1. Gottheil — Principles of Economics, 7e
Chapter 1
Introduction
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

2. Gottheil — Principles of Economics, 7e
Economic Principles
The earth’s resources
Renewable vs. nonrenewable resources
Insatiable wants
Scarcity and choice
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

3. Gottheil — Principles of Economics, 7e
Economic Principles
Economics is a social science
Economic model building
Microeconomic and macroeconomic analysis
Positive and normative economics
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

4. Gottheil — Principles of Economics, 7e
Natural Resources
A natural resource is a gift of nature.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

5. Gottheil — Principles of Economics, 7e
Natural Resources
Examples of natural resources include:
Land
The uncultivated produce of land
Water
Minerals
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

6. Gottheil — Principles of Economics, 7e
Natural Resources
There are two kinds of natural resources:
Renewable
Nonrenewable
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

7. Gottheil — Principles of Economics, 7e
Natural Resources
A renewable natural resource is one that can be replenished.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

8. Gottheil — Principles of Economics, 7e
Natural Resources
Renewable natural resources include:
Forests
Sea and land animals
Water
Grasses and forage on rangelands
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

9. Gottheil — Principles of Economics, 7e
Natural Resources
A nonrenewable natural resource is one that cannot be replenished.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

10. Gottheil — Principles of Economics, 7e
Natural Resources
Nonrenewable natural resources include:
Metals and ores
Oil and natural gas
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

11. Gottheil — Principles of Economics, 7e
Natural Resources
Are we running out of natural resources?
We live in a finite world
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

12. Gottheil — Principles of Economics, 7e
Natural Resources
Are we running out of natural resources?
Our knowledge of a resource’s relative scarcity, particularly when considering its availability in the not-too-distant future, is less than exact.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

13. Gottheil — Principles of Economics, 7e
Natural Resources
Are we running out of natural resources?
Even though some resources are renewable, the overproduction of lands and overharvesting of resources to meet the needs of a rapidly growing human population can destroy our living resources.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

14. Gottheil — Principles of Economics, 7e
Natural Resources
Are we running out of natural resources?
Properly managed conservation of resources can both protect natural resources and even increase their supply.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

15. Gottheil — Principles of Economics, 7e
Scarcity
Scarcity is the perpetual state of insufficiency of resources to satisfy people’s unlimited wants.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

16. Gottheil — Principles of Economics, 7e
Scarcity
Two competing facts create scarcity:
Because we live on planet earth, the supply of resources available to us is limited.
Our wants for goods that are produced by the limited resources is unlimited.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

17. Gottheil — Principles of Economics, 7e
Scarcity
Examples of things that are scarce:
Super Bowl tickets
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

18. Gottheil — Principles of Economics, 7e
Scarcity
Examples of things that are scarce:
Meals at a fine restaurant
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

19. Gottheil — Principles of Economics, 7e
Scarcity
Examples of things that are scarce:
Admission to an elite university
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

20. Gottheil — Principles of Economics, 7e
Scarcity
Examples of things that are not scarce:
Snow and ice in Alaska
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

21. Gottheil — Principles of Economics, 7e
Scarcity
Examples of things that are not scarce:
Sand in a desert
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

22. Gottheil — Principles of Economics, 7e
Scarcity
Some things that are not scarce can become scarce.
Air in the atmosphere is not scarce.
Clean, unpolluted air is scarce in many metropolitan areas, however.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

23. Scarcity and Consumers
No one will knowingly pay a positive price for something that is not scarce.
If something is not scarce, there is enough to satisfy everyone’s wants and the price system is not necessary to decide who can have it and who cannot.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

24. Gottheil — Principles of Economics, 7e
The Study of Economics
Economics is the study of how people work together to transform resources into goods and services to satisfy their wants.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

25. Gottheil — Principles of Economics, 7e
The Study of Economics
Four central questions of economics:
Who decides what goods to produce?
How are goods produced?
Who gets the goods produced?
Who produces what?
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

26. Gottheil — Principles of Economics, 7e
Consumer Sovereignty
Consumer sovereignty
The Freedom of consumers to determine what goods and services they will buy.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

27. Gottheil — Principles of Economics, 7e
Consumer Sovereignty
Consumer sovereignty affects the economy in several ways.
Consumer decisions ultimately determine what goods and services the economy will produce.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

28. Gottheil — Principles of Economics, 7e
Consumer Sovereignty
Consumer sovereignty affects the economy in several ways.
Consumer decisions determine who gets what goods.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

29. Gottheil — Principles of Economics, 7e
Economic Models
Economic models
Economic models are simplified abstractions of the real world.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

30. Gottheil — Principles of Economics, 7e
Economic Models
1. How can economic models be expressed?
Pictorially
Graphically
Algebraically
Verbally
Gottheil — Principles of Economics, 7e
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31. Gottheil — Principles of Economics, 7e
Economic Models
Economists use models because the world is too complex to fully and comprehensively consider at one time.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

32. Gottheil — Principles of Economics, 7e
Economic Models
Ceteris paribus
Ceteris Paribus is a Latin phrase meaning “everything else being equal.”
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

33. Gottheil — Principles of Economics, 7e
Economic Models
The ceteris paribus assumption allows economists to develop one-to-one, cause-and-effect relationships in isolation.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

34. Gottheil — Principles of Economics, 7e
Economic Models
The role of ceteris paribus:
Isolates one factor at a time in an experiment or study.
Allows researchers to identify cause-and-effect relationships removed from other factors.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

35. Gottheil — Principles of Economics, 7e
EXHIBIT 1 THE CIRCULAR FLOW MODEL
Gottheil — Principles of Economics, 7e
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36. Gottheil — Principles of Economics, 7e
Circular Flow Model
There are two principal players in the circular flow model
Households
Firms
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

37. Gottheil — Principles of Economics, 7e
Circular Flow Model
Households
A household is an economic unit of one or more persons, living under one roof, that has a source of income and uses it in whatever way it deems fit.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

38. Gottheil — Principles of Economics, 7e
Circular Flow Model
Firms
A firm is an economic unit that produces goods and services in the expectation of selling them to households, other firms, or the government.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

39. Gottheil — Principles of Economics, 7e
Circular Flow Model
Resource market
The resource market is the market in which households supply resources to firms.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

40. Gottheil — Principles of Economics, 7e
Circular Flow Model
These resources can include:
Land
Labor
Capital
Entrepreneurship
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

41. Gottheil — Principles of Economics, 7e
Circular Flow Model
Firms pay for these resources with:
Wages
Rent
Interest
Profit
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

42. Gottheil — Principles of Economics, 7e
Circular Flow Model
Product market
The product market is the market in which firms supply goods and services to households.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

43. Gottheil — Principles of Economics, 7e
Circular Flow Model
Product market
Households pay for goods and services they buy in the product market with the income they received from supplying resources in the resource market.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

44. Gottheil — Principles of Economics, 7e
Circular Flow Model
Circular flow model
In this model, households supply resources to firms, and firms supply goods and services to households.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

45. Gottheil — Principles of Economics, 7e
Micro vs. Macro
The study of economics is divided into two areas
Microeconomics
Macroeconomics
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

46. Gottheil — Principles of Economics, 7e
Micro vs. Macro
Macroeconomics
Macroeconomics analyzes the behavior of the market as a whole.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

47. Gottheil — Principles of Economics, 7e
Micro vs. Macro
Microeconomics
Microeconomics analyzes individual and firm behavior, especially in market conditions.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

48. Positive vs. Normative Economics
There are two different approaches to the study of economics
Positive economics
Normative economics
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

49. Positive vs. Normative Economics
Positive economics
Positive economics is a subset of economics that analyzes the way the economy actually operates.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

50. Positive vs. Normative Economics
Normative economics is a subset of economics founded on value judgments and leading to assertions of what ought to be.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning

51. Gottheil — Principles of Economics, 7e
Consumer Sovereignty
Invisible hand
Adam Smith’s concept of the market as a hand that guides firms that seek to satisfy their own self-interest to produce those goods and services that consumers want.
Gottheil — Principles of Economics, 7e
© 2013 Cengage Learning