. Dollar is the world’s standard currency? Other nations convert their currencies to the American dollar when buying from foreign countries

31. What happens when we modify the system too much? Communication between its different parts become blurred and the system falters

32. What is rent seeking? Businesses financially support politicians for the purpose of influencing legislation

33. What is crony capitalism? A system where success in business depends on close relationships between big business and government

34. What is moral hazard? Occurs when businesses are insulated from risk and therefore are encouraged to take undo risks

35. What does private gains but social losses mean? When big business is bailed out of a bad situation the tax payer picks up the tab

36. How much has the national debt increased? Much of the money has been borrowed, our national debt increased 40% in 2010!

37. What happens with a more intrusive government and higher taxes? The free market system breaks down

38. What happens when we chose between less government and more government? We incur an opportunity cost

39. What isabsolute advantage? The ability to produce something with fewer resources than other producers use

40. What iscomparative advantage? The ability to produce something at a lower opportunity cost than other producers face

41. The Big Picture Is it cheaper for a company to move to Mexico and pay a worker $2 an hour or stay in America and pay $20.00 an hour?

42. END