1. Copyright 2008 The McGraw-Hill Companies 1-1 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show 1 Limits, Alternatives, and Choices

2. Copyright 2008 The McGraw-Hill Companies 1-2 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Chapter Objectives Economic Perspective Role of Economic Theory Microeconomics and Macroeconomics Scarce Resources –The Economizing Problem Production Possibilities O 1.1

3. Copyright 2008 The McGraw-Hill Companies 1-3 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show ECONOMICS The study of human efforts to satisfy what appear to be unlimited and competing wants through the careful use of relatively scarce resources. It is also a social science because it deals with the behavior of people as they cope with the fundamental problem of scarcity.

4. Copyright 2008 The McGraw-Hill Companies 1-4 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show SCARCITY AND THE SCIENCE OF ECONOMICS TINSTAAFL The fundamental economic problem is SCARCITY SCARCITY is the condition that arises because society does not have enough resources to produce all the things people would like to have

5. Copyright 2008 The McGraw-Hill Companies 1-5 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show The Economic Perspective Scarcity and Choice –Opportunity Cost Purposeful Behavior –Utility Marginal Analysis –Marginal Benefits –Marginal Costs O 1.2O 1.3

6. Copyright 2008 The McGraw-Hill Companies 1-6 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Theories Principles and Models The Scientific Method Economic Principle –Generalizations –Other-Things-Equal Assumption (ceteris paribus) –Graphical Expression O 1.4

7. Copyright 2008 The McGraw-Hill Companies 1-7 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Macro and Microeconomics Macroeconomics –Aggregate Microeconomics –Individual Units Positive Economics Normative Economics

8. Copyright 2008 The McGraw-Hill Companies 1-8 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Individuals Economizing Problem Limited Income Unlimited Wants A Budget Line Attainable and Unattainable Combinations Tradeoffs & Opportunity Costs Choice Income Change O 1.5 W 1.1

9. Copyright 2008 The McGraw-Hill Companies 1-9 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Individuals Economizing Problem Average Income, Selected Nations Per Capita Income 2004 Switzerland United States Japan France South Korea Mexico Brazil China Pakistan Nigeria Rwanda Liberia Source: World Bank $48,230 41,400 37,180 30,090 13,980 6,770 3,090 1,290 600 390 220 110 Country GLOBAL PERSPECTIVE

10. Copyright 2008 The McGraw-Hill Companies 1-10 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Individuals Economizing Problem 65432106543210 0 2 4 6 8 10 12 DVDs $20 Books $10 12 10 8 6 4 2 0 2 4 6 8 10 12 14 $120 Budget Income = $120 P dvd = $20 = 6 Income = $120 P b = $10 = 12 Attainable Unattainable Quantity of Books Quantity of DVDs

11. Copyright 2008 The McGraw-Hill Companies 1-11 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Societys Economizing Problem Scarce Resources Resource Categories –Land –Labor –Capital Investment –Entrepreneurial Ability Factors of Production

12. Copyright 2008 The McGraw-Hill Companies 1-12 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show FACTORS OF PRODUCTION NATURAL –LAND CAPITAL –MACHINES, TOOLS, EQUIPMENT FINANCIAL CAPITAL –MONEY HUMAN –LABOR ENTREPRENEURS –SKILLS A PERSON HAS TO CREATE SOMETHING OR START A BUSINESS

13. Copyright 2008 The McGraw-Hill Companies 1-13 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show SPECIALIZATION OF LABOR Productive inputs do whatever tasks they are able to do best DIVISION OF LABOR takes place when workers perform fewer tasks more frequently HUMAN CAPITAL is the sum of the skills, abilities, health, and motivation of people

14. Copyright 2008 The McGraw-Hill Companies 1-14 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Production Possibilities Model Full Employment Fixed Resources Fixed Technology Two Goods –Consumer Goods (Pizzas) –Capital Goods (Industrial Robots)

15. Copyright 2008 The McGraw-Hill Companies 1-15 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show PRODUCTION The process of creating goods and services PRODUCTIVITY is the efficient use of productive resources –Productivity goes up whenever more output can be produced with the same amount of inputs –Productivity also goes up if the same output can be produced with fewer inputs

16. Copyright 2008 The McGraw-Hill Companies 1-16 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show GOODS GOODS are tangible commodities like books, cars, or compact disc players –CONSUMER GOODS are intended for final use by individuals –CAPITAL GOODS are manufactured goods that are used to produce other goods and services –DURABLE GOODS are any items that last three years or more when it is used on a regular basis –NONDURABLE GOODS are any items that last for less than three year when it is used on a regular basis

17. Copyright 2008 The McGraw-Hill Companies 1-17 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show FREE OR ECONOMIC FREE PRODUCTS –Things such as sunshine or air that are plentiful –No one could own them –No price can be attached to them ECONOMIC PRODUCTS –Goods and services that are useful –Relatively scarce in an economic sense –Transferable to others –Command a price

18. Copyright 2008 The McGraw-Hill Companies 1-18 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show SERVICES Work that is performed for someone by someone else –haircuts –home repairs –forms of entertainment such as a concert –work performed by doctors, lawyers, and teachers

19. Copyright 2008 The McGraw-Hill Companies 1-19 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show CONSUMERS People who use goods and services to satisfy wants and needs CONSUMPTION is the process of using up goods and services in order to satisfy wants and needs CONSPICUOUS CONSUMPTION is the use of a good or service to impress others

20. Copyright 2008 The McGraw-Hill Companies 1-20 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Production Possibilities Model Production Possibilities Table Type of Product Pizzas (in hundred thousands) Industrial Robots (in thousands) Production Alternatives ABCDE 109740 01234 Plot Points to Create Graph…

21. Copyright 2008 The McGraw-Hill Companies 1-21 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Production Possibilities Model Pizzas Industrial Robots Attainable 0 1 2 3 4 5 6 7 8 9 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C D E Economic Growth Now Attainable A B C D E Production Possibilities Curve G 1.1

22. Copyright 2008 The McGraw-Hill Companies 1-22 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Production Possibilities Model Pizzas Industrial Robots Attainable 0 1 2 3 4 5 6 7 8 9 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C D E Law of Increasing Opportunity Cost A B C D E Production Possibilities Curve Shape of the Curve W 1.2

23. Copyright 2008 The McGraw-Hill Companies 1-23 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Production Possibilities Model Pizzas Industrial Robots Under or Unemployment 0 1 2 3 4 5 6 7 8 9 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C D E Production Possibilities Curve U

24. Copyright 2008 The McGraw-Hill Companies 1-24 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Production Possibilities Model 15 10 5 0 1 2 3 a b c d e MB = MC MC MB Optimal Allocation of Resources Quantity of Pizza Marginal Benefit & Marginal Cost

25. Copyright 2008 The McGraw-Hill Companies 1-25 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Unemployment Growth and the Future A Growing Economy Economic Growth –Increasing Resource Supplies –Increasing Resource Quality –Technological Advances

26. Copyright 2008 The McGraw-Hill Companies 1-26 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Present Choices & Future Possibilities Goods for the Present Goods for the Future Goods for the Present PresentvilleFutureville P F Current Curve Current Curve Future Curve Future Curve Compare Two Hypothetical Economies Implications of International Trade G 1.2

27. Copyright 2008 The McGraw-Hill Companies 1-27 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Pitfalls to Sound Economic Reasoning Biases Loaded Terminology Fallacy of Composition Post Hoc Fallacy Correlation but not Causation Last Word

28. Copyright 2008 The McGraw-Hill Companies 1-28 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show THREE BASIC ECONOMIC QUESTIONS What to produce? How to produce? For whom to produce?

29. Copyright 2008 The McGraw-Hill Companies 1-29 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show FREE ENTERPRISE ECONOMY A type of economy in which consumers and privately owned businesses, rather than the government, jointly make the majority of the WHAT, HOW, and FOR WHOM decisions

30. Copyright 2008 The McGraw-Hill Companies 1-30 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show ECONOMIC SYSTEMS Traditional –Customs, Past Command –Leaders Market –Buyers and Sellers Mixed –All Three

31. Copyright 2008 The McGraw-Hill Companies 1-31 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show STUDYING ECONOMICS Provides an insight as to how incomes are earned and spent, how jobs are created, and how the economy works on a daily basis Provides a working knowledge of property rights, competition, supply and demand, the price system, and economic incentives that make the American economy function Helps people become better decision makers Helps people make better voting decisions

32. Copyright 2008 The McGraw-Hill Companies 1-32 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show ADAM SMITH 1723-1790 Scottish economist and philosopher An Inquiry into the Nature and Causes of the Wealth of Nations – published in 1776 Invisible Hand Theory –Argued that competition, together with the free market system, would act as an invisible hand that guided resources to their most productive use He believed that individuals acting naturally in their own self-interest, and with a minimum of government intervention, would bring about the greatest good for society as a whole. He believed in laissez-faire, meaning no government intervention in economic affairs

33. Copyright 2008 The McGraw-Hill Companies 1-33 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show VALUE Refers to something that has worth that can be expressed in dollars and cents Is determined by the price someone would pay for the item PARADOX OF VALUE is the apparent contradiction between the high value of nonessentials and low value of essentials –EX: diamond-water paradox

34. Copyright 2008 The McGraw-Hill Companies 1-34 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show THINGS THAT CREATE VALUE UTILITY is the capacity to be useful to someone –Varies from person to person WEALTH is the sum of those economic products that are tangible, scarce, useful and transferable from one person to another

35. Copyright 2008 The McGraw-Hill Companies 1-35 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show ECONOMIC INTERDEPENDENCE Actions in one part of the country or the world have an economic impact on what happens elsewhere –EX: Bad weather in one part of the world can affect sugar prices in the United States

36. Copyright 2008 The McGraw-Hill Companies 1-36 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show STANDARD OF LIVING The quality of life based on the possession of necessities and luxuries that make life easier

37. Copyright 2008 The McGraw-Hill Companies 1-37 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show SPECIALIZATION Working toward a well defined activity When specialization is based on a comparative advantage, it usually leads to an increase in productivity Economic systems deal with scarcity

38. Copyright 2008 The McGraw-Hill Companies 1-38 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show ADVANTAGES Absolute –Able to produce more of a product than another country at a lower cost –Differences in production costs such as labor or other resources Comparative –Able to produce a product at a relatively lower opportunity cost –Every country is better off producing the products they produce best –Total output is greater

39. Copyright 2008 The McGraw-Hill Companies 1-39 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Key Terms economics economic perspective opportunity cost utility marginal analysis scientific method economic principle other-things-equal assumptionother-things-equal assumption macroeconomics aggregate microeconomics positive economics normative economics economizing problem budget line economic resources land labor capital investment entrepreneurial ability factors of production consumer goods capital goods production possibilities curveproduction possibilities curve law of increasing opportunity costslaw of increasing opportunity costs economic growth

40. Copyright 2008 The McGraw-Hill Companies 1-40 Chapter Objectives Economic Perspective Theories Principles and Models Macro and Microeconomics Individuals Economizing Problem Societys Economizing Problem Production Possibilities Model Unemployment, Growth, and the Future Last Word Key Terms End Show Next Chapter Preview… The Market System and the Circular Flow