The Three Fundamental Questions What gets produced, and in what quantities? How are these goods produced? For whom are these goods produced ? : We can’t have it all; thus we must decide

If you buy a new car, you won’t be able to afford a new TV set. If you attend college, you give up income you could have earned by working full-time. If a farmer opts to grow soybeans, the land will not be available to grow cotton. If resources are allocated to manufacture military aircraft, then those resources will not be available to manufacture civilian aircraft. If state politicians allocate more state revenues for prison construction, then less money is left over for teacher salaries.

Congress has made supplemental appropriations for the Iraq effort of $110 billion since June of 2003 year. We should ask the question: what could we have for $110 billion ?

628 Boeing 7E7 Aircraft Construct three (3) 700 mile bullet trains (includes the cost of inner-city land acquisition). 4,075 “high quality” educational facilities to accommodate 1,000 students. Write a $379 check to every U.S. citizen. Fund 1,000 universities the size of Arkansas State for one year.

Economic Functions of Government Administration of justice Provision of “public goods” Correcting for “externalities” such as air pollution. Redistribution of income

State and Local Government Revenues by Source, 2001 Source: Economic Report of the President

State of Arkansas Revenues by Source, 2003 Source:

“Other” includes spending for libraries, hospitals, health, employment security, water transport and terminals, police and fire, solid waste management, parking, corrections, parks and recreation, housing, and other items. Source: Economic Report of the President State and Local Government Expenditures, 2001

State of Arkansas Expenditures, 2003 Source:

Federal Revenues by Source, 2003 Source: Economic Report of the President

Major Categories of Federal Spending,

à Land à Labor à Capital à Entrepreneurship Economic resources are also called “factors of production,” since they furnish the physical and intellectual means to produce and distribute goods and services The Economic Resources

“Free gifts of nature” Land or natural resources

Labor or “Human Resources”

Capital “Manmade instruments of production.”

Types of capital Private, tangible capital Examples: Aircraft and trucks used by Federal Express; Nuclear Plants “owned” by Entergy; Plants “owned” by Case Equipment Co. Public, tangible capital or “infrastructure” Examples: Bridges and viaducts; Water collection and filtration systems; navigable waterways; Mass transit systems; Airports. Human capital, defined as “the skills and training of the labor force.” Examples: Network engineers and webmasters; Accountants; Chemists; Machinists; Nurses; Pilots.

Entrepreneurship Entrepreneurship is the human resource that organizes land, labor and capital. Entrepreneurs identify profitable business opportunities and mobilize and coordinate resources to take advantage. Sam Walton, Michael Dell, Martha Stewart, and Bill Gates are examples of highly successful entrepreneurs.

Income received by owners of economic resources Rent: Income paid for the use of land. Wages (and salaries): income paid for the services of labor. Interest: income paid for the use of capital. Profit (or loss): Income earned by an entrepreneur for running a business.

The functional distribution of income refers to the division of factor payments between wages, rent, profits, and interest

Source: Bureau of Labor Statistics 1999 Occupational Survey

The personal distribution of income describes the distribution of income among households or individuals

Out of school for less than 10 years

A market is an institution in which buyers and sellers exchange goods and services for a medium of exchange --money

The Circular Flow Model Households Firms Goods Markets Factor Markets Resources Rent, wages, interest, profit received Rent, wages, interest, profit paid Resources Expenditure on goods and services Revenue from the sale of goods and services Goods and services bought Goods and services supplied

Governments in the Circular Flow Model Households Firms Goods Markets Factor Markets Rent, wages, interest, profit received Rent, wages, interest, profit paid Expenditure on goods and services Expenditures on goods and services Expenditure on Goods and services Governments Taxes Transfers