2. The Goals of This Course
To understand how the economy really works.
To determine how markets shape economic outcomes.
To examine the role that government can and does play in (re)shaping economic performance.
To understand how we ourselves can make better economic decisions.
It is always good to start out with a specific set of goals.
Emphasize the interaction of market forces and government intervention in the marketplace.
Emphasize that individuals are economic players who initiate action by making decisions.

3. Learning Objectives
Know how scarcity creates opportunity costs and forces economic choices.
Know what the production possibilities curve represents.
Know the three core economic questions that every society must answer.
Know how market and government approaches to economic problems differ.
The learning objectives will be revisited at the end of the chapter.
Covering these objectives is a good way to organize your classroom.

4. The Core Issues
The purpose of an economy is to produce goods and services that satisfy peoples’ wants using the limited resources available.
There are three core choices that confront every nation:
WHAT to produce with our limited resources.
HOW to produce the goods and services we select.
FOR WHOM goods and services are produced – that is, who should get them.
Emphasize how it takes production to create satisfaction.
Schiller returns to the three questions again and again.
So stress them now and again as a course organizer.

5. What Is the Economy? The economy is us.
It is the grand sum of all our production and consumption activities.
For the United States, it is the collective behavior of the 310 million individuals who participate in it.
Economics: the study of how best to allocate scarce resources among competing uses.
Most students view the economy as something out there, something esoteric – nothing to do with them.
Here is a chance to bring the students into the economic discussion.

6. Scarcity: The Core Problem
Scarcity: lack of enough resources to satisfy all desired uses of those resources.
There aren’t enough resources available to satisfy all our desires.
Scarcity of resources limits the amount of goods and services that can be produced.
Somebody’s wants will have to go unfulfilled.
Whose?
Scarcity requires economic choices to be made.
Who will decide?
Scarcity is probably the most fundamental concept in principles of economics.
It requires people (including your students) to make choices (and have choices made for them).
Which is preferable to them? Ask them. 6

7. Factors of Production
Factors of production: resource inputs used in the production of goods and services, the desired outputs.
Four types.
Land – all natural resources.
Labor – skills and abilities of all humans at work.
Capital – goods produced for use in further production.
Entrepreneurship – the assembling of resources to produce new or improved products and technologies.
This is a good time to tell students that words used in economics have specific meanings and that the everyday use of a word may not be accurate enough to get through a course. Land, for example. 7

8. Opportunity Cost
When we choose to use resources to produce one thing, we must give up producing something else with those resources. This trade-off comes with a cost.
Opportunity cost: the value to you of the next most desired good forgone to obtain some other higher-priority good.
What is given up to undertake a chosen activity.
Associated with every decision:
For example, if we choose to produce bread, then we cannot produce pizza crust with the same flour.
Another fundamental concept that is not necessarily intuitively obvious to the student.
Add examples: sleep in vs. come to 8 A.M. class; work vs. school; orthodontics vs. soccer camp. 8

9. Production Possibilities
Production possibilities: the various combinations of final goods and services that could be produced in a given time period with all available resources and technology.
The PPC concept is a good time to point out the existence of scarcity, of what is possible and what is not, and of making choices. 9

10. Trucks vs. Tanks
One factory can produce either trucks or tanks, or some of each with the limited resources available to it.
To increase truck production, resources must be shifted away from tank production, and vice versa.
Note the opportunity cost in this trade-off.
This is obviously an example from industry.
You could add an example from the home. For example, the kids want cake and cookies, and parents must set up to produce. How many cakes and how many cookies?
Or an example from government. WWII gives us a good one: rationing consumer goods to boost production of military goods.

11. Production Possibilities Curve (PPC)A B C D E F
OUTPUT OF TRUCKS 5 4 3 2 1
OUTPUT OF TANKS
Point
Trucks
Change
Tanks A 5 B 4 -1
2.0 +2 C 3
3.0 +1 D 2
3.8
+0.8 E 1
4.5
+0.7 F
5.0
+0.5
Note that as we move from
A to F, each time we give
up the same amount but
get back less and less in
return.
The trade-off gets worse
and worse.
Point out that the extremes (A and F) are rarely chosen. Proceed through the alphabetic points from A to F, or vice versa, and do a benefit-cost analysis of taking the next step.
Have the students act as decision maker and decide when to stop – that is, when the benefits of the next step do not justify the costs. 11

12. Law of Increasing Opportunity Costs
The opportunity cost of producing additional units of one good increases.
Each time we give up one truck, we get less back in tank production.
Resources are specialized to produce one good better than another.
Good tank resources are shifted first.
Later shifts involve resources less good for tank production.
Accounts for the bowed shape of the PPC.
Divide the resources used into three categories: those great for truck production but not much for tank production, those OK for either production, and those great for tank production but not much for truck production. Shift each category and identify what is lost and what is gained.

13. Law of Increasing Opportunity Costs
Step 1: give up one truck 5 B 4
Step 3: give up another truck
Step 2: get two tanks C 3
OUTPUT OF TRUCKS
Step 4: get one more tank D 2
Don’t stop at C. Continue to talk out the steps from C through F to hammer the point home. E 1 F 1 2 3 4 5
OUTPUT OF TANKS 13

14. Production Possibilities Curve (PPC)
The PPC illustrates two essential principles:
Scarce resources: there is a limit to the amount we can produce in a given time with available resources and technology.
This limitation positions the PPC.
Opportunity costs: we can obtain additional quantities of one of the goods only by reducing production of another good.
Draw a simple PPC on the board and show the maximum combinations that can be produced given available resources/technology. That’s scarcity.
Do a trade-off along the curve. The value of what must be given up to take the next step is the opportunity cost. 14

15. Surveying Points on the PPC
Points outside the PPC
are unattainable with
available resources and
technology. A X 5 B 4 Y C 3
OUTPUT OF TRUCKS
Points inside the PPC
represent incomplete
or inefficient use of
available resources. 2
Inefficiency (underuse of resources and technology) yields fewer outputs. Fewer outputs mean fewer wants get satisfied. More people must go without. Efficiency (on the line) fulfills more previously unmet wants. Society is better off. Standard of living goes up. 1 1 2 3 4 5
OUTPUT OF TANKS
Only points on the PPC represent maximum efficient use of our production possibilities. 15

16. Economic Growth
Economic growth: an increase in output; an expansion of production possibilities.
Raises our standard of living.
Satisfies more wants and needs.
Creates more jobs.
Economic growth is caused by increasing the resources available or by producing better technology.
The PPC pushes outward.
The limitation for the PPC was the amount of available resources and technology.
Increase either and the PPC shifts outward.

17. Economic Growth PPC2 Either increase resource inputs or
improve technology, or both
(B to X).
PPC1 X
OUTPUT OF TRUCKS B
Put idle resources
to work (Y to B). Y
The pale dashed line is the original PPC.
Step 1 is to get up to it by putting idle resources/technology to use (Y to B).
Step 2 is to grow by adding resources/technology.
Here might be a good spot to identify that most growth over the last several decades has been tech driven, not resource driven.
OUTPUT OF TANKS
First, reach the current PPC by putting idle resources to work.
Second, add resources or technology to achieve previously unattainable combinations. 17

18. Three Basic Decisions
WHAT to produce: the point we choose on the production possibilities curve determines what mix of output gets produced.
HOW to produce: someone must decide which production methods and technologies to use.
FOR WHOM to produce: there must be a mechanism to determine whose wants and needs will be satisfied and who must go without.
Again the three questions.
In each question, emphasize that choices must be made.

19. The Market Adam Smith called it “the invisible hand.”
It is as if we are “guided” to the correct point on the PPC.
In fact, we get there by the interaction of millions of decisions made by buyers, sellers, and producers in their own self-interest (i.e., to make themselves better off).
We call this the market mechanism:
The use of market prices and sales to signal desired outputs and resource allocations.
It might be worthwhile to take 10 minutes or so and introduce your students to Adam Smith, the father of economics, and how he opposed the mercantilist system of the day. The conventional wisdom was that the wealth of a nation was the gold in the king’s treasury. He said the wealth of the nation was in the productive capability and ingenuity of the people. His recommendation was for the king to get out of the way and let the people “truck and barter.”

20. The Market Here is how the market answers the three basic questions:
WHAT to produce? Produce goods and services that customers want.
HOW to produce? Profitably; produce an acceptable good or service while keeping production costs low.
FOR WHOM to produce? Produce for those who are both willing and able to pay for it.
A good way to drive these points home is to discuss their opposites: What happens to a company that produces goods that customers don’t want? What happens to a company that produces goods unprofitably? Does a company need to produce the perfect product, or is acceptable (by the consumer) enough? Someone doesn’t get goods in this market. Who?

21. The Government
At its extreme, government could dictate answers to all three questions.
Such decisions would be made by political leaders and bureaucrats.
Most likely these decisions would not mirror the individual desires of the people.
The FOR WHOM decision would lean heavily toward favoritism: goods for those the government favors and none for those not in favor.
Favoritism? The dictator’s friends get things; his enemies do not. Government passes laws authorizing payments to specific groups and companies; other groups and companies don’t get the payments.

22. A Mixture of Both
The market is highly efficient in production of wanted goods and services.
The government acts as a maintainer of balance in the economy.
Makes sure the market does not go to excesses either in underproduction or overproduction.
Regulates production to ensure that goods and services are safe.
Acts to redress excessive inequalities.
Now blend the two. Emphasize excesses: excessive pollution, unsafe products, etc. Introduce the safety net. Talk about those groups who don’t get products in the market system.

23. What Mix Is Best?
Few governments have relied exclusively on either pure market or pure government to manage the economy.
Public opinion around the world indicates that the free-market economic system is best.
The Index of Economic Freedom ranks nations according to economic freedom.
Market-dominated economies rank high; government-run economies rank low.
There is plenty of ammo here for a good discussion about how different countries organize themselves.

24. Market Failure and Government Failure
If the market does not produce the mix of goods that society desires, market failure is said to occur.
This provides an opening for government to step in.
If government can move us closer to the mix society desires, the intervention is successful.
However, government can do the opposite, or impose such high costs that the market simply ceases to produce. This is government failure.
“We elected you people to go to Washington to fix our problems. Why haven’t you done so?”
Someone said that the government can tackle any problem, but the cost of doing so will always be high.
And there is no guarantee that the government will succeed in fixing the problem.

25. What Economics Is All About
Society and its leaders set the nation’s economic goals. Economics focuses on the means of achieving those goals.
Macroeconomics will focus on “big picture” economics while microeconomics will focus on economic interactions of consumers and producers.
This is a brief overview of macro.

26. Types of Economic Analysis
Positive analysis in economics focuses on “what is” and is based on facts.
Normative analysis focuses on “what should be” and is based on opinions and judgments.
You really need to contrast the difference between facts and opinions.
“The unemployment rate is 10%” versus “the unemployment rate is too high.”