Download chapter_1234_quiz1


Chapter 1


ECONOMICS: THE CORE ISSUES


WHAT IS THIS CHAPTER ALL ABOUT?
WHAT to produce?
HOW to produce?
FOR WHOM to produce?
1.
2.
3.
1.
2.
3.
LEARNING OBJECTIVES:
The role scarcity plays in defining economic choices
The core economic issues that nations must resolve
How nations resolve these issues
OUTLINE
I. Introduction
A. Water was a key news items of 2012.
1. There is a lack of clean water for many people.
2. Traces of water have been found on Mars
B. The economic choice revolves around scarce resources. Do we use them to
1. provide water to more people?
2. pursue space exploration
C. This introduces the concept of making difficult choices because of scarce
resources
D. World View: “NASA Plans Lunar Outpost”
This Word View gives information regarding NASA plans to build a settlement on the
moon around 2020 and to send astronauts to Mars. This introduces the idea of the
opportunity costs of such decisions
E. Definition: Economics – The study of how best to allocate scarce resources among
competing uses.
F. The three core issues that must be resolved are:
1. WHAT to produce with our limited resources.
2. HOW to produce the goods and services we select.
3. FOR WHOM goods and services are produced; that is, who should get
them.
II.
The Economy is Us
4.
5.
“The Economy” is simply an abstraction that refers to the sum of all our
individual production and consumption activities. In this sense, the economy is us, the
aggregation of all of our supply and demand decisions.
We may not always be happy with the output of the economy.
Nevertheless, we cannot ignore the link between individual action and collective
outcomes.
III.
Scarcity: The Core Problem
6.
Although we can change economic outcomes, we cannot have
everything we want. Like every other nation, we have to grapple with the core problem of
scarcity.
7.
Definition:
Scarcity – The fact that available resources are
insufficient to satisfy
all desired uses thereof.
C. Factors of Production
1. Definition:
Factors of Production – Resource inputs used to produce
goods and services, e.g., land, labor, capital, entrepreneurship.
2. There are four basic factors of production.
• Land– refers not just to the ground but to all natural resources such as
crude oil, water, air and minerals.
• Labor – refers to the skills and abilities to produce goods and services.
Hence, both the quantity and the quality of human resources are
included in the “labor” factor.
• Capital –< /span> Fishing nets are a final good in Thailand that are
themselves a factor of production in obtaining the final goods (fish) that
people desire.
♦ Definition:
Capital – Final goods produced for use in the
production of other goods, e.g., equipment, structures.
• Entrepreneurship – It’s not just a matter of what resources you have but
also of how well you use them.
♦ Definition:
Entrepreneurship – The assembling of
resources to produce new or improved products and
technologies.
D. Limits to Output
1. No matter how an economy is organized there is a limit to how fast it can
grow.
2. The most evident limit is the amount of resources available for producing
goods and services.
3. Definition:
Scarcity – the imbalance between our desires and available
resources – forces us to make economic choices.
4. President Bush’s proposal to colonize the Moon and explore Mars will
require scarce resources; few resources will be available for other earthly
goods.
Guns vs. Butter
1. One of the persistent choices about resource use entails defense spending.
2. The U.S. government spends more than $300 billion a year on national
defense.
3. From an economic view, those defense expenditures also represent an
enormous claim on scarce resources.
4. The 1.4 million men and women serving in the armed forces aren’t available
to build schools, design clothes, or teach economics.
5. The land, labor, capital, and entrepreneurship devoted to producing military
hardware are not available for producing civilian goods, thus the “ guns vs.
butter” dilemma.
6. Since the end of the Cold War, the United States has chosen to produce
more “ Butter” (Civilian goods) and fewer “guns” resulting in defense
spending declining from a high of 6.3 percent of total output in 1986 to only
3 percent.
7. This freeing up of resources from the military sector is referred to as the
“peace dividend”.
Opportunity Costs
1. Every time we choose to use scarce resources in one way we give up the
opportunity to use them in other ways.
2. Definition: Opportunity Cost – The most desired goods or services that
are forgone in order to obtain something else.
3. Everything we do involves an opportunity cost.
IV.
Production Possibilities
A. The Production Possibilities Curve (Table 1.1 and Figure 1.1)
1. Definition: Production Possibilities – The alternative combinations of
final goods and services that could be produced in a given time period with
all available resources and technology.
2. Each point on the production possibilities curve depicts an alternative mix of
output.
3. The production possibilities curve illustrates two essential principles:
• Scarce resources – There is a limit to the amount we can produce in
a given time period with available resources and technology.
• Opportunity costs – We can obtain additional quantities of any
desired good only by reducing the potential production of another
good.
B. Increasing Opportunity Costs (Figure 1.1)
1. The shape of the production possibilities curve reflects another limitation on
our choices.
2. The production possibilities curve illustrated in Figure 1.1 demonstrates
increasing opportunity cost.
3. Why do opportunity costs increase? Mostly because it is difficult to move
resources from one industry to another.
4. The “law” of increasing opportunity cost says that we must give up everincreasing quantities of other goods and services in order to get more of a
particular good.
C. The Cost of North Korea’s Military (Figure 1.2)
1. North Korea maintains the fourth largest army in the world.
2. To do so, it must allocate nearly 16 percent of all its resources to feeding,
clothing, and equipping its military forces.
3. As a result, there aren’t enough resources available to produce food.
4. World View: “Food Shortages Plague N. Korea”
North Korea suffered severe food shortages in 2004.
World View: “North Korea Expanding Missile Programs”
In 1998 North Korea stepped up plans to produce more missiles and
construct new launch facilities.
6.
The allocation of output to the military is provided for 11 nations. (Figure
1.3)
D. Efficiency (Figures 1.1 and 1.2)
1. Although not all the choices on the production possibilities curve are equally
desirable. They are, however, all efficient.
2. Efficiency means squeezing the maximum output of available resources –
that is, using factors of production in the most productive way.
3. Definition:
Efficiency – Maximum output of a good from the resources
used in production.
E. Inefficiency (Figure 1.4)
1. There’s no guarantee, of course, that we’ll always use resources efficiently.
2. A production possibilities curve shows potential output, not necessarily
actual output.
3. If we are inefficient, actual output will be less than the potential output.
F. Unemployment
1. Countries may also end up inside their production possibilities curve if all
available resources aren’t used.
2. In 2003, for example, as many as 8 million Americans were looking for work
each week, but no one hired them.
3. As a result, we were stuck inside the production possibilities curve,
producing less output than we could have.
G. Economic Growth (Figure 1.5)
1. In figure 1.4, point X lies outside the production possibilities curve.
2. It suggests that we could get more goods than we are currently capable of
producing!
3. All output combinations that lie outside the production possibilities curve are
unattainable with available resources and technology.
4. Over time, population increases and we get more labor. Also, if we continue
building factories and machinery, the stock of available capital will also
increase.
5. The quality of labor and capital can also increase if we train workers and
pursue new technologies.
6. All of these changes will increase potential output and will shift the
production possibilities curve outward.
7. With more resources or better technology, our production possibilities
increase.
8. Definition:
Economic Growth – An increase in output (real GDP); an
expansion
of
production
possibilities.
V.
Basic Decisions
A. WHAT - There are millions of points along a production possibilities curve, and each one
represents a specific mix of output. We can choose only one of these points at any time.
B. HOW – Decisions must also be made about HOW to produce.
C. FOR WHOM – After we’ve decided what to produce and how, we must address a third
basic question: FOR WHOM? Who is going to get the output produced? Should
everyone get an equal share?
VI.
The Mechanisms of Choice
A. Answers to the question of WHAT, HOW, and FOR WHOM largely define an economy.
But who formulates the answers?
B. The Invisible Hand of a Market Economy
1. Adam Smith said the “invisible hand” determines what gets produce, how,
and for whom.
2. For example, in the auto industry, the interactions between consumers and
producers determine how many cars are produced rather than some central
planning agency.
3. Definition: Market Mechanism – The use of market prices and sales to
signal desired outputs (or resource allocations).
4. The essential feature of the market mechanism is the price signal.
5.
The market mechanism can also answer the HOW and FOR
WHOM questions.
• To maximize their profits, producers will seek to use the lowest-cost
method of producing a good.
• A market distributes goods to the highest bidder. Individuals who are
willing and able to pay the most for a good tend to get it in a pure
market economy.
6. Definition:
Laissez Faire – The doctrine of “leave it alone”, of
nonintervention by government in the market mechanism.
C. Government Intervention and Command Economies
1. The laissez-faire policy Adam Smith favored has always had its share of
critics.
2. Karl Marx emphasized how free markets tend to concentrate wealth and
power in the hands of the few, at the expense of the many.
• As Marx saw it, unfettered markets permit the capitalists (those who
own the machinery and factories) to enrich themselves while the
proletariat (the workers) toil long hours for subsistence wages.
• Marx argued that the government not only had to intervene but had to
own all the means of production.
3. John Maynard Keynes seemed to offer a less drastic solution.
• The market, he conceded, was pretty efficient in organizing production
and building better mousetraps.
• However, individual producers and workers had no control over the
broader economy. He believed the cumulative actions of so many
economic agents could easily tip the economy in the wrong direction.
• In Keynes’n view, government should play an active but no allinclusive role in managing the economy.
D. Continuing Debates
1. The core of most debates is some variation of the WHAT, HOW, or FOR
WHOM questions.
2. Conservatives favor Adam Smith’s laissez-faire approach with minimum
government interference.
3. Liberals tend to think government interventions is needed to improve the
outcomes.
4. World View: “Markets vs Government Reliance?”
This World View gives the results of a poll of 20 countries regarding the
effectiveness of the free market economic system. The consensus was
that it is the best system for the world’s future.
5. World View: “Index of Economic Freedom”
This World View provides a ranking of the world’s nations in terms of
economic freedom. Hong Kong, Singapore and New Zealand rank at the
top of the list while North Korea and Libya rank at the bottom. The U.S.
ranks tenth on the list. All nations must decide whether to rely on market
signals or government directives to determine economic outcomes.
Nations that rely the least on government intervention score highest on this
Index of Economic Freedom.
6. Countries answer the basic economics questions differently and their
answers change over time.
E. A Mixed Economy
1. Most economies use a combination of market signals and government
directives to select economic outcomes.
2. Definition:
Mixed Economy – An economy that uses both
market
signals and
government directives to allocate goods and
resources.
F. Market Failure
1. When market signals don’t give the best possible answers to the WHAT,
HOW, and FOR WHOM questions, we say that the market mechanism has
failed.
2. Definition:
Market Failure – An imperfection in the market mechanism
that prevents optimal outcomes.
Government Failure
1. Government intervention may move us closer to our economic goals. But
government intervention may fail as well.
2. Definition:
Government Failure – Government intervention that fails to
improve economic outcomes.
3. Examples of government failures include:
• Forcing an industry to clean up its pollution in a manner that is
excessive.
• Mandating pollution control technologies that are too expensive or
even obsolete.
• Imposing excessive taxes and transfer payments so that the total
economic pie shrinks making society as a whole worse off.
4. World View: “China’s Leaders Back Private Property”
Newly-introduced incentives including increased private ownership, move
China away from a centrally-planned economy in an effort to increase
productivity
and
growth.
Seeking Balance
1. None of these failures has to occur, but they might.
2. The challenge for society is to minimize failures by selecting the appropriate
balance of market signals and government directives.
3. It requires that we know how markets work and why they sometimes fail.
4. We also need to know what policy options the government has and how and
when they might work.
VII. What Economics is All About
A. Understanding how economies function is the basic purpose of studying economics – to
learn how.
1. an economy is organized,
2. it behaves, and
3. successfully it achieves it basic objectives.
B. End vs. Means
1. Economists don’t formulate an economy’ objectives.
2. Instead, they focus on the means available for achieving given goals.
C. Macro vs. Micro
1. Definition:
Macroeconomics – The study of aggregate economic
behavior, of the economy as a whole.
2. Definition:
Microeconomics – The study of individual behavior in the
economy, of the components of the larger economy.
3. For example, in macroeconomics, we might be concerned about how much
money, in total, consumers will spend on goods and services. In
microeconomics, economists focus attention on how much consumers
spend on specific goods.
4.
Although the study of microeconomics and macroeconomics operate at
different levels of abstraction, they are intrinsically related. Macro
(aggregate) outcomes depend on micro behavior, and micro (individual)
behavior is affected by macro outcomes.
D. Theory vs. Reality
1. The distinction between macroeconomics and microeconomics is one of
many simplifications we make in studying economic behavior.
2. The economy is much too vast and complex to describe and explain in one
course (or one lifetime).
3. We thus focus on basic relationships.
4. We isolate basic principles of economic behavior and then use those
principles to predict economic events and develop economic policies,
5. We formulate theories, or models, of economic behavior and then use those
theories to evaluate and design economic policy.
6. In these theories, we typically ignore the possibility that many things can
change at one time.
7. Definition: Ceteris Paribus – The assumption of nothing else changing.
8. Although the assumption of ceteris paribus makes it easier to formulate
economic theory and policy, it also increases the risk of error. If other
things do change in significant ways, our predictions (and policies) may fail.
9. Politics
• Politicians cannot afford to be complacent about economic
predictions. If the predictions are wrong, the politicians may not be
reelected.
• Inevitably, political choices must be made. The choice of more guns or
more butter, for example, isn’t an economic decision. Rather it is a
sociopolitical decision based in part on economic trade-offs
(opportunity costs), but also social values.
10.
Imperfect Knowledge
• It may be impossible to understand and explain how the economy
works without getting tangled up in subjective value judgments.
• It is not clear where the truth lies. For more that 200 years,
economists have argued about what makes the economy tick.
• We are adept at identifying all the forces at work, but not always
successful in gauging their relative importance.
• We may never find an absolute truth, because the inner workings of
the economy change over time. When economic behavior changes,
our theories must be adapted.
VIII. The Economy Tomorrow
A.
The Journey to Mars
1. After the successful landing of a robot on Mars, President Bush announced a
plan for a human mission to Mars by 2015.
2. The journey to Mars will require substantial economic commitment. The
opportunity cost may the development of high-speed rail systems or ecofriendly technologies.
3. There may also be earthly benefits of the program. Past NASA programs
prompted global positioning technology and imaging used in CAT scanners
and MRI machines.
4. Society will have to make decisions regarding resource allocations between
earthly goods and services and space exploration
Wk #2, U.S. Economy, a global veiw
Availability: Item is no longer available. It was last available on Apr 30, 2012 4:44 PM.
Chapter 2
THE U.S. ECONOMY: A GLOBAL VIEW
All nations confront the central economic questions: What to produce, How to produce;
and For Whom to produce. However, the nations of the world approach these issues
with very different production possibilities. The objective of this chapter is to assess how
the U.S. economy stacks up. Specifically, this chapter address these three questions:
WHAT goods and services does the United States produce?
HOW is that output produced?
FOR WHOM is the output produced?
LEARNING OBJECTIVES: Know:
1. The relative size and content of U.S. output (GDP)
2. How America is able to produce so much output
3. How incomes are distributed in the U.S. and elsewhere
OUTLINE
I. Introduction
A. All nations confront the central economic questions of WHAT to produce, HOW to
produce, and FOR WHOM to produce it. However, the nations of the world
approach these issues with very different production possibilities.
B. In addition to varying production possibilities, the nations of the world use different
mechanisms for deciding WHAT, HOW, and FOR WHOM to produce.
C. The objective of this chapter is to assess how the U.S. economy stacks up.
Specifically,
1. WHAT goods and services does the United States produce?
2. HOW is that output produced?
3. FOR WHOM is the output produced?
II. What America Produces
A. The U.S. has less than 5 percent of the world’s population and 12 percent of the
world’s arable land, yet it produces more than 20 percent of the world’s output.
B. GDP Comparisons
1. Definition:
Gross Domestic Product (GDP)– The total market value of all
final goods and services produced within a nation’s borders in a given time
period.
2.
WORLD VIEW: Comparative Output
The market value of output (GDP) is a basic measure of an economy’s size.
The U.S. economy is far larger than any other and accounts for nearly onefourth of the entire world’s output. This World View provides bar chart data
comparing U.S. GDP to several other nations.
3. In 2007, the U.S. economy produced about $13.8 trillion worth of output
compared to the second largest economy, China, which produced only $7.1
trillion.
4.
Per Capita GDP
• Per capita GDP is an indicator of how much output the average person
would get if all output were divided up evenly among the population.
• Definition:
Per Capita GDP – The dollar value of GDP divided by
total population: average GDP.
• With only 5 percent of the world’s population, the United States produces
far more output per person than other countries do.
• In Ethiopia and Nigeriai, per capita incomes are only about $1,000 per
year – which is less than four dollars per day.
• WORLD VIEW: GDP per Capita Around the World
Per capita GDP is a measure of average living standards. Americans
have access to far more goods and services than do people in other
nations. This World View provides bar chart data comparing U.S. GDP
per capita to several other nations.
5. GDP Growth (Figure 2.1)
• The GDP gap between the United States and the world’s poor nations
keeps growing.
• The reason for this growing gap is economic growth
• Definition:
Economic Growth – An increase in output (real GDP);
an expansion of production possibilities.
• On average, U.S. output has grown by roughly 3 percent a year, nearly
three times faster than population growth (1 percent).
• As a result, not only does total output keep rising, but so does per capital
output.
6. Poor Nations(Table 2.1)
• Some poor nations demonstrated economic growth (China and India).
• However, in many poor nations, total output has actually declined year
after year, depressing living standards.
• For example, between 2000 and 2007, Zambia’s GDP declined by an
average of 5.7 percent per year.
• As a result, Zambia’s output in 2007 was 50 percent smaller than in 2000.
• With negative economic growth and 1.9 percent annual population growth,
Zambia’s per capital GDP fell below $1,300 a year with nearly two-thirds
of Zambia’s population being undernourished.
• Even nations with positive GDP growth (e.g. Haiti, Ivory Coast) didn’t grow
fast enough to raise living standards.
7. The Mix of Output (Figure 2.2)
• The mix of output in any nations always includes both goods and services.
• A century ago, about two-thirds of U.S. output consisted of goods while
one-third of output consisted of services.
• Since then, over 25 million people have left farms and sought jobs in other
sectors.
• Today, nearly 75 percent of U.S. output consists of services, not
goods.
• The relative decline in goods production does not mean the U.S. is
producing fewer goods. Manufacturing output has increased four fold
since 1950. This mix of output is simply different.
8. Development Patterns
• The transformation of the U.S. into a service economy is a reflection of our
high incomes.
• In Ethiopia, where the most urgent concern is still to keep people from
starving, over 50 percent of output comes from the farm sector.
III.
How America Produces
A. Factors of Production
Definition: Factors of Production – Resource inputs used to produce goods
and services, e.g., land, labor, capital, entrepreneurship.
1. Human Capital
• Nations can accumulate various forms of capital.
• The knowledge and skills workers possess can also be accumulated.
• Definition:
Human Capital – The knowledge and skills possessed
by the workforce.
• In many less developed countries, only 1 out of 2 youth ever attend high
school. As a result, many are unable to read a book or even write their
own names. Without functional literacy, such workers are doomed to
low-productivity jobs.
• The high output of the U.S. is explained not only by a wealth of resources
but by their quality as well. The high productivity of the U.S. economy
results from using highly educated workers in capital-intensive
production processes.
• WORLD VIEW: The Education Gap Between Rich and Poor Nations
The high productivity of the American economy is explained in part by
the quality of its labor resources. Workers in poorer, less developed
countries get much less education or training. This World View provides
bar chart data comparing U.S. enrollment in secondary schools to other
nations in the world based on income status of the nation.
2. Capital Stock
• The exceptional productivity of American workers is due in large part to an
abundance of capital.
• American production tends to be capital-intensive while many other
nations tend to use labor-intensive production processes.
• Definition:
Capital-Intensive – Production processes that use a
high ratio of capital to labor inputs.
3. High Productivity
Skilled workers coupled with sophisticated capital equipment explains why the
U.S. leads other nations in worker productivity.
Definition: Productivity – Output per unit of input such as output per
labor hour.
• Factor Mobility – Our continuing ability to produce the goods and
services that consumers demand also depends on our ability in
reallocating resources from one industry to another.
• Technological Advance – Whenever technology advances, an economy
can produce more output with existing resources.
• Outsourcing and trade – Technological advances permit global resource
use. Advances in telecommunications have increased this. Although
some US workers suffer temporary job losses in this process, the
economy overall gains as U.S. workers pursue their comparative
advantage.
B. Role of Government
• We must also take heed of the role the government plays in choosing HOW a
nation’s goods and services are produced.
• The Heritage Foundation has documented a positive relationship between the
degree of economic freedom and economic growth.
1.
Providing a Legal Framework
• One of the most basic functions of government is to establish and
enforce the rules of the game.
• The government gives legitimacy to contracts by establishing the rules
for such pacts and by enforcing their provisions.
• By establishing ownership rights, contract rights, and other rules of the
game, the government lays the foundation for market transactions.
2.
Protecting the Environment
• The legal contract system is designed to protect the interests of a
buyer and a seller who wish to do business.
• What if the business they contract for harms third parties?
• Definition: Externalities – Costs (or benefits) of a market activity
borne by a third party.
• In the absence of government intervention, such side effects would be
common.
• To reduce the external costs of production, the government limits air,
water, and noise pollution and regulates environmental use.
3.
Protecting Consumers
• The government also uses it power to protect the interests of
consumers.
• One way to do this is to prevent individual business firms from
becoming too powerful.
• Definition: Monopoly – A firm that produces the entire market
supply of a particular good or service.
• To protect consumers from monopoly exploitation, the government
tries to prevent individual firms from dominating specific markets.
• The government also regulates the safety of products.
4.
Protecting Labor
• The government also regulates how labor resources are use in the
production process.
• In many poor nations, children are forced to start working at very early
ages. They don’t get the change to go to school or to stay healthy.
• In the U.S., child labor laws and compulsory schooling prevent minor
children from being exploited.
• Government regulations also set standards for work place safety,
minimum wages, fringe benefits, and overtime provisions.
C. Striking a Balance
1. Government interventions are designed to change the way in which resources
are used.
2. Such interventions reflect the conviction that the market alone might not select
the best possible way of producing goods and services.
3. There is no guarantee, however, that government regulation of HOW goods are
produce always make us better off.
4. Government failure might replace market failure, leaving us no better offpossibly even worse off.
IV For Whom America Produces
A. U.S. Income Distribution (Figure 2.3)
1.
Income Quintile
Definition:
Income Quintile – One-fifth of the population, rank-ordered
by income (for example, top fifth).
2. The top 20 percent (quintile) of the U.S. households gets half of all U.S.
income.
3. By contrast, the poorest 20 percent of U.S. households get less than 4
percent.
B. Global Inequality
1. As unequal as American incomes are, income disparities are actually greater in
many other countries. For example, in Namibia, Botswana, and Haiti the
richest tenth of the population has a far larger share of income than the richest
10 percent of Americans have.
2. WORLD VIEW: Income Share of the Rich
The FOR WHOM question is reflected in the distribution of income. Although
the U.S. distribution is very unequal, inequalities loom even larger in most
Third World countries. This World View provides bar chart data comparing
share of total income received by the top tenth of income earners in the U.S. to
the same group in several other nations.
3. As we saw earlier, third world GDP per capita is far below U.S. levels.
Consequently, even poor people in the United States receive more goods and
services than the average household in most low-income countries.
V.
The Economy Tomorrow: Ending Global Poverty
Answers still uncertain
1. Nearly 3 billion people still live in abject poverty with incomes of less than $2 a
day.
2. The World Bank has set ambitious goals for 2015 including reducing poverty
and hunger by one-half, achieving universal primary education, reduce child
and maternal mortality, and reduce the number of people without access to
drinkable water.
3. People in rich countries still aspire to higher living standards.
4. The challenge is to find the right balance between market and government
forces.

SUPPLY & DEMAND, Wk #1
Availability: Item is no longer available. It was last available on Apr 30, 2012 4:48 PM.
Chapter 3
SUPPLY AND DEMAND
The chapter has an explicit focus on the allocative and distributive functions of the price system. The section on
disequilibrium pricing -- price ceilings and floors -- provides an opportunity to illustrate the implications of interference
with market pricing mechanisms.
The general direction of this chapter, which is to look at how the market system answers the following questions:
1 .What determines the price of a good or service?
2. How does the price of a product affect its production and consumption?
Why do prices and production levels often change?
OUTLINE
I. Introduction
A. An opening illustration of the wide swings in gasoline prices during 2008. In early 2008, the price of gasoline
was $2.99 per gallon, then went to $4.05 in July, and was back down in the low-$2 range by the end of the
year.
B. How do market mechanisms decide WHAT to produce, HOW to produce, and FOR WHOM to produce?
Specifically:
1. What determines the price of a good or service?
2. How does the price of a product affect its production or consumption?
3. Why do prices and production levels often change
II.
Market Participants
A. Maximizing behavior
1. Consumers maximize their satisfaction (utility) given limited resources.
2. Businesses try to maximize profits by using resources efficiently in producing goods.
3. Government maximizes general welfare of society.
4. The basic goals of utility maximization, profit maximization, and welfare maximization explain most
market activity.
B. Specialization and Exchange
1. The notion that buying and selling goods and services in the market might maximize our wellbeing
originates in two simple observations.
• Most of us are incapable of producing everything we desire to consume.
• Even if we could produce all our own goods and service, it would still make sense to
specialize.
2. Economic interactions with others are necessitated by two constraints:
• Inability as individuals to produce all of the goods we need or desire.
• Limited amounts of time, energy, and resources possessed for producing things we could
make for ourselves.
III. The Circular Flow
A. Four different groups participate in our economy
1. Consumers
2. Business firms
3. Government
4. Foreigners
B. The Two Markets
1. Definition:
Factor Markets – Any place where factors of production (e.g., land, labor, capital) are
bought and sold.
2. Definition:
Product Markets – Any place where finished goods and services (products) are bought
and sold.
3. The consumer is the final recipient of all goods and services produced.
4. Locating Markets – A market exists wherever and whenever an exchange takes place.
C. Dollars and Exchange (Figure 3.1)
1. Nearly every market transaction involves an exchange of dollars for goods or resources.
2. Money thus plays a critical role in facilitating market exchanges and the specialization they permit.
D. Supply and Demand
1. Definition:
Supply – The ability and willingness to sell (produce) specific quantities of a good at
alternative prices in a given time period, ceteris paribus.
2. Definition:
Demand – The ability and willingness to buy specific quantities of a good at alternative
prices in a given time period, ceteris paribus.
IV.
Demand
A. Every market transaction involves an exchange and thus some elements of both supply and demand.
B. Individual Demand (Figure 3.2)
1. A demand exists only if someone is willing and able to pay for a good – that is, exchange dollars
for a good or service in the market place.
2. When people purchase a product there is an opportunity cost.
3. Definition:
Opportunity Cost– The most desired goods or services that are forgone in order to
obtain something else.
4. Definition:
Demand Schedule– A table showing the quantities of a good a consumer is willing
and able to buy at alternative prices in a given time period, ceteris paribus.
5. Definition:
Demand Curve– A curve describing the quantities of a good a consumer is willing
and able to buy at alternative prices in a given time period, ceteris paribus.
6. “Demand” is an expression of consumer buying intentions – an offer to buy – not a statement of
actual purchases.
7. Definition:
Law of Demand– The quantity of a good demanded in a given time period
increases as its price falls, ceteris paribus.
C. Determinants of Demand
1. The determinants of market demand include:
• Tastes (desire for this and other goods)
• Income (of the consumer)
• Other goods (their availability and price)
• Expectations (for income, prices, tastes)
• Number of buyers
• NOTE: Determinants of demand are factors that cause the whole curve to shift right or
left. The only thing that will cause a movement along a demand curve is a change in the
goods own price.
2. The availability and price of related goods also affect the demand for goods and services.
• Definition: Substitute Goods– Goods that substitute for each other; when the price of
good x rises, the demand for good y increases,ceteris paribus.
• Examples might include Pepsi for Coke, Fords for Toyotas, etc.
• Definition:
Complementary Goods– Goods frequently consumed in combination;
when the price of good x rises, the demand for good y falls, ceteris paribus.
• Examples might include Pepsi and Pizza, Cars and gasoline, etc.
3. In the News: “Auto Makers Return to Deep Discounts”
Decreased sales are causing auto makers to lower prices again. They had previously offered
customers employee discounts.
D. Ceteris Paribus
1. To simplify their models of the world, economists focus on only one or two forces at a time and
assume nothing else changes.
2. Definition:
Ceteris Paribus – The assumption of nothing else changing.
3. Demand curves show us how changes in market prices alter consumer behavior.
E. Shifts in Demand (Figure 3.3)
1. The determinants of demand can and do change
2. A demand curve (schedule) is valid only so long as the underlying determinants of demand remain
constant.
3. Definition:
Shift in Demand– A change in the quantity demanded at any (every) given price.
4. Pizza and Politics
• Demand shifts occur at the White House when a political crisis erupts.
• On an average day White House staffers order about $180 of pizzas from the nearby
Domino’s .
• Before the invasion of Iraq, White House staffers ordered more than $1,000 of pizzas a
day.
F. Movements vs. Shifts
1. Movements along a demand curve, referred to as a change in quantity demanded, are a response
to price changes for that good.
2. Shifts of the demand curve, referred to as changes in demand, occur when the determinants of
demand change.
G. Market Demand
1. The market demand is determined by the number of potential buyers and their respective tastes,
incomes, other goods and expectations.
2. Definition:
Market Demand – The total quantities of a good or service people are willing and able
to buy at alternative prices in a given time period: the sum of individual demands.
3. The Market Demand Curve (Figure 3.4)
• Market demand represents the combined demands of all market participants.
• To determine the total quantity demanded at any given price, we add up the separate
demands of the individual consumers.
V. Supply
A. To understand the complete market, we must also look at market supply.
B. Definition:
Market Supply:
The total quantities of a good that sellers are willing and able to sell at
alternative prices in a given time period, ceteris paribus.
C. Individual Suppliers
1. Law of Supply – The quantity of a good supplied in a given time period increases as its price
increases, ceteris paribus.
2. Large quantities will be offered for sale at higher prices.
3. Supply curves are upward-sloping to the right.
D. Market Supply (Figure 3.5)
1. The market supply curve is just a summary of the supply intentions of all producers.
2. Determinants of market supply include:
• Factor costs
• Technology
• Other goods
• Taxes and subsidies
• Expectations
• The number of sellers.
3. Market supply is an expression of seller’s intentions – an offer to sell – not a statement of actual sales.
E. Shifts of Supply
1. Changes in the quantity supplied are referred to as movements along the supply curve.
2. Changes in supply are referred to as shifts in the supply curve.
• Increase in supply is a rightward shift.
• Decrease in the supply is a leftward shift.
VI. Equilibrium
A. The purpose of drawing supply and demand curves is to see how markets answer the basic questions of
WHAT, HOW, and FOR WHOM.
B. Only one price and quantity are compatible with the existing intentions of both the buyers and the sellers.
C. Definition:
Equilibrium Price – The price at which the quantity of a good demanded in a given time period
equals the quantity supplied.
D. Market Clearing (Figure 3.6)
1. Equilibrium doesn’t imply that everyone is happy with the prevailing price or quantity.
2. The equilibrium price is not determined by any single individual. Rather it is determined by the
collective behavior of many buyers and sellers, each acting out his or her own demand or supply
schedule.
3. Although not everyone gets full satisfaction from the market equilibrium, that unique outcome is
efficient.
4. The Invisible Hand
• The equilibrium price and quantity reflect a compromise between buyers and sellers. No other
compromise yields a quantity demanded that’s exactly equal to the quantity supplied.
• Adam Smith characterized this market mechanism as “the invisible hand”.
• Definition:
Market Mechanism– The use of market prices and sales to signal desired
outputs (or resource allocations).
5. In the News: “Another Storm Casualty: Oil Prices” This article illustrates how Hurricane Katrina
interrupted oil supplies, resulting in a leftward shift of the supply curve. The impact on equilibrium
price (increase) and equilibrium quantity (decrease) is also shown
E. Surplus and Shortage (Figure 3.6)
1. When seller’s asking prices are too high, a market surplus is created.
2. Definition:
Market Surplus – The amount by which the quantity supplied exceeds the quantity
demanded at a given price; excess supply.
3. Definition: Price Floor: Lower limit set for the price of a good.
4. An Initial Shortage - When seller’s asking prices are too low, a market shortage is created.
5. Definition:
Market Shortage - The amount by which the quantity demanded exceeds the quantity
supplied at a given price; excess demand.
6. Self-Adjusting Prices
• Whenever the market price is set above or below the equilibrium price, either a market surplus
or a market shortage will emerge.
• To overcome a surplus or shortage, buyers and sellers will change their behavior.
• Only at the equilibrium price will no further adjustments be required.
7. In The News: “Historic Inauguration Could Lead to Ticket Scalping”
November 11, 2008. Sen. Dianne Feinstein (D-CA) says she’s disturbed by reports that tickets to
President-elect Barack Obama’s inauguration are being sold online for as much as $40,000. She
says she’s writing to eBay and other sites to make sure they’re not involved in ticket scalping. The
240,000 available tickets are supposed to be free to the public and are given out through
congressional offices. Feinstein is also working on a bill that would make it a federal crime to sell
tickets to the inauguration.
F. Changes in Equilibrium (Figure 3.7)
1. No equilibrium price is permanent.
2. The equilibrium price will change whenever the supply or demand curve shifts.
3. A Demand Shift – Should the demand curve shift, the result will be a change in equilibrium price and
quantity.
4. A Supply Shift – Should the supply curve shift, the result will be a change in equilibrium price and
quantity.
5. Changes in supply and demand occur when the determinants of supply and demand change.
6. World View: “ Dining On the Downtick”
This article uses a French restaurant’s flexible pricing scheme to demonstrate equilibrium pricing. A
surplus signals that price is too high, and a shortage suggests that price is too low.
VII. Market Outcomes
A. The market mechanism resolves the basic economic questions of WHAT, HOW, and FOR WHOM.
1. WHAT we produce is determined by the equilibrium of the markets.
2. HOW we produce is determined by profit seeking behavior and using resources efficiently.
3. FOR WHOM we produce is determined by those willing and able to pay the equilibrium price.
B. Optimal, Not Perfect
1. Not everyone is happy with market outcomes, but we are given the opportunity to maximize our own
satisfaction.
2. Although the outcomes of the marketplace are not perfect, they are often optimal, i.e., the best possible
given our incomes and scarce resources.
VIII. The Economy Tomorrow: “ Deadly Shortages: The Organ-Transplant Market”< /span>
1.
2.
Over 100,000 Americans await organ transplants
Supply of Organs
1. The major constraint on life-saving transplants is the supply of organs.
2. Organs may be available as a result of death or harvested from live donors, as with multiple organs (such as
kidneys.)
3. People donate organs for non-market reasons.
C. Market Incentives
1. Blood banks pay for blood when donations are inadequate to increase the quantity supplies
2. Cash payments to sign up for post-mortem organs would increase the quantity supplied if the Law of Supply holds
true
D. Zero Price Ceiling
1. U.S. government prohibits sale of human organs for moral as well as equity reasons
2. The result is a price ceiling set at zero. (Figure 3.8)
a. Definition: Price Ceiling – Upper limit imposed on the price of a good.
b. Price ceilings cause: Increase in the quantity demanded; decrease in the quantity supplied;
and create a market shortage
3. This results in more deaths and governmentally set rules on the distribution of the limited quantity of organs
supplied than would be true with market equilibrium
E. World View: “Are Kidneys a Commodity”
This article illustrates how a market for an organ will establish an equilibrium price and will create incentives
for people to possibly sell off their organs, namely kidneys. This would greatly reduce the current shortage of
kidneys for people awaiting life-saving transplants.

QUIZ Wk #1, ECONOMIC CHALLENGE
Availability: Item is no longer available. It was last available on Apr 30, 2012 4:50 PM.
QUIZ, WEEK #1
The Economic Challenge
My expectations are that it will take a page or more to answer the two questions
below
1. The U.S. farm population has shrunk by over 25 million people since 1900. Where did
all the people go? Why did they move? Link/ contrast that to the unemployment
problems we are having today. Are there similarities?
2. What are the opportunity costs of president Obama’s infrastructure spending? Use the
high speed train concept for Florida as an example