1. ECONOMICS : CHAPTER 2– ECONOMIC SYSTEMS AND TOOLS
ECONOMICS: choices
SCARCITY: meeting unlimited wants with limited resources.
Economic System: The mechanisms used to answer the three economics questions

2. THREE ECONOMIC QUESTIONS
What will be produced?
How will it be produced?
Who are we producing for?
These questions are interdependent

3. PURE MARKET ECONOMY Private firms produce everything
No government involvement
Markets answer the What?How?Who questions

4. FEATURES OF MARKET ECONOMY
All resources are privately owned
Economic activity is based on the prices in the free competitive markets.
Income goes back to the resource owners

5. Invisible Hand Adam Smith
Market forces coordinate production as if by an “Invisible Hand” (pure market, mixed)
The “invisible hand” promotes the general welfare
Voluntary choices answer the economic questions.

6. PURE MARKET PROBLEMS Hard to enforce property rights
Property rights: resource owners have the right to use the resources and can supply the highest bidders with those resources.
No government: no authority to protect

7. PURE MARKET PROBLEMS cont.
Resources aren’t equal
No guarantee of income
Property rights: resource owners can use their resources and supply those resources to the highest bidders as they wish.

8. PURE MARKET PROBLEMS cont.
Monopolies
No public goods: things that everyone uses but not charged for

9. PURE COMMAND ECONOMY Communism Everything is government owned.
Limits amount of all goods available to consumers.
Sometimes called: communism
Central planners answer the economic questions
INVISIBLE HAND: ADAM SMITH:
In market competition Promotes the general welfare.
Voluntary choices answer who? What? How?

10. Pure Command Economy Problems
Consumers are low priority
Freedom of choice: limited to none
Can be inefficient
Resources owned by central authority wasted
Environmental damage

11. PURE ECONOMIES DON’T EXIST

12. MIXED ECONOMY The U. S. Also a market economy
Government makes up about 1/3 of economic activity
Private sector is regulated

13. TRANSITIONAL ECONOMY
SHIFTING FROM ONE ECONOMY TO ANOTHER Privatization: Have to convert government owned into private.

14. TRADITIONAL ECONOMY
Customs and/or religion answer the economic questions.

15. PRODUCTION POSSIBILITIES FRONTIER
Chapter 2 Section 2
PRODUCTION POSSIBILITIES FRONTIER

16. Efficiency
Producing the maximum possible with the fewest resources available.

17. Simplify the Assumption
Output is limited to two products
Ex. Consumer goods: pizza or haircuts
Ex. Capital goods: pizza ovens hair clippers
Focus on a specific period of production
Available resources are fixed (quantity and quality)
Technology does not change (workforce knowledge)

18. PPF Production Possibilities Frontier
Shows the possible combination of the two good that could be made when the available resources are used efficiently
P. 47 #7

19. PPF Model
Points along the line show an economy’s resources are being used efficiently
Points inside the show inefficiency
Points outside are unattainable because the resources are not available.

20. Movement Along PPF
To move along the PPF production of some of one good has to be given up to produce more of the other.

21. The resources in the economy are not all perfectly adaptable to the production of both types of goods
The opportunity cost of capital goods increases as the economy produces more capital goods and fewer consumer goods

22. LAW OF INCREASING OPPORTUNITY
Each additional increment of one good requires the economy to give up successively larger increments of the other good

23. Shifts in PPF Outward Shift = Economic Growth
The ability to make stuff has grown
Labor force increased
Increase in availability of other resources

24. Decrease in available resources Decrease in quality of resources
Inward Shift
Decrease in available resources
Decrease in quality of resources

25. Increase in Stock of Capital Goods
The capital goods produced in one period means it can produce the next period.
(OUTWARD SHIFT)
Choosing between consumer goods and capital goods is really between present consumption and future production

26. WHY PPF MODEL Efficiency: shows efficient combination of outputs
Scarcity: With limited stock of resources and technology an economy can only produce so much

27. WHY PPF MODEL
Opportunity Cost: shown with the downward slope (producing more of one good means producing less of another)
Law of Increasing Opportunity Cost: Outward bow: Not all resources are perfectly adaptable
Shift outward: economic growth

28. CHOICE
PPF Emphasizes need for choice
Choice determines current consumption and capital stock for next period

29. COMPARATIVE ADVANTAGE
Chapter 2 Sec. 3
COMPARATIVE ADVANTAGE

30. ABSOLUTE ADVANTAGE
The ability to do something with fewer resources than other producers.

31. LAW OF COMPARATIVE ADVANTAGE
Best guide for deciding who should do what

32. LAW OF COMPARATIVE ADVANTAGE
The worker with the lowest opportunity cost of producing an output should specialize.

33. SPECIALIZATION INDIVIDUAL WORKERS FOCUS ON SINGLE TASKS
THIS ALLOWS EACH ONE TO BE MORE EFFICIENT AND PRODUCTIVE
WORKER: FIRM, REGION OR COUNTRY FOR LAW OF COMPARATIVE ADVANTAGE AND SPECIALIZATION

34. ABSOLUTE ADVANTAGE: FOCUS ON WHICH WORKER USES THE FEWEST RESOURCES
COMPARATIVE ADVANTAGE: FOCUS ON WHAT ELSE THOSE RESOURCES COULD HAVE PRODUCED (OPPORTUNITY COST OF THOSE RESOURCES)

35. MEDIUM OF EXCHANGE
THE ONE THING THAT EVERYONE IS WILLING TO ACCEPT IN EXCHANGE FOR ALL GOODS AND SERVICES

36. COMPARATIVE ADVANTAGE
WHEN PRODUCTION AND TRADE CONFORM TO THE COMPARATIVE ADVANTAGE, RESOURCES ARE MOST EFFICIENTLY ACROSS THE COUNTRY AND AROUND THE WORLD

37. DIVISION OF LABOR
SORTS THE PRODUCTION PROCESS INTO SEPARATE TASKS TO BE CARRIED OUT BY SEPARATE WORKERS.