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Chapter 1
Introduction
© 2002 South-Western
Economic Principles
• The Earth’s Resources
• Renewable vs. Nonrenewable
Resources
• Insatiable Wants
• Scarcity and Choice
2
Economic Principles
• Economic Model Building
• Microeconomic and
Macroeconomic Analysis
• Positive and Normative
Economics
3
Natural Resources
A natural resource is a
gift of nature.
4
Natural Resources
Examples of natural resources
include:
• land
• the uncultivated produce of land
• water
• minerals
5
Natural Resources
There are two kinds of natural
resources:
• Renewable
• Nonrenewable
6
Natural Resources
• A renewable natural resource is
one that can be replenished.
7
Natural Resources
Renewable natural resources
include:
• forests
• sea and land animals
• water
• grasses and forage on rangelands
8
Natural Resources
• A nonrenewable natural
resource is one that cannot be
replenished.
9
Natural Resources
Nonrenewable natural resources
include:
• metals
and ores
• oil and natural gas
10
Natural Resources
Are we running out of natural
resources?
• We live in a finite world
11
Natural Resources
Are we running out of natural
resources?
• Our knowledge of a resource’s relative
scarcity, particularly when considering
its availability in the not-too-distant
future, is less than exact.
12
Natural Resources
Are we running out of natural
resources?
• Even though some resources are
renewable, the overproduction of lands
and overharvesting of resources to meet
the needs of a rapidly growing human
population can destroy our living
resources.
13
Natural Resources
Are we running out of natural
resources?
• Properly managed conservation of
resources can both protect natural
resources and even increase their supply.
14
Scarcity
Scarcity is the perpetual state of
insufficiency of resources to satisfy
people’s unlimited wants.
15
Scarcity
Two competing facts create scarcity:
• Because
we live on planet
earth, the supple of resources
available to us is limited.
• Our wants for goods that are
produced by the limited
resources is unlimited.
16
Scarcity
Examples of things that are
scarce:
• Super Bowl tickets
17
Scarcity
Examples of things that are
scarce:
• Meals at a fine restaurant
18
Scarcity
Examples of things that are
scarce:
• Admission to an elite university
19
Scarcity
Examples of things that are not
scarce:
• Snow and ice in Alaska
20
Scarcity
Examples of things that are not
scarce:
• Sand in a desert
21
Scarcity
Some things that are not scarce can
become scarce.
• Air in the atmosphere is not
scarce.
• Clean, unpolluted air is scarce
in many metropolitan areas,
however.
22
Scarcity and Consumers
• No
one will knowingly pay a
positive price for something that
is not scarce.
• If something is not scarce,
there is enough to satisfy
everyone’s wants and the price
system is not necessary to decide
who can have it and who cannot.
23
The Study of Economics
Economics is the study of how
people work together to
transform resources into goods
and services to satisfy their
wants.
24
The Study of Economics
Four central questions of
economics:
• Who decides what goods to produce?
• How are goods produced?
• Who gets the goods produced?
• Who produces what?
25
Consumer Sovereignty
Consumer Sovereignty
• The Freedom of consumers to
determine what goods and
services they will buy.
26
Consumer Sovereignty
Consumer sovereignty affects the
economy in several ways.
• Consumer decisions ultimately
determine what goods and services the
economy will produce.
27
Consumer Sovereignty
Consumer sovereignty affects the
economy in several ways.
• Consumer decisions determine who
gets what goods.
28
Economic Models
Economic Models
• Economic models are simplified
abstractions of the real world.
29
Economic Models
1. How can economic models be
expressed?
• pictorially
• graphically
• algebraically
• verbally
30
Economic Models
Economists use models because
the world is too complex to fully
and comprehensively consider at
one time.
31
Economic Models
Ceteris Paribus
• Ceteris Paribus is a Latin
phrase meaning “everything else
being equal.”
32
Economic Models
The ceteris paribus assumption
allows economists to develop oneto-one, cause-and-effect
relationships in isolation.
33
Economic Models
The role of ceteris paribus:
• isolates
one factor at a time in
an experiment or study.
• allows researchers to identify
cause-and-effect relationships
removed from other factors.
34
EXHIBIT 1
THE CIRCULAR FLOW MODEL
35
Circular Flow Model
There are two principal players in
the circular flow model
• households
• firms
36
Circular Flow Model
Households
• A household is an economic unit
of one or more persons, living
under one roof, that has a source
of income and uses it in whatever
way it deems fit.
37
Circular Flow Model
Firms
• A firm is an economic unit that
produces goods and services in
the expectation of selling them to
households, other firms, or the
government.
38
Circular Flow Model
Resource Market
• The resource market is the
market in which households
supply resources to firms.
39
Circular Flow Model
These resources can include
• land
• labor
• capital
• entrepreneurship
40
Circular Flow Model
Firms pay for these resources with:
• wages
• rent
• interest
• profit
41
Circular Flow Model
Product Market
• The product market is the
market in which firms supply
goods and services to households.
42
Circular Flow Model
Product Market
• Households pay for goods and
services they buy in the product
market with the income they
received from supplying
resources in the resource market.
43
Circular Flow Model
Circular Flow Model
• In this model, households
supply resources to firms, and
firms supply goods and services
to households.
44
Micro vs. Macro
The study of economics is divided
into two areas
• microeconomics
• macroeconomics
45
Micro vs. Macro
Macroeconomics
• Macroeconomics analyzes the
behavior of the market as a
whole.
46
Micro vs. Macro
Microeconomics
• Microeconomics analyzes
individual and firm behavior,
especially in market conditions.
47
Positive vs. Normative
Economics
There are two different approaches
to the study of economics
• Positive
economics
• Normative economics
48
Positive vs. Normative
Economics
Positive Economics
• Positive economics is a subset of
economics that analyzes the way
the economy actually operates.
49
Positive vs. Normative
Economics
Normative Economics
• Normative economics is a subset
of economics founded on value
judgments and leading to
assertions of what ought to be.
50