Chapter 1: Alleviating Human Misery

Goods & Services Commodities we use to satisfy our needs and wants Goods are tangible commodities we use (things we use or consume: pizza, gasoline) Services are intangible commodities (things other people do for us: hair cut, piano lesson)

Scarcity The imbalance between what we have and what we need Goods & services are scarce because we cannot have all we want Price is the cost of removing scarcity of goods and services

Economic Resources Human: physical & mental efforts of workers in production of goods & services Capital: goods used in production of other goods (e.g., tools, equipment, buildings) Natural: gifts of the nature (e.g., water, minerals)

Economic Problem Unlimited human needs and wants vs. Limited economic resources Choice must be made in satisfying unlimited human needs and wants by optimal allocation of limited resources to production of goods and services

Opportunity Cost Choice: the act of selecting between alternatives Opportunity cost is the cost of making unavoidable choices; it is measured by: –cost of foregone opportunities, or –value of best alternative sacrificed

Cost of College Education Out-of-pocket costs: payments the we actually make: tuition fees, books, supplies, transportation, etc. Opportunity costs: foregone labor income if one decided to work instead of attending college

Production Possibilities Curve Maximum quantities of two good and services the economy can produce, assuming: –full employment / efficiency –fixed resources –constant technology

PPC Schedule Combination Food Education A BCE

Education A B C E D PPC Graph F Food Combinations A, B, C, and E are attainable Combination D is unattainable Combination F indicates unemployment/inefficiency

Economic Growth Education A B C E D Food Combination D becomes available with -more resources -technological advancement

Law of Increasing Opportunity Costs Moving from A to B: lose 10 Food, but gain 40 Education O.C. = 10/40 = 0.25 Moving from B to C: lose 40 Food, but gain 40 Education O.C. = 40/40 = 1 Moving from C to E: lose 50 Food, but gain 20 Education O.C. = 50/20 = 2.5 O.C. increases because resources are not fully substitutable.

Cost-Benefit Analysis Marginal Social Cost (MSC): the opportunity cost of producing an additional unit of good or service Marginal Social Benefit (MSB): the benefit to society from consuming an additional unit of good or service

Decision Criterion Optimal: MSC = MSB Non-optimal: MSC > MSB reduce production Non-optimal: MSB > MSC increase production

Gross Domestic Product Market value of all final goods and services produced by an economy in one year Real GDP = GDP / Price Index Real GDP Per Capita= Real GDP / Population

Growth vs. Distribution Economic Growth: Increase in Real GDP Income Distribution: Patterns of the distribution of Real GDP between population Growth without Distribution will increase income disparity

Income Distribution Income inequality is greater in LDCs than MDCs: –Poorest 20% of population: 5.3 vs. 6.1% of income –Richest 20% of population: 52.1 vs. 41.8% of income –Middle 60% of population: 42.6 vs. 52.1% of income

Problems of Developing Countries Rapid population growth Insufficient human capital investment Insufficient capital investment High income inequality Inefficient government Reliance on natural resource exports