Chapter 1 Limits, Alternatives, and Choices McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Economics Defined Economics: is the social science that studies how individuals, institutions, and society make optimal choices under conditions of scarcity. Economic wants (UNLIMITED) exceed productive capacity. Or Economic wants (UNLIMITED) but the resources to satisfy these wants are limited. 1-2

The Economic Perspective Thinking like an economist. Scarcity requires that choices be made. The cost of any good, service, or activity is the value of what must be given up to obtain it (opportunity cost). 1-3

The Economic Perspective Consider This … Free for All? “free” products to an individual are not free for society because of the required use of scarce resources to produce them. Companies provide “free” goods as a marketing strategy to promote brand awareness. Or a “free” bundled product requires a purchase. “There is no such free lunch” There is always an Opportunity Cost. 1-4

Why Study Economics? Most political problems have an economic aspect: Example: balancing the budget, tax structure, welfare reform, health care, retirement, international trade, unemployment, inflation, or concern for the environment, etc. Study of economics helps to develop an individual’s analytical skills and allows students to better predict the logical consequences of their actions. Economic principles enable business managers to make more intelligent decisions. Economics can help individuals make better buying decisions, better employment choices, and better financial investments. 1-5

Macro vs. Micro Macroeconomics examines the economy as a whole (Ex: total output, total employment, total income, aggregate expenditures, and general price level. examining the forest, not the trees Microeconomics looks at specific economic units (Ex: individual industry, firm or household and the price of specific products) examination of trees, and not the forest. 1-6

Individual’s Economizing Problem 1. Limited income. 2. Unlimited wants. 3. Budget line. 4. Make choices. Tradeoffs & opportunity costs 1-7

A Budget Line $120 Budget 12 10 8 6 4 2 DVDs $20 Books $10 2 4 6 8 10 12 6 5 4 3 2 1 Income = $120 Pdvd = $20 = 6 Unattainable Quantity of DVDs Income = $120 Pb = $10 = 12 Attainable 2 4 6 8 10 12 14 Quantity of Paperback Books 1-8

Consider This … Did Bill Gates, Winfrey, and LeBrown James … make bad choices? Future benefits of completing college will earn greater lifetime earnings OR The cost of staying in college and pay tuition and forgone possible wages/profit.

Society’s Economizing Problem Scarce resources = Economic resources Land (ex. Field, building office, shop, >>>>>> Rent Labor which include physical and mental abilities used in production. >>>>>> Wage &/OR Salary Capital (ex. tools, equipment, factories, transportation, etc., >>>>>>> Interest Rate Entrepreneurial Ability (Entrepreneur): Combines resources needed for production & innovator for new products, production techniques, organizational forms. >>>>>>>>> Profit Factors of production = Economic resources Full Employment: means all available resources should be employed (used). Efficiency: means that used resources are providing maximum output of our wants. Underemployment occurs if this is not so. 1-10

Production Possibilities Curve (PPC) Illustrate production choices Assumptions: 1- Full employment 2- limited & fixed resources 3- constant or fixed Technology 4- two products only (2 goods) 1-11

Production Possibilities Table Production Alternatives Type of Product A B C D E Pizzas (in hundred thousands) 1 2 3 4 Industrial Robots (in thousands) 10 9 7 4 Plot Points to Create Graph… 1-12

PPC Economic Growth Now Attainable Unattainable Industrial Robots 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable A Economic Growth B C’ C Industrial Robots D’ D Now Attainable Attainable E E’ 0 1 2 3 4 5 6 7 8 9 Pizzas 1-13

Production Possibilities Curve A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ Unattainable A Law of Increasing Opportunity Cost B C’ C Industrial Robots D’ Shape of the Curve D Attainable E E’ 0 1 2 3 4 5 6 7 8 9 Pizzas 1-14

PPC Notes: 1- Points on the PPC curve represent Full Employment (Best Choices) 2- Negative Slope b/c of scarcity & OC 3- Concave from the origin b/c of increasing OC

Chapter 1: Appendix: P22-28 Graphs and Their Meaning: 1- Two-dimensional graph. 2- Direct and/or inverse relationships. 3- Mathematicians: independent variable (horizontal axis), and the dependent variable (vertical axis). 4- Inverse relationships are downward sloping. 5- Direct relationships are upward sloping. 6- Other Things Being Equal = Ceteris Paribus. 7- Slope of a straight line. Some students will remember this as “rise over run.” 8- A vertical line has an infinite slope. 9- A horizontal line has a zero slope. 10- Equation of a linear relationship: Y = a + bX 11- Slope of a nonlinear curve.

Chapter 2 The Market System and the Circular Flow McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Economic Systems A: Command economy = ‘socialism’ or ‘communism’: The state owns all resources. And Economic activity is coordinated by central planning. B. The market system = ‘capitalism’: 1. There is private ownership of resources. And Economic activity is coordinated by Markets and prices. Government plays a very limited role. NOTE: PURE Capitalism=Laissez-faire=Let it be. No Gov interference.

The Demise of the Command Systems Examples: USSR, Eastern Europe, Cuba, China, …etc). Problems: Coordination problem. Incentive problem.

Characteristics of the Market System 1. Individuals & firms can own private property. 2. Entrepreneurs and businesses are free to produce & sell products in any market. 3. Entrepreneurs try to maximize profits. Resource suppliers try to maximize income. Consumers maximize satisfaction. 4. A market is the mechanism that brings buyers and sellers into contact. Note: 1776 Adam Smith’s “the invisible hand” hypothesis which promotes public interest through a market system where the primary motivation is self‑interest.

Consider THIS … The Two Koreas A. North Korea, under the influence of the Soviet Union, established a command economy. B. South Korea, protected by the U.S., established a market economy. C. S Korea has experienced significantly higher GDP, GDP per capital, exports & imports than N Korea. Note: WE WILL CONSIDER THE MARKET SYSTEM in this course

Circular Flow Both Flows Are Equal Money Income Costs Input Factors Figure 2.2; page 40 Resource Market Money Income Costs Input Factors Resources Both Flows Are Equal Businesses Households Goods & Services Goods & Services Product Market Consumption Revenue 2-22