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Copyright 2008 The McGraw-Hill Companies1-1
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
End Show
1Limits, Alternatives, and Choices
Copyright 2008 The McGraw-Hill Companies1-2
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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Chapter Objectives• Economic Perspective
• Role of Economic Theory
• Microeconomics and Macroeconomics
• Scarce Resources–The Economizing Problem
• Production Possibilities
O 1.1
Copyright 2008 The McGraw-Hill Companies1-3
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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ECONOMICS
• The study of human efforts to satisfy what appear to be unlimited and competing wants through the careful use of relatively scarce resources.
• It is also a social science because it deals with the behavior of people as they cope with the fundamental problem of scarcity.
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Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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SCARCITY AND THE SCIENCE OF ECONOMICS
• TINSTAAFL• The fundamental
economic problem is SCARCITY
• SCARCITY is the condition that arises because society does not have enough resources to produce all the things people would like to have
Copyright 2008 The McGraw-Hill Companies1-5
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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The Economic Perspective
• Scarcity and Choice–Opportunity Cost
• Purposeful Behavior–Utility
• Marginal Analysis–Marginal Benefits
–Marginal Costs
O 1.2
O 1.3
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Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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Theories Principles and Models
• The Scientific Method• Economic Principle
–Generalizations–Other-Things-Equal Assumption (ceteris paribus)
–Graphical Expression
O 1.4
Copyright 2008 The McGraw-Hill Companies1-7
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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Macro and Microeconomics
• Macroeconomics–Aggregate
• Microeconomics–Individual Units
• Positive Economics
• Normative Economics
Copyright 2008 The McGraw-Hill Companies1-8
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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Individual’s Economizing Problem
• Limited Income• Unlimited Wants• A Budget Line• Attainable and Unattainable
Combinations• Tradeoffs & Opportunity
Costs• Choice• Income Change
O 1.5
W 1.1
Copyright 2008 The McGraw-Hill Companies1-9
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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Individual’s Economizing Problem
Average Income, Selected NationsPer Capita Income 2004
SwitzerlandUnited StatesJapanFranceSouth KoreaMexicoBrazilChinaPakistanNigeriaRwandaLiberia
Source: World Bank
$48,23041,40037,18030,09013,980
6,7703,0901,290
600390220110
Country
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies1-10
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Individual’s Economizing Problem
6543210
02468
1012
DVDs$20
Books$10
12
10
8
6
4
2
02 4 6 8 10 12 14
$120 Budget
Income = $120
Pdvd = $20= 6
Income = $120
Pb = $10= 12
Attainable
Unattainable
Quantity of Books
Qu
anti
ty o
f D
VD
s
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Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Society’s Economizing Problem
• Scarce Resources• Resource Categories
–Land–Labor–Capital
• Investment–Entrepreneurial Ability
• Factors of Production
Copyright 2008 The McGraw-Hill Companies1-12
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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FACTORS OF PRODUCTION
• NATURAL– LAND
• CAPITAL– MACHINES, TOOLS,
EQUIPMENT• FINANCIAL CAPITAL
– MONEY• HUMAN
– LABOR• ENTREPRENEURS
– SKILLS A PERSON HAS TO CREATE SOMETHING OR START A BUSINESS
Copyright 2008 The McGraw-Hill Companies1-14
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Production Possibilities Model
• Full Employment• Fixed Resources• Fixed Technology• Two Goods
–Consumer Goods (Pizzas)
–Capital Goods (Industrial Robots)
Copyright 2008 The McGraw-Hill Companies1-15
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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PRODUCTION
• The process of creating goods and services
• PRODUCTIVITY is the efficient use of productive resources– Productivity goes up
whenever more output can be produced with the same amount of inputs
– Productivity also goes up if the same output can be produced with fewer inputs
Copyright 2008 The McGraw-Hill Companies1-16
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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GOODS
• GOODS are tangible commodities like books, cars, or compact disc players– CONSUMER GOODS are intended for final
use by individuals– CAPITAL GOODS are manufactured goods
that are used to produce other goods and services
– DURABLE GOODS are any items that last three years or more when it is used on a regular basis
– NONDURABLE GOODS are any items that last for less than three year when it is used on a regular basis
Copyright 2008 The McGraw-Hill Companies1-17
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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FREE OR ECONOMIC
• FREE PRODUCTS– Things such as
sunshine or air that are plentiful
– No one could own them
– No price can be attached to them
• ECONOMIC PRODUCTS– Goods and services
that are useful– Relatively scarce in
an economic sense– Transferable to
others– Command a price
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SERVICES
• Work that is performed for someone by someone else– haircuts – home repairs – forms of
entertainment such as a concert
– work performed by doctors, lawyers, and teachers
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CONSUMERS
• People who use goods and services to satisfy wants and needs
• CONSUMPTION is the process of using up goods and services in order to satisfy wants and needs
• CONSPICUOUS CONSUMPTION is the use of a good or service to impress others
Copyright 2008 The McGraw-Hill Companies1-20
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Production Possibilities Model
Production Possibilities Table
Type of Product
Pizzas (in hundred thousands)
Industrial Robots (in thousands)
Production Alternatives
A B C D E
10 9 7 4 0
0 1 2 3 4
Plot Points to Create Graph…
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Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Production Possibilities Model
Pizzas
Ind
ust
rial
Ro
bo
ts
Attainable
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
AB
C
D
E
EconomicGrowth
Now Attainable
A’
B’
C’
D’
E’
Production Possibilities Curve
G 1.1
Copyright 2008 The McGraw-Hill Companies1-22
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
End Show
Production Possibilities Model
Pizzas
Ind
ust
rial
Ro
bo
ts
Attainable
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
AB
C
D
E
Law of IncreasingOpportunity Cost
A’
B’
C’
D’
E’
Production Possibilities Curve
Shape of the Curve
W 1.2
Copyright 2008 The McGraw-Hill Companies1-23
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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Production Possibilities Model
Pizzas
Ind
ust
rial
Ro
bo
ts
Under or Unemployment
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A’
B’
C’
D’
E’
Production Possibilities Curve
U
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Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
Key Terms
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Production Possibilities Model
15
10
5
0 1 2 3
a
b
c
d
e
MB = MC
MC
MB
Optimal Allocation of Resources
Quantity of Pizza
Mar
gin
al B
enef
it &
Mar
gin
al C
ost
Copyright 2008 The McGraw-Hill Companies1-25
Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Unemployment Growth and the Future
• A Growing Economy
• Economic Growth–Increasing Resource
Supplies
–Increasing Resource Quality
–Technological Advances
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Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Present Choices & Future Possibilities
Goods for the Present
Goo
ds f
or t
he F
utur
e
Goo
ds f
or t
he F
utur
e
Goods for the PresentPresentville Futureville
P
F
CurrentCurve
CurrentCurve
FutureCurve
FutureCurve
Compare Two Hypothetical Economies
Implications of International Trade
G 1.2
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Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Pitfalls to Sound Economic Reasoning
• Biases
• Loaded Terminology
• Fallacy of Composition
• Post Hoc Fallacy
• Correlation but not Causation
Last
Word
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THREE BASIC ECONOMIC QUESTIONS
• What to produce?• How to produce?• For whom to produce?
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FREE ENTERPRISE ECONOMY
A type of economy in which consumers and privately owned businesses, rather than the government, jointly make the majority of the WHAT, HOW, and FOR WHOM decisions
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ECONOMIC SYSTEMS
• Traditional– Customs, Past
• Command– Leaders
• Market– Buyers and Sellers
• Mixed– All Three
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STUDYING ECONOMICS
• Provides an insight as to how incomes are earned and spent, how jobs are created, and how the economy works on a daily basis
• Provides a working knowledge of property rights, competition, supply and demand, the price system, and economic incentives that make the American economy function
• Helps people become better decision makers
• Helps people make better voting decisions
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THINGS THAT CREATE VALUE
• UTILITY is the capacity to be useful to someone– Varies from person to person
• WEALTH is the sum of those economic products that are tangible, scarce, useful and transferable from one person to another
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ECONOMIC INTERDEPENDENCE
• Actions in one part of the country or the world have an economic impact on what happens elsewhere– EX: Bad weather
in one part of the world can affect sugar prices in the United States
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STANDARD OF LIVING
The quality of life based on the possession of necessities and luxuries that make life easier
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SPECIALIZATION
• Working toward a well defined activity
• When specialization is based on a comparative advantage, it usually leads to an increase in productivity
• Economic systems deal with scarcity
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ADVANTAGES
• Absolute– Able to produce
more of a product than another country at a lower cost
– Differences in production costs such as labor or other resources
• Comparative– Able to produce
a product at a relatively lower opportunity cost
– Every country is better off producing the products they produce best
– Total output is greater
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Chapter ObjectivesEconomic PerspectiveTheories Principles and ModelsMacro and MicroeconomicsIndividual’s Economizing ProblemSociety’s Economizing ProblemProduction Possibilities ModelUnemployment, Growth, and the FutureLast Word
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Key Terms• economics• economic perspective• opportunity cost• utility• marginal analysis• scientific method• economic principle• other-things-equal as
sumption• macroeconomics• aggregate• microeconomics• positive economics• normative economics• economizing problem• budget line
• economic resources• land• labor• capital• investment• entrepreneurial ability• factors of production• consumer goods• capital goods• production possibilitie
s curve• law of increasing oppo
rtunity costs• economic growth
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The Market System and the Circular Flow
