McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-1 CHAPTER TWO Economics: The Creation and Distribution of Wealth

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-2 Economics: Use of scarce resources to produce goods/services, distribute them among competing groups/individuals Land Land Labor Labor Capital Capital Entrepreneurship Entrepreneurship Knowledge Knowledge

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-3 Economics: Create Wealth Micro v. Macro Micro v. Macro Resource Development Resource Development

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-4 Economic Theory Thomas Malthus (Early 1800s) Thomas Malthus (Early 1800s) “Dismal Science” “Dismal Science” Too many people Too many people Adam Smith (1776) Adam Smith (1776) Freedom is vital Freedom is vital “Invisible Hand” “Invisible Hand”

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-5 Four “What’s” of an Economic System $ What (how it) is produced $ What amount is produced $ What method of output distribution $ What rate of economic growth Adapted from: Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-6 Three Economic Systems Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-7 Capitalism Private Property Private Property Profit/Ownership Profit/Ownership Freedom of Competition Freedom of Competition Freedom of Choice Freedom of Choice

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-8 Communism Public Ownership Public Ownership Productive Capacity Productive Capacity Capital Capital Central Planning/Controlled Economy Central Planning/Controlled Economy Managers = Mandatory Party Membership Managers = Mandatory Party Membership

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-9 Socialism Private & Public Ownership Private & Public Ownership Some Choices are Limited Some Choices are Limited Creates Social Equality & Equality of Results Creates Social Equality & Equality of Results Reduces Individual Incentive Reduces Individual Incentive

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Mixed Economies Free-Market Economy = Capitalism Free-Market Economy = Capitalism Command Economy Command Economy Socialism Socialism Communism Communism Trend Results in Blend Trend Results in Blend Capitalism > Socialism Capitalism > Socialism Socialism > Capitalism Socialism > Capitalism

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Supply Curve Quantity(S) High High Low Price(P) S

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Demand Curve Price(P) Quantity(D) High HighLow D

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Quantity High HighLow Price EQUILIBRIUM POINT Market Equilibrium SD Surplus Shortage

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Degrees of Competition Sellers OneMany Monopoly Oligopoly MonopolisticCompetition Pure Competition

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Monopoly = One Seller Diamonds Diamonds Utilities Utilities

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Oligopoly = Few Sellers Tobacco Tobacco Automobiles Automobiles

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Monopolistic Competition = Many Sellers With Perceived Differences Fast Food Fast Food Colleges Colleges

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Pure Competition Buyer Sellers Sellers

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Limitations of Free-Market Inequality of Wealth- Causes National & World Tension Inequality of Wealth- Causes National & World Tension Potential Environmental Damage Potential Environmental Damage Limitations Push Country towards Socialism = Government Regulation Limitations Push Country towards Socialism = Government Regulation

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Government’s Role in Economics Enforces Rules/Regulations Enforces Rules/Regulations Provides Public Goods Provides Public Goods Transfers Payments Transfers Payments Fosters Competition Fosters Competition Contributes to Economic Stability Contributes to Economic Stability

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Industrialized Nations Tax Rate Source: Parade Magazine, Apr. 12, 1998.

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Where Does the Government Get Its Money Source: Federal Budget for Fiscal 2001

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Egg McMuffin and large coffee for President Bush & 2,000 Secret Service Agents every morning for 575 years. Egg McMuffin and large coffee for President Bush & 2,000 Secret Service Agents every morning for 575 years. Average annual grocery bill for 250,000 families of 4. Average annual grocery bill for 250,000 families of 4. One year’s food for 5 million cats & dogs. One year’s food for 5 million cats & dogs. Tuition, room and board for freshman classes at Brown, Cornell, Harvard, Pennsylvania & Yale with $50M leftover for books. Tuition, room and board for freshman classes at Brown, Cornell, Harvard, Pennsylvania & Yale with $50M leftover for books. What $1 Billion Can Buy

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-24

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Key Economic Indicators Gross Domestic Product (GDP) Gross Domestic Product (GDP) Unemployment Rate Unemployment Rate Price Indexes Price Indexes Consumer Price Index(CPI) Consumer Price Index(CPI) Producer Price Index(PPI) Producer Price Index(PPI)

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved What Makes Up the Consumer Price Index SOURCE: SOURCE: U.S. Bureau of Labor Statistics

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Economic Scenarios Inflation vs. Deflation = #Dollars Chasing Amount of Goods/Services Inflation vs. Deflation = #Dollars Chasing Amount of Goods/Services Recession & Depression = Degrees of Severity Recession & Depression = Degrees of Severity Federal Reserve Attempts to Control Federal Reserve Attempts to Control

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved U.S. Government Economic Tools Monetary Policy- management of money supply Monetary Policy- management of money supply Fiscal Policy- management of taxes and government expenditures Fiscal Policy- management of taxes and government expenditures National Debt National Debt

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved How Much is the Federal Debt? The debt has reached $5.6 trillion The debt has reached $5.6 trillion If $1,000 bills were stacked: If $1,000 bills were stacked: $1 Million = 4.29 Inches $1 Million = 4.29 Inches $1 Billion = Feet $1 Billion = Feet $1 Trillion = 67 Miles $1 Trillion = 67 Miles The debt is equal to miles in $1,000 bills The debt is equal to miles in $1,000 bills

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Labor Productivity /3 of workforce produced U.S. food needs /3 of workforce produced U.S. food needs 2000 – 1/50 of workforce produces U.S. food needs 2000 – 1/50 of workforce produces U.S. food needs Service vs. Manufacturing Economy? Service vs. Manufacturing Economy? Quality vs. Quantity? Quality vs. Quantity?

McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved Revenue by Industry Source: Wired, November In Billions of Dollars