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Economic Systems & Economic Analysis

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Presentation on theme: "Economic Systems & Economic Analysis"— Presentation transcript:

1 Economic Systems & Economic Analysis

2 Resource Classifications
Factors of production: Anything which is directly used in the production of goods and services Land Natural resources and raw materials Labor Worker’s time and effort Capital Physical Capital: Machines, factories, construction equipment Human Capital: Education, skills, experience

3 Marginal Analysis Decision to rent a kayak
What is happening to the benefits? Diminishing marginal benefits Marginal: additional, extra, one more Given the costs and benefits of kayaking, should you kayak for 3 hours? Individuals make decisions “on the margin” Results in an equilibrium outcome which maximizes net benefits

4 Equilibrium Analysis Equilibrium
Results after an individual has exploited all opportunities to make themselves better off What’s the best line to wait in at the grocery store? It doesn’t matter – all lines should be roughly the same speed! Economic analysis is primarily concerned with equilibrium analysis

5 Types of Statements Positive statements Normative statements
Why do people disagree on economic and political issues? Positive statements Objective statements that can be proven or disproven “If you decrease the cost of college, then more students will attend.” Normative statements Opinions or beliefs based upon subjective value judgments “The NSA should stop spying on American citizens.”

6 Limits of Economic Analysis
Environmental Proposal Suppose the government is proposing to impose a tax on gasoline in order to reduce carbon emissions What would be the effects of imposing such a tax? How could we forecast and quantifying the effects? Should a tax on gasoline be imposed? Common value conflicts

7 Efficiency vs. Equity Efficiency Visualizing the economic pie Equity
Achieving a goal with the fewest resources possible Student printing policy An outcome is efficient when it is impossible to make someone better off without making someone else worse off Visualizing the economic pie Equity “Fairness” Handicap parking laws

8 Economic Systems Three key tasks:
What to produce? How to produce it? Who gets what is produced? Two distinct approaches to answering these questions Command Economy vs Market Economy

9 Sources of Wealth What does it mean for a country to be wealthy?
What gives money its value? Not money but standard of living that matters How is wealth created? Production of goods and services Specialization and voluntary trade

10 Command Economies Examining Communism
What are the appeals of communism/criticisms of capitalism? Why have command economies typically failed? Unable to promote economic growth by ignoring human nature

11 The Power of Markets Markets properly harness self-interest for societal good Adam Smith’s insight Is greed good? Milton Friedman on greed: Does capitalism promote international peace or war? Friedman’s pencil: Markets are consistent with freedom and economic growth Economic freedom:

12 Economic Models Model: Simplified abstraction of reality
Why are models used? Aid in understanding underlying concepts Allow for predictive analysis How much detail and realism is ideal? Characteristics of a useful model Highlights what matters Makes reasonable assumptions Enables one to isolate the effects of a single change at a time Ceteris Paribus “All other things equal”


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