The Principals of Economics Chapters 1-2
Economics The effort to satisfy unlimited wants with limited means Choice Needs Wants
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
Production The Factors of Production Entrepreneur Land Labor Capital Physical Capital Human Capital Entrepreneur
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
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)
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)
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
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
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?
Economic Goals Economic efficiency Economic freedom Economic security and predictability Economic equity Economic growth and innovation Other goals Ex- Environmental Protection, National Security
The Four Economic Systems Traditional Market Command Mixed
ALL ACTIONS ARE SELFISH ACTIONS The Market ALL ACTIONS ARE SELFISH ACTIONS
The Self-Regulating Market Self-Interest Competition Incentives The Invisible Hand
Market Economics Actors Markets Households Firms Factor Markets Product Markets
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
Advantages of the Free Market Efficiency Freedom Growth Consumer Sovereignty Widest possible array of goods and services
Command Economics The “Central Planners” make the decisions Socialism Communism Mandated Equality Lack of Incentives
Ex- The Two St. Jeans Capitalist Communist A B C D F B
The USSR Marxist-Leninist Collective Farming Heavy Industry Peasant Control Government Goals Failure 5-year plans Heavy Industry Soviet Consumers Shortages The “Black Market”
The Mixed Market Limits of Laissez Faire Control vs. Freedom Market Failures Private Property vs. Public Property Catch-up Time Control vs. Freedom
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
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