Chapter 1 Welcome to Economics! Principles of Economics Chapter 1 Welcome to Economics! PowerPoint Image Slideshow

Figure 1.1 Economics is greatly impacted by how well information travels through society. Today, social media giants Twitter, Facebook, and Instagram are major forces on the information super highway. (Credit: modification of work by Manuel Iglesias/Flickr Creative Commons)

Chapter summary ECONOMIC CONCEPTS CIRCULAR FLOW ECONOMIC SYSTEMS

Resources used in production of goods and services: Economic concepts Resources used in production of goods and services: Labor or Human Resources Land or Natural Resources Capital or Capital Resources

Scarcity: Not freely available Economic concepts Scarcity: Not freely available Resources are scarce; they are limited in supply. In order to use resources to produce more of one good, we must be ready to produce less of another good.

Economic concepts Homeless people are a stark reminder that scarcity of resources is real

Opportunity Cost: The unavoidable cost of making choices Economic concepts Opportunity Cost: The unavoidable cost of making choices Value of the best alternative forgone What you give up to get something

To solve the economic problem, the society has to make choices Economic concepts Economics: the study of allocation and use of scarce resources to satisfy unlimited human wants To solve the economic problem, the society has to make choices

Economic concepts Microeconomics: study of economic behavior of individual consumer and producer and market structure Macroeconomics: study of economic behavior of the entire unit and its problems (e.g., inflation, unemployment, recession)

Adam Smith, The Wealth of Nations, 1776 Division of Labor: Divide a job into discrete tasks and have each worker perform an assigned task, thus becoming more productive (e.g., the assembly line).

Workers on an assembly line are an example of the divisions of labor. Division of labor Workers on an assembly line are an example of the divisions of labor. (Credit: Nina Hale/Flickr Creative Commons)

John Maynard keynes A capitalistic economy can get stock in a deep downturn with massive unemployment. To recover, the government must play an active role by spending money to create jobs and incomes.

The circular flow of income Circular Flow: A model depicting interactions between economic actors within markets Markets are where buyers and sellers negotiate transactions Actors are market participants: Households, Firms, Government

The circular flow of income Goods and Services Market: Where buyers and sellers of goods and services negotiate and conduct exchange Labor Market: Where buyers and sellers of labor resources negotiate for wages and hours of work Capital Market: Where banks and financial institutions provide loanable funds for households and firms

The circular flow of income The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor market. The direction of the arrows shows that in the goods and services market, households receive goods and services and pay firms for them. In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits.

Basic Economic questions What to Produce: kind of goods and services people need or want (guns vs. butter) How to Produce: kind of methods used in production of goods and services (labor-intensive vs. capital-intensive) For Whom to Produce: kind of people benefiting from distribution of goods and services (rich, poor, or middle class)

Economic systems Tradition: Customs and the way of life answering the basic questions Command and Control: Government makes a plan to determine what, how and for whom to produce (i.e., Socialism) Market Orientation: The market system based on interaction between buyers and sellers answer the basic questions (i.e., Capitalism)

Example of commend and control Ancient Egypt was an example of a command economy

Nothing says “market” more than The New York Stock Exchange Market orientation Nothing says “market” more than The New York Stock Exchange

Benefits of Market Orientation Freedom to choose Freedom to compete Capitalism & Freedom Benefits of Market Orientation Freedom to choose Freedom to compete Freedom to trade Rule of law Enforcement of contracts Democracy Creation of a large middle class

Capitalism & Freedom Cargo ships are one mode of transportation for shipping goods in the global economy.