The Economic Perspective Chapter 1

Economics What is economics?What is economics? –Studies the allocation of limited resources in response to unlimited wants –Choice Choices are caused by ScarcityChoices are caused by Scarcity Scarcity – a situation in which there are too few resources to meet all human wantsScarcity – a situation in which there are too few resources to meet all human wants

Scarcity All resources are scarce

Making decisions at the margin Margin: the cutoff point; decision making at the margin refers to deciding on one more or one less of somethingMargin: the cutoff point; decision making at the margin refers to deciding on one more or one less of something Weighing and balancing of alternativesWeighing and balancing of alternatives –Marginal benefit –Marginal cost –Benefits > Costs

Resource Allocation It is not scarcity of money that is at the root of economicsIt is not scarcity of money that is at the root of economics Scarce resources lead to scarce goods, whether or not money is involvedScarce resources lead to scarce goods, whether or not money is involved Resource allocation refers to the uses which we place on resources Allocation depends partly upon technology

Resource Allocation TechnologyTechnology –Which refers to the techniques of production –The results of new technology created, can include new ways of doing things, new product choices, and new uses for resources.

Microeconomics Analyzes the individual components of the economy, such as the choices made by people, firms, and industries.Analyzes the individual components of the economy, such as the choices made by people, firms, and industries. Markets – make possible the voluntary exchange of resources, goods and services; can take physical, electronic, and other forms.Markets – make possible the voluntary exchange of resources, goods and services; can take physical, electronic, and other forms. Market prices – serve as signals that guide the allocation of resourcesMarket prices – serve as signals that guide the allocation of resources

Macroeconomics Analyzes economic aggregates such as aggregate employment, output, growth, and inflationAnalyzes economic aggregates such as aggregate employment, output, growth, and inflation Most important is GDPMost important is GDP –Gross domestic product

Three basic questions What will be produced?What will be produced? How will it be produced?How will it be produced? For whom will it be produced?For whom will it be produced? Answer depends on the economic system involvedAnswer depends on the economic system involved

Economic system Command and controlCommand and control Mixed economiesMixed economies Free markets/laissez- faire/capitalismFree markets/laissez- faire/capitalism

Command and control Government determine all economic activityGovernment determine all economic activity Determines what is producedDetermines what is produced Determines how producedDetermines how produced Determines for whomDetermines for whom

Mixed Economy The mixture of free-market and command and control methods of resource allocation that characterizes modern economies.

Free market The collective decisions of individual buyers and sellers that, taken together, determine what outputs are produced, how those outputs are produced, and who receives the outputs; free markets depend on private property and free choiceThe collective decisions of individual buyers and sellers that, taken together, determine what outputs are produced, how those outputs are produced, and who receives the outputs; free markets depend on private property and free choice CapitalismCapitalism

Spectrum of economic systems RealityReality –All countries have mixed economies with the mix varying from country to country

Goals of Equity and Efficiency There are two primary economic objectives to guide countries in choosing how much government to mix with free markets.There are two primary economic objectives to guide countries in choosing how much government to mix with free markets. –Equity –Efficiency

Equity & Efficiency EquityEquity –Fairness –Personal perception –What is equitable Efficiency –Which means that resources are use in ways that provide the most value –Technological –Allocative

Efficiency TechnologicalTechnological –The greatest quantity of output for given inputs –Least cost production technique Allocative –Involves choosing the most valuable mix of outputs to produce.

Equity & Efficiency There is frequently a tradeoff between efficiency and equityThere is frequently a tradeoff between efficiency and equity –More of one less of the other What is more efficientWhat is more efficient –Command and control –Free market Market failureMarket failure –inefficient

Economic Analysis Fallacy of compositionFallacy of composition –What is true at the micro level is also true at the macro level What is true for the individual is true for the wholeWhat is true for the individual is true for the whole

Economic Analysis NormativeNormative –Having to do with behavioral norms which are judgments as to what is good or bad –What ought to be Positive –Having to do with what is –Scientific thinking