CHAPTER TWO Economics: The Creation and Distribution of Wealth

W HAT ARE THE 3 MAJOR BRANCHES OF ECONOMICS ? EconomicsMacroeconomicsMicroeconomics

E CONOMICS Use of scarce resources to produce goods/services, distribute them among competing groups/individuals

W HAT IS M ACROECONOMICS ? Concentrates on the operation of a nation's economy as a whole

W HAT IS M ICROECONOMICS ? Concentrates on the behavior of people and organizations in markets for particular products or services

E CONOMIC T HEORY Thomas Malthus (Early 1800s) “Too many people “ “Too many people “ if the rich had most of the wealth and the poor had most of the population resources would run out. if the rich had most of the wealth and the poor had most of the population resources would run out. Thomas Carlyle “Dismal Science”. Neo-Malthusians “Radical birth control”. Adam Smith (1776) Freedom is vital Freedom is vital Freedom to own land or property and the right to keep the profits of a business Freedom to own land or property and the right to keep the profits of a business People will work hard if they believe they will be rewarded. People will work hard if they believe they will be rewarded. “Invisible Hand” : When self-directed gain leads to “Invisible Hand” : When self-directed gain leads to social and economic benefits for the whole community.

S UPPLY C URVE Quantity(S) High High Low Price(P) S

D EMAND C URVE Price(P) Quantity(D) High HighLow D

Quantity High HighLow Price EQUILIBRIUM POINT Market Equilibrium SD Surplus Shortage

T HREE E CONOMIC S YSTEMS Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

C APITALISM Private Property Profit/Ownership Freedom of Competition Freedom of Choice Capital countries Capital countries USA USA UK UK Australia Australia

C OMMUNISM Public Ownership Central Planning/Controlled Economy The Government : makes almost all economic decisions makes almost all economic decisions owns almost all the major factors of production. owns almost all the major factors of production. Managers = Mandatory Party Membership

S OCIALIS M Private & Public Ownership Some Choices are Limited Creates Social Equality & Equality of Results Reduces Individual Incentive

M IXED E CONOMIES Free-Market Economy: The market largely determines what goods and services are produced, who gets them, and how the economy grows. Capitalism Capitalism Command Economy : The government largely determines what goods and services are produced, who gets them, and how the economy will grow. Socialism + Communism Socialism + Communism Mixed Economies : Some allocation of resources is made by the market and some by the government.

D EGREES OF C OMPETITION Sellers One Many Monopoly Oligopoly MonopolisticCompetition Pure Competition

M ONOPOLY = O NE S ELLER DiamondsUtilities Microsoft ? Microsoft ?

O LIGOPOLY = F EW S ELLERS TobaccoAutomobiles

M ONOPOLISTIC C OMPETITION M ANY S ELLERS W ITH P ERCEIVED D IFFERENCES Fast Food Colleges

P URE C OMPETITION Buyer Sellers (Agriculture)

L IMITATIONS OF F REE - M ARKET Inequality of Wealth- Causes National & World Tension Potential Environmental Damage Limitations Push Country towards Socialism = Government Regulation

G OVERNMENT ’ S R OLE IN E CONOMICS Enforces : Rules/Regulations Provides : Public Goods Fosters Competition Contributes to Economic Stability

W HERE D OES THE G OVERNMENT G ET I TS M ONEY Source: Federal Budget for Fiscal 2001