Download Lesson 1 Economic Growth

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Economic Growth & Scarcity
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Hypothesis for the Week:
Human prosperity and social
cooperation develop spontaneously
in societies that protect private
property rights and encourage
voluntary trade.
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Why Should We Care?
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Why Can’t You Have It All?
SCARCITY:
the FACT that resources are limited and
human wantsandneeds are unlimited
Not enough to go around!
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Economic Reasoning Principle #1:
People choose, and individual choices are
the source of social outcomes.
Scarcity necessitates choices: not all of our
desires can be satisfied. People make these
choices based on their perceptions of the
expected costs and benefits of the alternatives.
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Why can’t we have all we want?
Available resources are limited
 Land (57,506,000 sq mi. & not even all
habitable!)
 Labor (6,7 bil. souls x 24 hrs a day)
 Capital (less than ∞, trust me)
 Entrepreneurship (not everybody is Bill Gates)
Human desires are boundless
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Are YOU Never Satisfied ?
– It’s not just you out there
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Scarcity forces us to
choose
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So…
Although we cannot have it all…
…we still can have SOME of
it.




What shall we have?
How much of it?
How shall we produce it?
Who will get it?
Scarcity implies the need to make CHOICES!
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Questions:
Why are some countries rich and others
poor?
Why have some countries experienced
economic growth and others have not?
(What factors lead to economic growth?
What can be done to promote economic
growth and reduce poverty?
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Low, Middle, & High Income Nations
Why are some countries rich and others poor?
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Economic Growth
Economic growth raises standards of
living, even in the continuing face of
scarcity
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Population Growth and Important World Events
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~1750
6539
6000
World GDP per capita
Source: http://econ161.berkeley.edu/tceh/2000/world_gdp/estimating_world_gdp.html
1990 dollars
5000
4000
3000
2000
1000
679
98
133
178
138
0
0
200
400
600
800
1000
Year
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1200
1400
1600
1800
2000
Economic Growth
improves the lives of the
poor by making the pie
bigger
Bigger “slices” mean higher
standards of living
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The Secret to Economic
Growth: Productivity
The output produced from a given set of
resources in a given period of time.
Increasing productivity means that
greater output is produced from a given
set of resources in a given period of
time.
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Key to Productivity:
Institutions
the formal and informal “rules of the
game” that shape incentives and outline
expected and acceptable forms of
behavior in social interaction.
Institutions in your life:
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What are the “rules of the game” (the
accepted and expected forms of social
interaction) in:
Dating ?
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Institutions Matter:
Property rights
The rule of law
Open markets
Entrepreneurship and innovation
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Institutions Shape
Incentives
The reward or penalties that influence
people’s choices and behavior.
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Economic Reasoning Principle #2:
Choices impose costs; people receive
benefits and incur costs when they make
decisions.
The cost of a choice is the value of the nextbest alternative foregone, measurable in time
or money or some alternative activity given up.
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Opportunity Cost
The value of the next best or forgone
alternative.
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Marginal Cost = cost of
next
Action, Choice, Unit of production
Marginal Benefit = benefit of the next
Action, Choice, Unit of production
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Choices are made at the
Margin
Our only choice is the next choice
Marginal = additional, next, a little more
or a little less
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The “Big Ideas” from Lesson 1:
1. Scarcity forces us to choose among alternatives
2. Economic growth gives us more to choose from and
raises standards of living by:
–
–
–
–
–
reducing infant mortality,
Increasing life expectancy,
reducing hunger,
improving environmental quality, and
reducing the incidence of debilitating
diseases.
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The “Big Ideas” from Lesson 1:
3. Some institutions and institutional
arrangements encourage economic growth and
some do not.
4. The institutions that foster growth and
economic development include:
 Open markets
 Property rights and the rule of law
 Entrepreneurship and innovation
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The poverty of some nations and the wealth
of others is not an accident; it is the result
of choices
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