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Economics
The study of how scarce, or limited
resources are used to satisfy
unlimited material wants and needs;
the study of decision making in a
world of scarcity.
Unlimited wants
Limited resources to satisfy wants
Choose between alternatives
Scarcity and Choice
Scarce Goods
Food
(bread, milk, meat, eggs,
vegetables, coffee, etc.)
Clothing (shirts, pants, blouses, shoes,
socks, coats, sweaters, etc.)
Household (tables, chairs, rugs, beds,
goods
dressers, television sets, etc.)
Space exploration
Education
National defense
Recreation
Leisure time
Entertainment
Clean air
Pleasant
(trees, lakes, rivers,
environment open spaces, etc.)
Pleasant working conditions
Limited Resources
Land
(various degrees of fertility)
Natural
(rivers, trees, minerals,
Resources
oceans, etc.)
Machines and other
human-made physical resources
Non-human animal resources
Technology (physical and scientific
“recipes” of history)
Human
(the knowledge, skill,
resources
and talent of individuals)
In more advanced economies…
Division of Labor
allows
Specialization
which increases
Production
Specialization allows for:
1. Focus on a particular
production process.
2. Faster and higher
quality production.
3. Economies of scale.
Division of Labor
•Workers on an assembly line are an
example of the divisions of labor.
•Specialization is often paired with
trading your specialty for theirs.
Benefits of Trade
Economic Analysis
Macroeconomics (ECO201)
Monetary policy
Fiscal policy
Microeconomics (ECO202)
Households and firms
Marginal analysis
modeling
1. Make Assumptions
a. Principle - relationship
b. Theory – string of principles
c. Law –theory proven to hold
true most times
Factor (Labor) Markets
Businesses
Household
Goods and Services Markets
Another
Circular
Flow
The Circular Flow Diagram
• Four key markets coordinate the
circular flow of income.
•1. the resource market coordinates
demand for factors of production
between businesses and households.
2. The goods & services market
coordinates the demand for output
between businesses and households.
3. The loanable funds market
directs household and foreign
investments to business and
government borrowers .
4. The foreign exchange market
coordinates demand for currencies
for export/import transactions
Circular Flow Markets
1. Resource (Labor) Market:
a. Business firms demand resources
b. Households supply labor and other resources
c. in exchange for income.
2. Goods and Services Market:
a. Businesses supply goods & services
b. Receive sales revenue.
c. Households, investors, governments, and
foreigners (net exports) demand goods.
Which
one?
a. A real flow through a product market?
b. A money flow through a product market?
c. A real flow through a resource market?
d. A money flow through a resource market?
1. Receiving a paycheck at the end of each month?
2. Delivering a specially ordered car to a buyer?
3. Receiving patient care in a hospital?
4. Using a credit card to buy a meal in a restaurant?
5. Earning profit at your summer ice cream stand?
6. Obtaining college credits?
7. Working overtime?
a
d
b
c
How Decisions are Made
Using an Economic System
Method of organizing the
relationship between businesses,
households and the government
to make the production decisions
4 Types
2. Using an Economic System
Method of organizing the
relationship between businesses,
households and the government
to make the production decisions
4 Types
1. Agrarian or Traditional
A. What?
What the family business has been
producing (for generations)
B. How?
Using the same method that have
been used (for generations)
No incentive for change
C. For Whom?
Determined by place in society.
3. Command Economy
A. What?
-Goods needed to meet economic
planning targets
B. How?
Aimed at achieving targets
Switch resources around to meet targets
C. For Whom?
Government decides who gets goods
Bonuses for important workers
2. Market Economies
A. What?
- Goods and services that are profitable
- Goods and services consumers want.
B. How?
Efficiently- least cost combination of resources
C. For Whom?
Those who can pay.
4. Mixed Economies
- Combine aspects of market and
planned economies
- Includes almost all economies
4. Mixed Economies
Resource Ownership
Coordinating Mechanism
Market System
Private
US
Public
China
Planning
Nazi
Germany
Cuba
Most Economic Freedom
Least Economic Freedom
1. Hong Kong
168. Iran
2. Singapore
169. Turkmenistan
3. Australia
170. Equatorial Guinea
4. New Zealand
171. Democratic Republic
of the Congo
5. Switzerland
172. Burma
6. Canada
173. Eritrea
7. Chile
174. Venezuela
8. Mauritius
175. Zimbabwe
9. Denmark
176. Cuba
10. United States
177. North Korea
Economic Freedoms, 2013 (Source: The Heritage Foundation, 2013 Index of
Economic Freedom, Country Rankings, http://www.heritage.org/index/ranking)
1. Businesses are free to produce what
ever they want and are always looking for
cost-cutting techniques of production.
Traditional? Market? Planned? Mixed?
Market
Market
Market
2. A catering business goes bankrupt,
but its employees receive unemployment
compensation while they look for other
jobs.
Market?
Mixed Planned?
Traditional?
Mixed
Mixed
Mixed?
3. Union and management
representatives submit a deadlocked
labor contract negotiation to the
government for mediation.
Traditional?
Mixed
Mixed
Mixed
Market? Planned?
Mixed?
4. Workers who have lost their jobs and
incomes cut back their spending because
there is no alternative source of
emergency financial support once their
savings runs out.
Market
Mixed? Market
Market?
Traditional?
Planned?
Market
5. Consumers are unable to obtain fuel
injectors and windshield wiper motors
for their cars because they are not being
produced, yet accordions, which are
plentiful and not in demand, continue to
be produced.
Planned
Planned
Planned?
Planned
Traditional?
Market?
Mixed?
Underground Economy
Seen in heavily
regulated
economies
Buyers and sellers make
transactions without
government approval
Globalization
The trading of goods, services,
and assets across national
boundaries
Economic Equations
Most of the relationships we use in this
course are expressed as linear
equations of the form:
y = b + mx or y = 9 + 3x
x
y
0
___
1
___
2
___
3
___
4
___
5
___
6
___
Economic graphs
1. Graphs of one Variable
- market shares
- bar graphs, pie charts
Figure 1A.1 Bar Graphs and Pie Charts
Economic graphs
2. Graphs of two Variables
- price, quantity
- demand curve
Economic graphs
1. Direct, or positive, relationship
- Graph slopes up from left to right
2. Inverse, or negative, relationship
- Graph slopes down from left to right
3. Slope =
Rise
Run
3. Percent change
new - old
old
1. When an economist states that a good is scarce, he means that:
a. Production cannot expand the availability of the good.
b. It is rare.
c. Desire for the good exceeds the amount that is freely available
from nature.
d. People would want to purchase more of the good at any price.
2) By definition, economics is the study of
A) how to make money in the stock market.
B) how to make money in a market economy.
C) the choices people make to attain their goals, given their scarce resources.
D) supply and demand.
3) How are the fundamental economic questions answered in a market
economy?
A) The government alone decides the answers.
B) Individuals, firms, and the government interact in markets to
decide the answers to these questions.
C) Households and firms interact in markets to decide the answers to
these questions.
D) Large corporations alone decide the answers.
4) Specializing in the production of a good or service in which one has a
comparative advantage enables a country to do all of the following except
A) engage in mutually beneficial trade with other nations.
B) increase the variety of products that it can consume with no increase in
resources.
C) consume a combination of goods that lies outside its own production
possibilities frontier.
D) produce a combination of goods that lies outside its own production
possibilities frontier.
5) Households
A) have no influence on the circular flow in a market economy.
B) purchase resources in the factor market.
C) sell goods in the product market.
D) sell resources in the factor market.
True or False?
1.
Highly-developed economies must make the basic
economic choices, whereas less-developed economies produce
so little that no choices are possible.
2.
Households buy goods and services in output markets and
sell factors of production in input markets.
3.
In a planned economy, economic decisions are made by
individual buyers and sellers.
4.
In a command economy, goods and services go only to
those who can pay for them with money earned from resources
they own.
5. There is no difference between a market economy and a
command economy in how income is distributed
6.
Scarcity is a problem in a market economy but not a
command economy.