1. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 1 PowerPoint© Presentations Prepared by Assistant Professor Paul Harris Camden County College PowerPoint© Presentations Prepared by Assistant Professor Paul Harris Camden County College MACROECONOMICS: EXPLORE & APPLY by Ayers and Collinge CHAPTER 1 “The Economic Perspective”

2. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 2 Learning Objectives 1.Describe how scarce resources and unlimited wants lead to the study of economics. 2.Distinguish between microeconomics and macroeconomics. 3.Identify three basic questions that all economies must answer. 4.Recognize the strengths of the market place and motivations for government involvement. 1.Describe how scarce resources and unlimited wants lead to the study of economics. 2.Distinguish between microeconomics and macroeconomics. 3.Identify three basic questions that all economies must answer. 4.Recognize the strengths of the market place and motivations for government involvement.

3. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 3 Learning Objectives 4.Understand what a model is and why models are best kept simple. 5.(E&A) Explain why incentives are important for economics prosperity. 6.Appendix: Working with graphs and data. 4.Understand what a model is and why models are best kept simple. 5.(E&A) Explain why incentives are important for economics prosperity. 6.Appendix: Working with graphs and data.

4. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 4 1.1 SCARCE RESOURCES, UNLIMITED WANTS Economics studies the allocation of scarce resources in response to unlimited wants.

5. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 5 Economics is about choice. Society is forced to choose because resources are scarce. Scarce Resources, Unlimited Wants

6. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 6 When something is scarce we must choose. We make choices at the margin. At margin means “incrementally”, or in small steps. Resource allocation refers to the uses to which resources are put. How resources are used depends partly upon technology. When something is scarce we must choose. We make choices at the margin. At margin means “incrementally”, or in small steps. Resource allocation refers to the uses to which resources are put. How resources are used depends partly upon technology. Making Decision at the Margin

7. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 7 1.2 SURVEYING THE ECONOMIC LANDSCAPE Microeconomics: examines the individual components of the economy. Macroeconomics: examines the economy as a whole (aggregates). Microeconomics: examines the individual components of the economy. Macroeconomics: examines the economy as a whole (aggregates).

8. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 8 1.3 THREE BASIC QUESTIONS 1. What? What goods and services will be produced and offered for sale, and in what quantities? 1. What? What goods and services will be produced and offered for sale, and in what quantities?

9. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 9 Three Basic Questions 2. How? How will the goods and services be produced? 2. How? How will the goods and services be produced?

10. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 10 Three Basic Questions 3. For Whom? Who will consume the goods and services which are produced? 3. For Whom? Who will consume the goods and services which are produced?

11. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 11 In answering the three basic questions society must choose among three kinds of economic systems: Command and control: where government might make the decisions. Free markets: which are “laissez faire”, and characterized by freedom of choice in both production and consumption. Mixed economies: meaning that they choose with a combination of both markets and government. In answering the three basic questions society must choose among three kinds of economic systems: Command and control: where government might make the decisions. Free markets: which are “laissez faire”, and characterized by freedom of choice in both production and consumption. Mixed economies: meaning that they choose with a combination of both markets and government. Three Basic Questions

12. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 12 CommandandControlCommandandControl Laissez-Faire Free Markets Laissez-Faire MixedMixed The Spectrum of Economic Systems

13. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 13 There are two primary economic objectives for countries in choosing how much government to mix with free markets. The Goals of Equity and EfficiencyThe Goals of Equity and Efficiency è Equity è Efficiency

14. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 14 The first is objective equity, which refers to fairness. Equity is ultimately a matter of personal perception. The first is objective equity, which refers to fairness. Equity is ultimately a matter of personal perception. The second objective is efficiency. Efficiency means resources are used in ways that provide the most value. The second objective is efficiency. Efficiency means resources are used in ways that provide the most value. The Goals of Equity and EfficiencyThe Goals of Equity and Efficiency

15. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 15 4Technological efficiency:getting the greatest quantity of output from the resources that are being used. 4Technological efficiency: getting the greatest quantity of output from the resources that are being used. 4 Allocative efficiency:choosing the most valuable mix of outputs to produce. 4 Allocative efficiency: choosing the most valuable mix of outputs to produce. 4Technological efficiency:getting the greatest quantity of output from the resources that are being used. 4Technological efficiency: getting the greatest quantity of output from the resources that are being used. 4 Allocative efficiency:choosing the most valuable mix of outputs to produce. 4 Allocative efficiency: choosing the most valuable mix of outputs to produce. Economic Efficiency

16. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 16  Frequently, there is a tradeoff between efficiency and equity.  More equity may result in less efficiency, which is often referred to as inefficiency.  Likewise, less equity may result in greater efficiency.  Frequently, there is a tradeoff between efficiency and equity.  More equity may result in less efficiency, which is often referred to as inefficiency.  Likewise, less equity may result in greater efficiency. Economic Efficiency

17. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 17 Command and Control Who Needs Markets?  Throughout history, countries have embraced central planning to help eliminate the perceived disorder of the marketplace.  This sets production plans for most goods, which are produced by government-owned state enterprises.  Throughout history, countries have embraced central planning to help eliminate the perceived disorder of the marketplace.  This sets production plans for most goods, which are produced by government-owned state enterprises.

18. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 18 “The Invisible Hand” Who Needs Government?  Adam Smith described in The Wealth of Nations the invisible hand of the marketplace.  This leads the economy to produce an efficient variety of goods and services, with efficient production methods.  Adam Smith described in The Wealth of Nations the invisible hand of the marketplace.  This leads the economy to produce an efficient variety of goods and services, with efficient production methods.

19. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 19 The Price System  In the market system all participants make choices on the basis of information conveyed by market prices.  The collection of prices in product and resource markets is termed the price system.  Prices provide information about scarcity.  It is the price system that allocates resources in a market economy to their highest valued uses.  In the market system all participants make choices on the basis of information conveyed by market prices.  The collection of prices in product and resource markets is termed the price system.  Prices provide information about scarcity.  It is the price system that allocates resources in a market economy to their highest valued uses.

20. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 20 Mixing Government With the Marketplace Market failures occur when markets fail to achieve efficiency.

21. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 21 Market Failure Market failures include: public goodspublic goods externalitiesexternalities market powermarket power imperfect informationimperfect information Market failures include: public goodspublic goods externalitiesexternalities market powermarket power imperfect informationimperfect information

22. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 22 Command-and-Control Techniques Command-and-Control techniques used by the government in a mixed economy: government productiongovernment production income redistributionincome redistribution taxationtaxation regulationsregulations mandatesmandates Command-and-Control techniques used by the government in a mixed economy: government productiongovernment production income redistributionincome redistribution taxationtaxation regulationsregulations mandatesmandates

23. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 23 1.4 ECONOMIC ANALYSIS  The practice of economics involves analysis and problem solving.  Care must be taken to avoid faulty reasoning.  An example of this is the fallacy of composition.  The practice of economics involves analysis and problem solving.  Care must be taken to avoid faulty reasoning.  An example of this is the fallacy of composition.

24. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 24 Positive and Normative Economics Normative economic statements have to do with behavioral norms. They are judgments as to what is good or bad. Examples often include “ought” or “should” in them. Normative economic statements have to do with behavioral norms. They are judgments as to what is good or bad. Examples often include “ought” or “should” in them. Positive economic statements have to do with facts. They may involve current, historical, or even future facts. Examples often include what is, was or will be.

25. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 25 Economic Modeling: The Route to Higher-Level Understanding Models: Simplified version of reality. They emphasize features central to the questions we are trying to answer.They emphasize features central to the questions we are trying to answer. Theories: Statements about how the world works. Models: Simplified version of reality. They emphasize features central to the questions we are trying to answer.They emphasize features central to the questions we are trying to answer. Theories: Statements about how the world works.

26. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 26 Occam’s razor principle Argues that reasoning is improved by focusing one’s thinking on the most essential elements of an issue. Occam’s razor principle Argues that reasoning is improved by focusing one’s thinking on the most essential elements of an issue. Economic Modeling: The Route to Higher-Level Understanding

27. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 27 To keep models simple, economist make assumptions. They act as though certain things are true without proving them to in fact be true. One common assumption is termed ceteris paribus: This is Latin for holding all else constant. To keep models simple, economist make assumptions. They act as though certain things are true without proving them to in fact be true. One common assumption is termed ceteris paribus: This is Latin for holding all else constant. Economic Modeling: The Route to Higher-Level Understanding

28. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 28 1.5 EXPLORE & APPLY: From Mao to Now 1978 Transition from planned to market-oriented economy begins. 1979-1983 Collective farming is replaced by “household responsibility system” of individual farms. 1980 Special economic zones are created to experiment with market reforms. 1986 Foreign investment law is passed.

29. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 29 E & A From Mao to Now 1988 Enterprise law allows for the existence of privately owned stock companies. 1990 Chinese stock markets are established. 1993 Modern corporate system at state- owned enterprises is introduced. 1994 China allows the exchange value of its currency to be set on world markets, reflecting the common practice of market economies.

30. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 30 E & A From Mao to Now 1999 China’s economy becomes the world’s second largest, behind only that of the United States. 2001 Price controls on key items are lifted as China is admitted as member of the World Trade Organization.

31. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 31 Terms along the Way economicseconomics scarcityscarcity the marginthe margin microeconomicsmicroeconomics macroeconomicsmacroeconomics command & controlcommand & control free marketsfree markets mixed economiesmixed economies economicseconomics scarcityscarcity the marginthe margin microeconomicsmicroeconomics macroeconomicsmacroeconomics command & controlcommand & control free marketsfree markets mixed economiesmixed economies equityequity efficiencyefficiency technological efficiencytechnological efficiency allocative efficiencyallocative efficiency invisible handinvisible hand market failuresmarket failures public goodspublic goods externalitiesexternalities

32. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 32 Terms along the Way (continued) market powermarket power normative statementsnormative statements positive statementspositive statements market powermarket power normative statementsnormative statements positive statementspositive statements modelsmodels Occam’s razorOccam’s razor egalitarianismegalitarianism original positionoriginal position

33. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 33 Test Yourself 1.Economics is primarily the study of a.stocks and bonds. b.allocating limited resources to meet unlimited wants. c.methods to eliminate scarcity. d.why consumers want what they do. 1.Economics is primarily the study of a.stocks and bonds. b.allocating limited resources to meet unlimited wants. c.methods to eliminate scarcity. d.why consumers want what they do.

34. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 34 Test Yourself 2. The three basic questions an economy must answer are a.why produce; how much to produce; who to produce it. b.what to produce; how to produce it; who to consume it. c.what to produce; why produce; how to produce. d.when to produce; how to produce; what to produce. 2. The three basic questions an economy must answer are a.why produce; how much to produce; who to produce it. b.what to produce; how to produce it; who to consume it. c.what to produce; why produce; how to produce. d.when to produce; how to produce; what to produce.

35. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 35 Test Yourself 3. Command and control economies are identified by a.reliance upon free markets. b.adherence to the principles of capitalism. c.economic freedom. d.government decision making. 3. Command and control economies are identified by a.reliance upon free markets. b.adherence to the principles of capitalism. c.economic freedom. d.government decision making.

36. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 36 Test Yourself 4. In a capitalist economy, economic activities are coordinated by a.tradition. b.prices. c.government. d.business firms. 4. In a capitalist economy, economic activities are coordinated by a.tradition. b.prices. c.government. d.business firms.

37. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 37 Test Yourself 5. The idea that the economy should produce its outputs with the least costly combination of inputs is known as a.allocative efficiency. b.technological efficiency. c.economic efficiency. d.equity. 5. The idea that the economy should produce its outputs with the least costly combination of inputs is known as a.allocative efficiency. b.technological efficiency. c.economic efficiency. d.equity.

38. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 38 The End! Next Chapter 1 Appendix