Lecture Slides Chps1 and 2

8/8/2019 Lecture Slides Chps1 and 2

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Chps. 1 and 2 1

Chapters 1 and 2

Chapter 1 ± Getting Started

Chapter 2 - The U.S. and Global

Economies



Chps. 1 and 2 2

Scarcity and Economics

Scarcity is the condition that arises because theavailable resources are insufficient to satisfy allhuman wants.

Economics is the social science that studies thechoices that individuals, businesses,governments, and entire societies make as theycope with scarcity and the incentives thatinfluence those choices.



Chps. 1 and 2 3

Key Economic Questions

(1) What goods & services should be produced?

(2) How are the goods & services to be produced?

(3) For whom are the goods & services produced?

(4) When is the pursuit of self-interest consistent

with the best interests of society as a whole?



Chps. 1 and 2 4

(1) What goods & services

should be produced?

Goods are physical objects.

Services are actions that are performed.

Goods and services are classified as

Consumption goods and services

Capital goods

Government goods and services

Export goods and services



Chps. 1 and 2 5

Consumption Goods & Services

Consumption goods and services are goods andservices that are bought by households.

Examples:

± Durable Consumption Goods: automobiles,

furniture, appliances

± Non-Durable ConsumptionGoods: food,

clothing

± Consumption Services: medical, legal, andentertainment services



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Capital Goods

Purchases of plant & machinery by firms Also called ³physical capital´

Examples: cranes, trucks, machines



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Government Goods & Services

Purchases of goods and services by all levels of government: local, state, and federal.

Examples: National defense, state highways,

local schools.



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Exports

Goods and services produced in the U.S. andthen sold abroad.

Examples: Airplanes produced by Boeing in

U.S. and sold to Swiss Air, Citicorp banking

services sold to China.



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(2) How are the goods & services

to be produced?

What inputs (or factors of production) andtechnology are to be used

Key factors of production are Land: all natural resources

Labor: all productive human effort

± The quality of labor depends on how skilled peopleare what economists call human capital. Humancapital is the knowledge and skill that people obtainfrom education, on-the-job training, and workexperience.

Capital: plant & machinery Entrepreneurship: the human resource that

organizes labor, land, and capital



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(3) For whom are the

goods & services produced?

Factors of production are paid incomes

This concerns the distribution of income

(a) Rent is income paid for the use of land

(b) Wages & salaries are income paid for theservices of labor

(c) Interest is income paid for the use of

capital

(d) Profit (or loss) is income earned by anentrepreneur for running a business



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Economic Agents

Economic decision makers Households (i.e. individuals or consumers)

Firms (i.e. businesses)

Governments



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Markets

A market is any arrangement that brings buyersand sellers together and enables them to get

information and do business with each other.

Goods/product/output markets are markets in

which goods and services are bought and sold.

Factor/input markets are markets in which

factors of production are bought and sold.



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THE CIRCULAR FLOWS

In goods/product markets ± Firms supply goods and services produced

± Households buy goods and services

± Households pay firms for the goods andservices they buy

In factor/input markets

± Households supply factors of production

± Firms hire factors of production ± Firms pay households incomes for the

services of factors of production



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THE CIRCULAR FLOWS



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Government in the Circular Flow

Households and firms pay taxes and receivetransfers

G

overnment buys goods and services from firms



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Government in the Circular Flow



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Core Economic Ideas

Rational choice

Incentives

Economic Benefit

Economic Cost

Marginal Analysis



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Rational choice

We assume that economic agents makerational choices.

A rational choice is a choice that uses theavailable resources to best achieve theobjective of the person making the choice.

Objectives include maximization of net personalsatisfaction by individuals.

Net satisfaction = total satisfaction gained fromthe choice minus the total cost of that choice

Rational choices are made by comparing costsand benefits.



Chps. 1 and 2 19

Incentives

Economic agents make choices in response toincentives.

An incentive is a reward to encourage an action

or a penalty to discourage an action.

Rewards are measured as part of the benefits.

Penalties are counted as part of the costs.



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Economic Benefit

Economic benefit is the gain or pleasure

that a choice brings



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Economic Cost

Economic Costs include Explicit costs: dollar expenditures

Opportunity cost (implicit costs):

Opportunity cost of a choice or decision is the

value of the next best alternative that we forgo or

give up, when we make that choice or decision



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Marginal Analysis Marginal analysis is the process of analyzing the

additional costs or benefits arising from a choiceor decision.

Marginal benefit is the incremental benefit of adecision.

Marginal cost is the incremental cost of adecision.

A rational choice involves an action for whichmarginal benefit exceeds or equals marginalcost.

Note: a sunk cost is a previously incurred andirreversible cost and is NOT considered.



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Microeconomics

Microeconomics is the branch of economics thatanalyzes the decisions that individual consumers,firms and industries make and its implications for behavior of prices and quantities in individualmarkets.

Examples:

the choice of an individual to work

the choice of a household to buy a new car

a firm¶s choice of what product and how much of it to produce.



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Macroeconomics

Macroeconomics is the study of theperformance of aggregate (or overall) nationaleconomy and the global economy.

Examples:

study of total national production & income

study of national employment andunemployment

study of overall price level and inflation

study of how government may influence thenational economy



Chps. 1 and 2 25

Employment by

Individual

Businesses &

Industries ±

Jobs in the steel

industry

Number of

employees in a

firm

Distribution of

Income and Wealth

±

Wages in the auto

industry

Executive salaries

Price of Individual

Goods and Services

±

Price of medical

care

Price of gasoline

Food prices

Apartment rents

Production/Output

in Individual

Industries and

Businesses ±

How much steel

How many cars

Microeconomics

Employment and

Unemployment in

the Economy ±

Total number of

jobs

Unemployment

rate

Total wages and

salaries ±

National Income

Aggregate Price

Level ±

Consumer pricesProducer Prices

Rate of Inflation

National

Production/Output

±

Total Industrial

Output

Gross Domestic

Product

Growth of Output

Macroeconomics

EmploymentIncomePricesProduction

Examples of microeconomic and macroeconomic concerns



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The Method of Economics

Positive Economics Normative Economics (also called policy

economics)



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Positive Economics

Positive Economics describes what exists andhow it works

A statement of fact.

Examples:

If the price of a product increases, households

tend to purchase fewer units

A government budget deficit occurs when

government spending exceeds tax revenue



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Normative Economics

Normative Economics examines what should be A statement of opinion

Examples:

Congress should cut taxes now

Government spending cuts are unfair

The current unemployment rate is too high

Documents

Lecture Slides Chps1 and 2