Download Chapter 1: Human Misery

Chapter 1:
Alleviating Human Misery
Goods & Services
Commodities we use to satisfy our needs and
wants
Goods are tangible commodities we use (things
we use or consume: pizza, gasoline)
Services are intangible commodities (things other
people do for us: hair cut, piano lesson)
Scarcity
The imbalance between what we have and what
we need
Goods & services are scarce because we cannot
have all we want
Price is the cost of removing scarcity of goods and
services
Economic Resources
Human: physical & mental efforts of workers in
production of goods & services
Capital: goods used in production of other goods
(e.g., tools, equipment, buildings)
Natural: gifts of the nature (e.g., water, minerals)
Economic Problem
Unlimited human needs and wants
vs.
Limited economic resources
Choice must be made in satisfying unlimited
human needs and wants by optimal allocation of
limited resources to production of goods and
services
Opportunity Cost
Choice: the act of selecting between alternatives
Opportunity cost is the cost of making unavoidable
choices; it is measured by:
– cost of foregone opportunities, or
– value of best alternative sacrificed
Cost of College Education
Out-of-pocket costs: payments the we actually
make: tuition fees, books, supplies, transportation,
etc.
Opportunity costs: foregone labor income if one
decided to work instead of attending college
Production Possibilities Curve
Maximum quantities of two good and services the
economy can produce, assuming:
– full employment / efficiency
– fixed resources
– constant technology
PPC Schedule
Combination
A
B
C
E
Food
100
90
50
0
Education
0
40
80
100
PPC Graph
Combinations A, B, C, and E are attainable
Combination D is unattainable
Combination F indicates unemployment/inefficiency
Food
100
90
50
A
B
F
40
D
C
E
80 100
Education
Economic Growth
Combination D becomes available with
-more resources
-technological advancement
Food
100
90
A
B
D
C
50
40
E
80 100
Education
Law of Increasing Opportunity Costs
Moving from A to B: lose 10 Food, but gain 40 Education
O.C. = 10/40 = 0.25
Moving from B to C: lose 40 Food, but gain 40 Education
O.C. = 40/40 = 1
Moving from C to E: lose 50 Food, but gain 20 Education
O.C. = 50/20 = 2.5
O.C. increases because resources are not fully substitutable.
Cost-Benefit Analysis
Marginal Social Cost (MSC): the opportunity cost
of producing an additional unit of good or service
Marginal Social Benefit (MSB): the benefit to
society from consuming an additional unit of good
or service
Decision Criterion
Optimal: MSC = MSB
Non-optimal: MSC > MSB reduce production
Non-optimal: MSB > MSC increase production
Gross Domestic Product
Market value of all final goods and services
produced by an economy in one year
Real GDP = GDP / Price Index
Real GDP Per Capita= Real GDP / Population
Growth vs. Distribution
Economic Growth: Increase in Real GDP
Income Distribution: Patterns of the distribution of
Real GDP between population
Growth without Distribution will increase income
disparity
Income Distribution
Income inequality is greater in LDCs than MDCs:
– Poorest 20% of population: 5.3 vs. 6.1% of income
– Richest 20% of population: 52.1 vs. 41.8% of income
– Middle 60% of population: 42.6 vs. 52.1% of income
Problems of Developing Countries
Rapid population growth
Insufficient human capital investment
Insufficient capital investment
High income inequality
Inefficient government
Reliance on natural resource exports