1. Economics: The Core Issues
Chapter 1
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. The Economy Is Us
The economy is the aggregation of individual production and consumption decisions
Important link between individual choices and collective outcomes

3. Macro Versus Micro
Economics: The study of how best to allocate scarce resources among competing uses
Macroeconomics: The study of aggregate economic behavior, of the economy as a whole
Microeconomics: The study of individual behavior in the economy, of the components of the larger economy

4. Three Core Choices Three core choices confront every nation:
WHAT to produce with our limited resources
HOW to produce the goods and services we select
FOR WHOM goods and services are produced; that is, who should get them

5. Scarcity: The Core Problem
Scarcity: Lack of enough resources to satisfy all desired uses of those resources
Scarcity of resources limits the amount of production that can be undertaken
Requires choices to be made

6. Factors of Production
Factors of Production: Resource inputs used to produce goods and services
Four Types:
Land
Labor
Capital
Entrepreneurship

7. Factors of Production Land: Includes all natural resources
e.g. oil, water, iron ore, energy, etc.
Labor: Quantity and quality of human resources
Includes physical presence of workers as well as their skills and abilities

8. Factors of Production
Capital: Final goods produced for use in production of other goods and services
Includes equipment and structures, such as:
Factories
Production machinery
Fleet vehicles

9. Factors of Production
Entrepreneurship: Assembling of resources to produce new or improved products and technologies
It’s not just a matter of what resources you have but also of how well you use them

10. Opportunity Costs
Opportunity cost: The next most desired goods and services foregone to obtain something else
What is given up to undertake a chosen activity
Associated with every decision
For example, if we choose to produce bread then we cannot produce pizza crust with the same flour

11. Production Possibilities
Production possibilities: The alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology

12. The Production Possibilities Curve
Production possibilities curve (PPC): Describes the various output combinations that could be produced in a given time period with available resources and technology
Represents a menu of output choices an economy confronts

13. The Production Possibilities Curve
Illustrates Two Essential Principles:
Scarce resources: Production is limited by available resources and technology
Opportunity costs: Can obtain additional quantities of a good only by reducing production of another

14. A Production Possibilities CurveF
OUTPUT OF TRUCKS 5 4 3 2 1
OUTPUT OF TANKS

15. Increasing Opportunity Costs
Resources do not transfer perfectly from the production of one good to another
Increased production of one good or service can only be attained by sacrificing ever-increasing quantities of others

16. Increasing Opportunity Costs
The shape of the curve illustrates increasing opportunity costs
Lose some efficiency in the transfer
Resources used for truck production are not ideally suited for producing tanks

17. Law of Increasing Opportunity Costs
Step 1: give up one truck 5 B 4
Step 3: give up another truck
Step 2: get two tanks C 3
OUTPUT OF TRUCKS
Step 4: get one more tank D 2 E 1 F 1 2 3 4 5
OUTPUT OF TANKS

18. Efficiency
Efficiency: Maximum output of a good from the resources used in production
Every point on the production possibilities curve is a point of efficiency

19. Points Inside the Curve
A production possibilities curve shows potential output
Actual output can be less than potential due to
Inefficiency: Resources not being used to maximum potential
Unemployment: Some resources are idle

20. A Point Inside the Curve5 B 4 Y C 3
OUTPUT OF TRUCKS
Some resources are unemployed or used inefficiently 2 1 1 2 3 4 5
OUTPUT OF TANKS

21. Points Outside the Curve
Any point outside the production possibilities curve is unattainable with available resources and technology

22. A Point Outside the CurveX
Currently not attainable 5 B 4 C 3
OUTPUT OF TRUCKS 2 1 1 2 3 4 5
OUTPUT OF TANKS

23. Economic Growth
Economic growth: An increase in output due to an expansion of production possibilities
Production possibilities increase with more resources or better technology
The production possibilities curve shifts outward

24. Economic Growth
PP2
PP1
OUTPUT OF TRUCKS
OUTPUT OF TANKS

25. The Mechanism of Choice
An economy is largely defined by how it answers the WHAT, HOW and FOR WHOM questions

26. Continuing Debates
The core of most debates is some variation of the WHAT, HOW, or FOR WHOM questions
Conservatives favor Adam Smith’s laissez-faire approach
Liberals think government intervention is likely to improve market outcomes

27. A Mixed Economy Countries answer the questions differently
Mixed economy: An economy that uses both market signals and government directives to allocate goods and resources

28. Theory Versus Reality
The economy is much too vast and complex to describe and explain in one course (or one lifetime)
Economists use theories, or models, of economic behavior to evaluate and design economic policy