1. The Principals of Economics
Chapters 1-2

2. Economics The effort to satisfy unlimited wants with limited means
Choice
Needs
Wants

3. Value Everything has value Example- Scarcity defines value Goods
Services
Scarcity defines value
All goods and services have scarcity
High Scarcity = High Value
Low Scarcity = Low Value
Scarcity v. Shortage
Example-
The US Dollar
Inflation

4. Production The Factors of Production Entrepreneur Land Labor Capital
Physical Capital
Human Capital
Entrepreneur

5. Cost Decisions have ramifications: Trade-Offs Cost-Benefit Analysis
Opportunity Cost
Trade-Offs
Example: Guns or Butter
Cost-Benefit Analysis
Decision
Benefits
Benefits Forgone
Thinking at the Margins

6. Maximizing Productivity
Production Possibilities Curve
Frontier
Watermelons (millions of tons)
Shoes (millions of pairs) 25 20 15 10 5
Production Possibilities Graph
a (0,15) 15 8 14
b (8,14) 14 18 20 21 12 9 5
A production
possibilities frontier
c (14,12)
d (18,9)
e (20,5)
f (21,0)

7. Watermelons (millions of tons) Shoes (millions of pairs)
Cost
The Law of Increasing Costs
Watermelons (millions of tons)
Shoes (millions of pairs) 25 20 15 10 5
Production Possibilities Graph 14 18 21 12 9 8
c (14,12)
d (18,9)

8. Efficiency and Underutilization
Shoes (millions of pairs) 25 20 15 10 5
Watermelons (millions of tons)
Production Possibilities Graph
c (14,12)
d (18,9)
e (20,5)
f (21,0)
a (0,15)
b (8,14) S
g (5,8)
A point of underutilization

9. Shoes (millions of pairs) Watermelons (millions of tons)
The Future Frontier
Shoes (millions of pairs) 25 20 15 10 5
Watermelons (millions of tons)
Production Possibilities Graph
Increases in Land, Labor or Capital T
Future production
Possibilities frontier
c (14,12)
d (18,9)
e (20,5)
f (21,0)
a (0,15)
b (8,14) S

10. Types of Economic Systems
Three Key Questions
What goods and services should be produced?
How should goods and services be produced?
Who should consume these goods and services?

11. Economic Goals Economic efficiency Economic freedom
Economic security and predictability
Economic equity
Economic growth and innovation
Other goals
Ex- Environmental Protection, National Security

12. The Four Economic Systems
Traditional
Market
Command
Mixed

13. ALL ACTIONS ARE SELFISH ACTIONS
The Market
ALL ACTIONS ARE SELFISH ACTIONS

14. The Self-Regulating Market
Self-Interest
Competition
Incentives
The Invisible Hand

15. Market Economics Actors Markets Households Firms Factor Markets
Product Markets

16. The Circular Flow of the Market
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households
Firms
Households pay firms for goods and services.
Product market
Firms supply households with goods and services.
Households supply firms with land, labor, and capital.
Firms pay households for land, labor, and capital.
Factor market

17. Advantages of the Free Market
Efficiency
Freedom
Growth
Consumer Sovereignty
Widest possible array of goods and services

18. Command Economics The “Central Planners” make the decisions
Socialism
Communism
Mandated Equality
Lack of Incentives

19. Ex- The Two St. Jeans
Capitalist
Communist A B C D F B

20. The USSR Marxist-Leninist Collective Farming Heavy Industry
Peasant Control
Government Goals
Failure
5-year plans
Heavy Industry
Soviet Consumers
Shortages
The “Black Market”

21. The Mixed Market Limits of Laissez Faire Control vs. Freedom
Market Failures
Private Property vs. Public Property
Catch-up Time
Control vs. Freedom

22. Circular Flow of the Mixed Market
monetary flow
physical flow
Circular Flow Diagram of a Mixed Economy
Households
Firms
Product market
taxes
government purchases
Government
expenditures
government-owned factors
taxes
Factor market

23. The Continuum of Mixed Markets
Transitions
Privatization
Ex: Margret Thatcher and GB
Nationalization
Ex: Fidel Castro and Cuba
Continuum of Mixed Economies
Centrally planned
Free market
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Iran
North Korea
Cuba
China
Russia
Greece
Peru
United States
South Africa
France
United Kingdom
Botswana
Canada
Singapore
Hong Kong