Download Econ 101Week 1

Economic Issues 101
D.W. Hedrick
Instructional Method
• Primarily Lecture format with discussion,
simulations, and video presentations
• Constructive discussion is welcomed
• Grading is based on six Mini-exams – NO
MAKEUPS GIVEN
• Suggestions for the study of economics
Definition of Economics
• Traditional Definition
– How society chooses to allocate its scarce resources
among competing demands to best satisfy human wants
• Alternative definitions
– How society manages its scarce resources.
– Economics is the study of choice.
– Economics is what economist do.
Scarcity and the Fundamental
Questions of Economics
• Unlimited wants versus limited resources
• WHFM
– What is to be produced?
– How is to be produced?
– For whom will it be produced?
Economics as a Science
•
•
•
•
•
•
Macroeconomic vs. Microeconomics
The scientific method
Economic models
Normative vs. positive approaches
A brief history of economic thinking
The language of economics
Economic Thinking
• How do people make decisions?
• How do people interact?
• How does the economy work overall?
How Do People Make Decisions?
• People face tradeoffs
• The cost of something is what you have to
give up to get it
– Opportunity Costs
• Rational people think at the margin
– Marginal Benefits vs. Marginal Cost and
Maximum Net Benefits
• People respond to incentives
How Do People Interact?
• Trade can make everybody better off
– Voluntary Exchange = Mutually Beneficial Exchange
• Markets are usually a good way of organizing
economic activity
– Markets are institutions that have evolved as human
society has developed
• Governments can sometimes improve market
outcomes
– Governments can wisely, or unwisely, coerce the
individual to act in the common interest.
How Does the Economy work
overall?
• A country’s standard of living depends upon its
ability to produce goods and services
– Adam Smith (1776) and the “Wealth of Nations”
• The general level of prices rises when the
government prints and distributes too much money
– Inflation versus hyperinflation
• Society faces a short-run tradeoff between
inflation and unemployment
– Recessions and expansions and the business cycle.
Economics Models and Issues:
Putting Economic Tools to Work
• The art of making models = making them simple
and effective
• Example: circular flow – what, how and for whom
questions.
– overall economy, role of economic agents, output and
income, product and resource markets
– Resources: labor, capital, natural resources,
entrepreneurship
– Circular flow model indicates that consumers ultimately
answer the WHAT question – consumer sovereignty, and
markets determine the how and for whom.
Figure 1 The Circular Flow
MARKETS
FOR
GOODS AND SERVICES
•Firms sell
Goods
•Households buy
and services
sold
Revenue
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
Factors of
production
Spending
MARKETS
FOR
FACTORS OF PRODUCTION
•Households sell
•Firms buy
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Copyright © 2004 South-Western
Issue: An Economy in Transition
(always)
• 1700s – WWII: agrarian to a manufacturing
economy
• WWII – present: manufacturing to a service
economy
• Change in consumer demands as income increase
combined with technological change increased
productivity in the agricultural sector spurred on
by competition
• Resources shifted from agricultural uses to
manufacturing sector.
• Changes in consumer demands and technological
change in the informational sector, have led
competitive markets to move from manufacturing
goods to producing services. In 2002, total
consumption consisted of Durable Goods (12%),
Non-Durable Goods (28%), and Services (52%).
• Resources are shifting from manufacturing
industries to service sectors.
• Market or laissez-faire versus command or
planned economy
• Capitalism and socialism and the mixed economy
Issue: Economic Growth and
Human Welfare
• Example: production possibilities frontier
(PPF)
-scarcity: inputs labor, capital, natural resources,
entrepreneurship
- technology, tradeoffs, efficiency and
unemployment, opportunity costs, law of
increasing costs, and economic growth.
Causes of Economic Growth
• Increased number of resources: L, K, NR, E
– Investment
– Growth in Labor Force
• Increased productivity of resources:
–
–
–
–
Work Ethic
Technology
Education
Risk-taking and innovation
• Social system that allows the efficient use of
resources and promotes productivity
– Market system and self-interest
– Laws, property rights, and public order
– Political and economic freedom
Opportunity Cost
Production possibilities curve
Computers
(mill.)
7
6
7
A
6
B
5
Attainable and
unattainable production
combinations
Computers
(mill.)
Possible combinations
of computers and VCRs
Production
possibilities curve
(PPC)
A
B
5
4
Production possibilities
curve (PPC)
F
4
Points along PPC
imply no unemployed
resources and efficient
production
C
3
2
1
unattainable
C
3
Foregone
output
2
E
1
inefficient
D
0
0
1
2
3
0
4
VCRs (millions)
5
6
7
0
1
2
D
3
4
VCRs (millions)
5
6
7
Opportunity Cost
Law of increasing opportunity cost
Computers
(mill.)
7
6
A
A bowed outward PPC
illustrates increasing
opportunity costs
B
5
4
C
3
2
1
D
0
0
1
2
3
4
VCRs (millions)
5
6
7
Changes in the PPC
Economic growth & the PPC
Computers
(mill.)
8
7
E
6
Economic growth is
illustrated by an outward
shift in a nation’s PPC
F
5
4
3
G
C
2
PPC0
PPC1
1
0
0
1
2
3
4
5
6
VCRs (millions)
7
8
9
Economic Growth
Consumption trade-offs & growth
Consumer
goods
(hamburgers)
United States
Next year's production
possibilities
The US choice to
produce more
consumer goods
(point A) limits future
production growth
A
Consumer
goods
(hamburgers)
Japan
Next year's production
possibilities
Japan's choice to
favor capital goods
(point A) will shift
its future PPC
farther out
PPC0
PPC0
This year's
production possibilities
PPC1
Capital Goods (machinery)
A
This year's
production possibilities
Capital Goods (machinery)
PPC1
Economic Growth
•
•
•
•
Gross Domestic Product
Real Gross Domestic Product
Real Gross Domestic Product Per Capita
Growth Rates = percentage change in the
above variables.
• Rule of 70 =
70
= Doubling
%Growth Rate Time