1. Copyright ©2001, South-Western College Publishing Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition Chapter 1: Scarcity and Choice

2. Carbaugh, Chap. 1 2 Opportunity cost and choice Scarcity and Opportunity Cost Number of compacts Number of minivans D C B A E Car wash possibilities

3. Carbaugh, Chap. 1 3 Production possibilities curve Possible combinations of computers and VCRs Computers (mill.) Opportunity Cost A B C D Production possibilities curve (PPC) Points along PPC imply no unemployed resources and efficient production Attainable and unattainable production combinations Computers (mill.) A B C D Production possibilities curve (PPC) inefficient unattainable F E Foregone output

4. Carbaugh, Chap. 1 4 Law of increasing opportunity cost Opportunity Cost Computers (mill.) A B C D A bowed outward PPC illustrates increasing opportunity costs

5. Carbaugh, Chap. 1 5 Changes in the PPC Economic growth Computers (mill.) G F C E Economic growth is illustrated by an outward shift in a nation’s PPC PPC 1 PPC 0

6. Carbaugh, Chap. 1 6 Consumption trade-offs United States Consumer goods (hamburgers) Economic Growth A Next year’s production possibilities This year’s production possibilities PPC 1 PPC 0 The US choice to produce more consumer goods (point A) limits future production growth Japan Consumer goods (hamburgers) A Next year’s production possibilities This year’s production possibilities PPC 1 PPC 0 Japan’s choice to favor capital goods (point A) will shift its future PPC farther out

7. Carbaugh, Chap. 1 7 Economic Growth Investment and consumption Investment as aConsumption as a Nationpercentage of GDPpercentage of GDP Brazil19.6%63.2% Canada18.758.8 China33.847.5 Germany21.756.9 Japan28.360.6 Mexico19.565.2 Russia19.351.2 Singapore36.940.6 South Korea35.356.5 Sweden13.753.1 United Kingdom15.464.3 United States14.767.7 Investment and consumption as a share of Gross Domestic Product, 1998 Investment defined as gross fixed capital formation. Source: IMF

8. Carbaugh, Chap. 1 8 Economic sanctions Economic Growth Iraq Machines A (before sanctions) (after sanctions) PPC 1 PPC 0

9. Carbaugh, Chap. 1 9 Fundamental economic questions Economic Systems Scarcity Fundamental economic questions: - What to produce? - How to produce? - For whom to produce? Type of economic system: - Market economy - Command economy - Mixed economy Imposes Answered by

10. Carbaugh, Chap. 1 10 Economic Systems Market economy: circular flow model Resource markets Product markets Business firms Land, labor, capital and entrepreneurship Rent, wages, interest and profits Households Consumption expenditures Goods and services

11. Carbaugh, Chap. 1 11 Economic Systems Role of government in a mixed economy Resource markets Product markets Business firms Government interventions: - minimum wage law - collective bargaining legislation - worker health & safety regulations - anti-discrimination legislation Households Government interventions: - household income taxes - public welfare programs - job retraining programs Government interventions: - laws promoting competition - business taxes and subsidies - public utility regulation Government interventions: - purchases of goods and services - trade barriers protecting domestic firms and workers - product safety laws protecting consumers