Copyright ©2001, South-Western College Publishing Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition Chapter 1: Scarcity and Choice

Carbaugh, Chap. 1 2 Opportunity cost and choice Scarcity and Opportunity Cost Number of compacts Number of minivans D C B A E Car wash possibilities

Carbaugh, Chap. 1 3 Production possibilities curve Possible combinations of computers and VCRs Computers (mill.) Opportunity Cost A B C D Production possibilities curve (PPC) Points along PPC imply no unemployed resources and efficient production Attainable and unattainable production combinations Computers (mill.) A B C D Production possibilities curve (PPC) inefficient unattainable F E Foregone output

Carbaugh, Chap. 1 4 Law of increasing opportunity cost Opportunity Cost Computers (mill.) A B C D A bowed outward PPC illustrates increasing opportunity costs

Carbaugh, Chap. 1 5 Changes in the PPC Economic growth Computers (mill.) G F C E Economic growth is illustrated by an outward shift in a nation’s PPC PPC 1 PPC 0

Carbaugh, Chap. 1 6 Consumption trade-offs United States Consumer goods (hamburgers) Economic Growth A Next year’s production possibilities This year’s production possibilities PPC 1 PPC 0 The US choice to produce more consumer goods (point A) limits future production growth Japan Consumer goods (hamburgers) A Next year’s production possibilities This year’s production possibilities PPC 1 PPC 0 Japan’s choice to favor capital goods (point A) will shift its future PPC farther out

Carbaugh, Chap. 1 7 Economic Growth Investment and consumption Investment as aConsumption as a Nationpercentage of GDPpercentage of GDP Brazil19.6%63.2% Canada China Germany Japan Mexico Russia Singapore South Korea Sweden United Kingdom United States Investment and consumption as a share of Gross Domestic Product, 1998 Investment defined as gross fixed capital formation. Source: IMF

Carbaugh, Chap. 1 8 Economic sanctions Economic Growth Iraq Machines A (before sanctions) (after sanctions) PPC 1 PPC 0

Carbaugh, Chap. 1 9 Fundamental economic questions Economic Systems Scarcity Fundamental economic questions: - What to produce? - How to produce? - For whom to produce? Type of economic system: - Market economy - Command economy - Mixed economy Imposes Answered by

Carbaugh, Chap Economic Systems Market economy: circular flow model Resource markets Product markets Business firms Land, labor, capital and entrepreneurship Rent, wages, interest and profits Households Consumption expenditures Goods and services

Carbaugh, Chap Economic Systems Role of government in a mixed economy Resource markets Product markets Business firms Government interventions: - minimum wage law - collective bargaining legislation - worker health & safety regulations - anti-discrimination legislation Households Government interventions: - household income taxes - public welfare programs - job retraining programs Government interventions: - laws promoting competition - business taxes and subsidies - public utility regulation Government interventions: - purchases of goods and services - trade barriers protecting domestic firms and workers - product safety laws protecting consumers