Upload
tika-gusmawarni
View
212
Download
0
Embed Size (px)
DESCRIPTION
hope it'll be useful :)
Citation preview
C
H A
P T
E
C H
A P
T E
RR
2
Prepared by: Fernando QuijanoPrepared by: Fernando Quijano and Yvonn Quijano and Yvonn Quijano
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair
The Economic Problem: Scarcity and Choice
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 2 of 40
Scarcity, Choice, and Opportunity Cost
• Human wants are unlimited, but resources are not.
• Three basic questions must be answered in order to understand an economic system:
• What gets produced?
• How is it produced?
• Who gets what is produced?
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 3 of 40
Scarcity, Choice, and Opportunity Cost
• Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 4 of 40
Scarcity, Choice, and Opportunity Cost
• Capital refers to the things that are themselves produced and then used to produce other goods and services.
• The basic resources that are available to a society are factors of production:
• Land
• Labor
• Capital
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 5 of 40
Scarcity, Choice, and Opportunity Cost
• Production is the process that transforms scarce resources into useful goods and services.
• Resources or factors of production are the inputs into the process of production; goods and services of value to households are the outputs of the process of production.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 6 of 40
Scarcity and Choicein a One-Person Economy
• Nearly all the basic decisions that characterize complex economies must also be made in a single-person economy.
• Constrained choice and scarcity are the basic concepts that apply to every society.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 7 of 40
Scarcity and Choicein a One-Person Economy
• Opportunity cost is that which we give up or forgo, when we make a decision or a choice.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 8 of 40
Scarcity and Choicein an Economy of Two or More
• A producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resources.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 9 of 40
Scarcity and Choicein an Economy of Two or More
• A producer has a comparative advantage in the production of a good or service over another if it can produce that product at a lower opportunity cost.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 10 of 40
Comparative Advantageand the Gains From Trade
• Colleen has an absolute advantage in the production of both wood and food because she can produce more of both goods using fewer resources than Bill.
Daily ProductionWood(logs)
Food(bushels)
Colleen 10 10
Bill 4 8
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 11 of 40
Comparative Advantageand the Gains From Trade
• In terms of wood:
• For Bill, the opportunity cost of 8 bushels of food is 4 logs.
• For Colleen, the opportunity cost of 8 bushels of food is 8 logs.
• In terms of food:
• For Colleen, the opportunity cost of 10 logs is 10 bushels of food.
• For Bill, the opportunity cost of 10 logs is 20 bushels of food.
Daily ProductionWood(logs)
Food(bushels)
Colleen 10 10
Bill 4 8
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 12 of 40
Comparative Advantageand the Gains From Trade
• Suppose that Colleen and Bill each wanted equal numbers of logs and bushels of food. In a 30-day month they (each separately) could produce:
Daily Production
Wood(logs)
Food(bushels)
Colleen 10 10
Bill 4 8
Monthly Production with No Trade
Wood(logs)
Food(bushels)
Colleen 150 150
Bill 80 80
Total 230 230A.B.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 13 of 40
Comparative Advantageand the Gains From Trade
• By specializing on the basis of comparative advantage, Colleen and Bill can produce more of both goods.
Monthly Production after Specialization
Wood(logs)
Food(bushels)
Colleen 270 30
Bill 0 240
Total 270 270
C.
Monthly Production with No Trade
Wood(logs)
Food(bushels)
Colleen 150 150
Bill 80 80
Total 230 230
B.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 14 of 40
Comparative Advantageand the Gains From Trade
• To end up with equal amounts of wood and food after trade, Colleen could trade 100 logs for 140 bushels of food. Then:
Monthly Production after Specialization
Wood(logs)
Food(bushels)
Colleen 270 30
Bill 0 240
Total 270 270
D.
Monthly Use After Trade
Wood(logs)
Food(bushels)
Colleen 170 170
Bill 100 100
Total 270 270
C.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 15 of 40
Specialization, Exchangeand Comparative Advantage
• According to the theory of competitive advantage, specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 16 of 40
Capital Goods and Consumer Goods
• Capital goods are goods used to produce other goods and services.
• Consumer goods are goods produced for present consumption.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 17 of 40
Capital Goods and Consumer Goods
• Investment is the process of using resources to produce new capital. Capital is the accumulation of previous investment.
• The opportunity cost of every investment in capital is forgone present consumption.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 18 of 40
The Production Possibility Frontier
• The production possibility frontier (ppf) is a graph that shows all of the combinations of goods and services that can be produced if all of society’s resources are used efficiently.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 19 of 40
The Production Possibility Frontier
• The production possibility frontier curve has a negative slope, which indicates a trade-off between producing one good or another.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 20 of 40
The Production Possibility Frontier
• Points inside of the curve are inefficient.
• At point H, resources are either unemployed, or are used inefficiently.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 21 of 40
The Production Possibility Frontier
• Point F is desirable because it yields more of both goods, but it is not attainable given the amount of resources available in the economy.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 22 of 40
The Production Possibility Frontier
• Point C is one of the possible combinations of goods produced when resources are fully and efficiently employed.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 23 of 40
The Production Possibility Frontier
• A move along the curve illustrates the concept of opportunity cost.
• From point D, an increase the production of capital goods requires a decrease in the amount of consumer goods.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 24 of 40
The Law of Increasing Opportunity Cost
• The slope of the ppf curve is also called the marginal rate of transformation (MRT).
• The negative slope of the ppf curve reflects the law of increasing opportunity cost. As we increase the As we increase the production of one good, we production of one good, we sacrifice progressively more sacrifice progressively more of the other.of the other.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 25 of 40
Economic Growth
• Economic growth is an increase in the total output of the economy. It occurs when a society acquires new resources, or when it learns to produce more using existing resources.
• The main sources of economic growth are capital accumulation and technological advances.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 26 of 40
Economic Growth
• An outward shift means that it is possible to increase the production of one good without decreasing the production of the other.
• Outward shifts of the Outward shifts of the curve represent curve represent economic growth.economic growth.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 27 of 40
Economic Growth
• From point D, the From point D, the economy can choose economy can choose any combination of any combination of output between F and output between F and G.G.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 28 of 40
Economic Growth
• Not every sector of the economy grows at the same rate.
• In this historic example, productivity increases were more dramatic for corn than for wheat over this time period.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 29 of 40
Capital Goods and Growthin Poor and Rich Countries
• Rich countries devote more resources to capital production than poor countries.
• As more resources flow into capital production, the rate of economic growth in rich countries increases, and so does the gap between rich and poor countries.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 30 of 40
Economic Growthand the Gains From Trade
• By specializing and engaging in trade, Colleen and Bill can move beyond their own production possibilities.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 31 of 40
Economic Systems
• The economic problem: Given scarce resources, how, exactly, do large, complex societies go about answering the three basic economic questions?
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 32 of 40
Economic Systems
• Economic systems are the basic arrangements made by societies to solve the economic problem. They include:
• Command economies
• Laissez-faire economies
• Mixed systems
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 33 of 40
Economic Systems
• In a command economy, a central government either directly or indirectly sets output targets, incomes, and prices.
• In a laissez-faire economy, individuals and firms pursue their own self-interests without any central direction or regulation.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 34 of 40
Economic Systems
• The central institution of a laissez-faire economy is the free-market system.
• A market is the institution through which buyers and sellers interact and engage in exchange.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 35 of 40
Economic Systems
• Consumer sovereignty is the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 36 of 40
Economic Systems
• Free enterprise: under a free market system, individual producers must figure out how to plan, organize, and coordinate the production of products and services.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 37 of 40
Economic Systems
• In a laissez-faire economy, the distribution of output is also determined in a decentralized way. The amount that any one household gets depends on its income and wealth.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 38 of 40
Economic Systems
• The basic coordinating mechanism in a free market system is price. Price is the amount that a product sells for per unit. It reflects what society is willing to pay.
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 39 of 40
Mixed Systems,Markets, and Governments
Since markets are not perfect, governments intervene and often play a major role in the economy. Some of the goals of government are to:
• Minimize market inefficiencies
• Provide public goods
• Redistribute income
• Stabilize the macroeconomy:
• Promote low levels of unemployment
• Promote low levels of inflation
C
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
eC
H A
P T
E R
2:
The E
conom
ic P
roble
m:
Sca
rcit
y a
nd C
hoic
e
© 2004 Prentice Hall Business Publishing© 2004 Prentice Hall Business Publishing Principles of Economics, 7/ePrinciples of Economics, 7/e Karl Case, Ray FairKarl Case, Ray Fair 40 of 40
Review Terms and Concepts
absolute advantage
capital
command economy
comparative advantage,
theory of consumer goods
consumer sovereignty
economic growth
economic problem
investment
laissez-faire economylaissez-faire economy
marginal rate of transformation (mrt)marginal rate of transformation (mrt)
marketmarket
opportunity costopportunity cost
outputsoutputs
priceprice
productionproduction
production possibility frontier (ppf)production possibility frontier (ppf)
resources or inputsresources or inputs
three basic questionsthree basic questions