Chapter 1 Introduction McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives Understand the importance of markets. Identify three of the main forces shaping today’s economy. Explain the debate over the role of government in the economy. Define economics and discuss how prosperity is measured Name some key disagreements in economics. 1-2

Objectives of Textbook Tools of Economics Role of Market Economy Changing Nature of Economy 1-3

Tools of Economics View the world from the perspective of an economist To accomplish this, need to understand the key tools of analysis Some of these tools include: –supply and demand –elasticity –production function –the multiplier 1-4

Role of Market Economy In a market, buyers and sellers come together to voluntarily exchange goods and services for money. Market transactions are activities that produce and exchange goods and services for which other people are willing to pay. In this text we will study how markets work and how prices are set. 1-5

Changing Nature of Economy Individuals, businesses, and even countries are subject to limits and constraints. But these limits and constraints are constantly changing. –Goods that were once expensive are now commonplace. –Countries that were once poor are rapidly growing. 1-6

Key Forces Shaping Today’s Economy Need to understand forces driving change Three main forces at work: – Technological change – Globalization – Financial markets 1-7

Key Forces Shaping Today’s Economy Technological change is an improvement in knowledge that increases the range of products and services the economy can deliver. –Examples: electricity, cars, and the Internet Technology creates new ways of producing goods and services. Technology is the critical factor in raising living standards. –Technology is also a possible solution to the energy crisis and global climate change. 1-8

Key Forces Shaping Today’s Economy Globalization is the exchange of goods, services, ideas, and people among countries. –The world economy is becoming more global. –Does this trend benefit the U.S. economy? –There are many aspects to globalization, including: trade in goods and services flow of information and movement in money –Example: impact of China on the global economy 1-9

Key Forces Shaping Today’s Economy Key Forces Shaping Today’s Economy Financial markets encompass all those parts of the economy that have to do with borrowing, investing, or transferring money. –Include the stock market, mortgages, banks, brokerage firms, and credit cards Financial markets are constantly evolving. –Fuel economic growth by enabling companies, individuals, and government markets to raise money 1-10

Key Forces Shaping Today’s Economy Interest rates are defined as the cost of money and are determined in the financial markets. –The central bank plays a key role in determining interest rates. Subprime loans given to people who did not have enough income to qualify for ordinary mortgages are currently a major problem in the financial markets. 1-11

The Role of Government Who should guide the economy: government, or businesses and individuals? –At one extreme is a centrally-planned economy, in which all economic activities are controlled from the top. –At the other extreme is a laissez-faire economy, where no government regulations or laws exist at all. What is the role of competition in guiding the economy? 1-12

The Role of Government Competition is the most consistent force for growth and progress. The U.S. economy is the most competitive in the world. There are some concerns over excessive competition. –Impact on job security, poverty, etc. 1-13

The Role of Government Government plays a large role in the U.S. economy. –Makes laws, regulates businesses, etc. Macroeconomic policy: making sure that the economy doesn’t fall into deep slumps where a lot of people lose their jobs, or overheat to the point where prices soar out of control. –Key role in the economy played by Federal Reserve 1-14

The Role of Government The role played by the government and by private businesses differs across countries. There is a global trend toward deregulation. –Deregulation is the process of reducing government control over industries. There is a need to find a balance. 1-15

Economics Defined Economics is the study of how individuals, businesses, and governments make decisions and make trade-offs in the face of scarce resources. Role of scarcity and choice –Limited resources –Need to make trade-offs –Opportunity costs 1-16

Economics Defined Two main areas of focus: –Macroeconomics Studies the overall aggregate economy, focusing on issues such as growth, inflation, trade, and interest rates. –Microeconomics Studies the behavior of individual units in the economy, such as households and businesses. 1-17

Measures of Prosperity Improving individual prosperity is a key goal of economics. Measure prosperity by using various indicators: –One key measure is GDP. GDP is the dollar value of all the goods and services produced by the economy. –Other indicators of prosperity include wages, income, and consumption. Use GDP to compare the level of prosperity among countries 1-18

World’s Largest Economies 1-19

Safety Net Provides a measure of security for the poor, sick, and vulnerable –Consists of a wide array of government programs, including Social Security, Medicare, etc. –Objective is to improve the lives of low- income households Debate among economists as to whether enough is being done Safety net programs in Europe are more comprehensive than in U.S. 1-20

Economics – Not an Exact Science There is considerable policy disagreement among economists. –The role that government plays in the economy is one of the main debates. Some key questions include: –How to fund Social Security and Medicare? –How to solve the health care problem? –How to improve the educational system? –What is an appropriate tax policy? 1-21

Why the Disagreement? Reasons for policy disagreement are due to: –Political agenda –Lack of data –Winners and losers The objective of this textbook is to present both sides of the discussion. 1-22

Appendix: Learning Objectives Read data from a line graph or a bar graph. Plot points on a graph using data from a table. 1-23

Appendix: The Basics of Graphs Graphs have a horizontal axis (x- axis) and a vertical axis (y-axis). Bar and line graphs are two different types of graphs. A line graph can be upward-sloping or downward-sloping. 1-24

An Example of a Bar Graph 1-25

An Example of a Line Graph 1-26

Plotting Graphs from Data: Population of Cleveland 1-27

Plotting Graphs from Data: Population of Cleveland 1-28