1. Economic Issues 101
D.W. Hedrick

2. Instructional Method
Primarily Lecture format with discussion, simulations, and video presentations
Constructive discussion is welcomed
Grading is based on six Mini-exams – NO MAKEUPS GIVEN
Suggestions for the study of economics

3. Definition of Economics
Traditional Definition
How society chooses to allocate its scarce resources among competing demands to best satisfy human wants
Alternative definitions
How society manages its scarce resources.
Economics is the study of choice.
Economics is what economist do.

4. Scarcity and the Fundamental Questions of Economics
Unlimited wants versus limited resources
WHFM
What is to be produced?
How is to be produced?
For whom will it be produced?

5. Economics as a Science Macroeconomic vs. Microeconomics
The scientific method
Economic models
Normative vs. positive approaches
A brief history of economic thinking
The language of economics

6. Economic Thinking How do people make decisions?
How do people interact?
How does the economy work overall?

7. How Do People Make Decisions?
People face tradeoffs
The cost of something is what you have to give up to get it
Opportunity Costs
Rational people think at the margin
Marginal Benefits vs. Marginal Cost and Maximum Net Benefits
People respond to incentives

8. How Do People Interact? Trade can make everybody better off
Voluntary Exchange = Mutually Beneficial Exchange
Markets are usually a good way of organizing economic activity
Markets are institutions that have evolved as human society has developed
Governments can sometimes improve market outcomes
Governments can wisely, or unwisely, coerce the individual to act in the common interest.

9. How Does the Economy work overall?
A country’s standard of living depends upon its ability to produce goods and services
Adam Smith (1776) and the “Wealth of Nations”
The general level of prices rises when the government prints and distributes too much money
Inflation versus hyperinflation
Society faces a short-run tradeoff between inflation and unemployment
Recessions and expansions and the business cycle.

10. Economics Models and Issues: Putting Economic Tools to Work
The art of making models = making them simple and effective
Example: circular flow – what, how and for whom questions.
overall economy, role of economic agents, output and income, product and resource markets
Resources: labor, capital, natural resources, entrepreneurship
Circular flow model indicates that consumers ultimately answer the WHAT question – consumer sovereignty, and markets determine the how and for whom.

11. Figure 1 The Circular Flow
Firms sell
Households buy
MARKETS
FOR
GOODS AND SERVICES
Revenue
Spending
Goods
and services
sold
Goods and
services
bought
FIRMS
Produce and sell
goods and services
Hire and use factors
of production
Buy and consume
goods and services
Own and sell factors
of production
HOUSEHOLDS
Households sell
Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
Factors of
production
Labor, land,
and capital
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars
Copyright © South-Western

13. Issue: An Economy in Transition (always)
1700s – WWII: agrarian to a manufacturing economy
WWII – present: manufacturing to a service economy
Change in consumer demands as income increase combined with technological change increased productivity in the agricultural sector spurred on by competition
Resources shifted from agricultural uses to manufacturing sector.

14. Changes in consumer demands and technological change in the informational sector, have led competitive markets to move from manufacturing goods to producing services. In 2002, total consumption consisted of Durable Goods (12%), Non-Durable Goods (28%), and Services (52%).
Resources are shifting from manufacturing industries to service sectors.
Market or laissez-faire versus command or planned economy
Capitalism and socialism and the mixed economy

15. Issue: Economic Growth and Human Welfare
Example: production possibilities frontier (PPF)
-scarcity: inputs labor, capital, natural resources, entrepreneurship
- technology, tradeoffs, efficiency and unemployment, opportunity costs, law of increasing costs, and economic growth.

16. Causes of Economic Growth
Increased number of resources: L, K, NR, E
Investment
Growth in Labor Force
Increased productivity of resources:
Work Ethic
Technology
Education
Risk-taking and innovation
Social system that allows the efficient use of resources and promotes productivity
Market system and self-interest
Laws, property rights, and public order
Political and economic freedom

17. Production possibilities curve
Opportunity Cost
Production possibilities curve
Computers (mill.)
Computers (mill.)
Attainable and unattainable production combinations
Possible combinations of computers and VCRs A A
Production possibilities curve (PPC) B
Production possibilities curve (PPC) B F
unattainable
Points along PPC imply no unemployed resources and efficient production C C
Foregone output E D
inefficient D

18. Law of increasing opportunity cost
Computers (mill.) A
A bowed outward PPC illustrates increasing opportunity costs B C D

19. Economic growth & the PPC
Changes in the PPC
Economic growth & the PPC
Computers (mill.) E
Economic growth is illustrated by an outward shift in a nation’s PPC F G C
PPC0
PPC1

20. Consumption trade-offs & growth
Economic Growth
Consumption trade-offs & growth
Consumer goods (hamburgers)
Consumer goods (hamburgers)
United States
Japan
Next year's production possibilities
Next year's production possibilities
Japan's choice to favor capital goods (point A) will shift its future PPC farther out
The US choice to produce more consumer goods (point A) limits future production growth A
PPC0
PPC0
PPC1
This year's production possibilities A
PPC1
This year's production possibilities

21. Economic Growth Gross Domestic Product Real Gross Domestic Product
Real Gross Domestic Product Per Capita
Growth Rates = percentage change in the above variables.
Rule of 70 = = Doubling
%Growth Rate Time