1. CHAPTER 1 The Economic Perspective
ECONOMICS: EXPLORE & APPLY Enhanced Edition
CHAPTER 1 The Economic Perspective
PowerPoint© Presentations Prepared by Assistant Professor Paul Harris
Camden County College

2. Learning Objectives
Describe how scarce resources and unlimited wants lead to the study of economics.
Distinguish between microeconomics and macroeconomics.
Identify three basic questions that all economies must answer.
Recognize the strengths of the market place and motivations for government involvement.

3. Learning Objectives
Understand what a model is and why models are best kept simple.
(E&A) Explain why incentives are important for economics prosperity.
Appendix: Working with graphs and data.

4. 1.1 SCARCE RESOURCES, UNLIMITED WANTS
Economics studies the allocation of scarce resources in response to unlimited wants.

5. Scarce Resources, Unlimited Wants
Economics is about choice. Society is forced to choose because resources are scarce.

6. Making Decision at the Margin
When something is scarce we must choose.
We make choices at the margin.
At margin means “incrementally”, or in small steps.
Resource allocation refers to the uses to which resources are put.
How resources are used depends partly upon technology.

7. Examples of Choices at the Margin
Choices Facing a Consumer:
Should I eat the last slice of Pizza?
What is the best use of the next hour of time?
How should I spend the last dollar in my pocket?

8. Examples of Choices at the Margin
Choices Facing a Business:
Should revenues be used to hire another worker or to upgrade the office computer system?
Should one more entrée be added to a restaurant’s menu? Should one be deleted?
Should the restaurant stay open one hour later, or close an hour earlier?

9. Examples of Choices at the Margin
Choices Facing Government:
Should we add another freeway exit ramp?
Should a new new elementary school be built?
How badly does a city need another water plant?

10. 1.2 SURVEYING THE ECONOMIC LANDSCAPE
Microeconomics: examines the individual components of the economy.
Macroeconomics: examines the economy as a whole (aggregates).

11. Markets
Markets make possible the voluntary exchange of resources, goods, and services; can take the form of physical, electronic, and other forms.
Market prices serve as signals that guide the allocation of resources.

12. 1.3 THREE BASIC QUESTIONS 1. What?
What goods and services will be produced and offered for sale, and in what quantities?

13. 2. How? How will the goods and services be produced?
Three Basic Questions
2. How?
How will the goods and services be produced?

14. Who will consume the goods and services which are produced?
Three Basic Questions
3. For Whom?
Who will consume the goods and services which are produced?

15. Three Basic Questions
In answering the three basic questions society must choose among three kinds of economic systems:
Command and control: where government might make the decisions.
Free markets: which are “laissez faire”, and characterized by freedom of choice in both production and consumption.
Mixed economies: meaning that they choose with a combination of both markets and government.

16. The Spectrum of Economic Systems
Command
and
Control
Mixed
Laissez-Faire
Free Markets

17. Equity Efficiency The Goals of Equity and Efficiency
There are two primary economic objectives for countries in choosing how much government to mix with free markets.
Equity
Efficiency

18. The Goals of Equity and Efficiency
The first is objective equity, which refers to fairness.
Equity is ultimately a matter of personal perception.
The second objective is efficiency.
Efficiency means resources are used in ways that provide the most value.

19. Economic Efficiency
Technological efficiency: getting the greatest quantity of output from the resources that are being used.
Allocative efficiency: choosing the most valuable mix of outputs to produce.

20. Economic Efficiency
Frequently, there is a tradeoff between efficiency and equity.
More equity may result in less efficiency, which is often referred to as inefficiency.
Likewise, less equity may result in greater efficiency.

21. Command and Control Who Needs Markets?
Throughout history, countries have embraced central planning to help eliminate the perceived disorder of the marketplace.
This sets production plans for most goods, which are produced by government-owned state enterprises.

22. “The Invisible Hand” Who Needs Government?
Adam Smith described in The Wealth of Nations the invisible hand of the marketplace.
This leads the economy to produce an efficient variety of goods and services, with efficient production methods.

23. The Price System
In the market system all participants make choices on the basis of information conveyed by market prices.
The collection of prices in product and resource markets is termed the price system.
Prices provide information about scarcity.
It is the price system that allocates resources in a market economy to their highest valued uses.

24. Mixing Government With the Marketplace
Market failures occurs in situations when markets fail to achieve an efficient outcome.

25. Market Failure Market failures include: public goods externalities
market power
imperfect information

26. Market Failure
The identification of market failures and the design of efficient policies to correct them is a major topic within microeconomics.
Helping identify a proper role for government in a mixed economy is an ongoing theme in economics.

27. Command-and-Control Techniques
Command-and-Control techniques used
by the government in a mixed economy:
government production
income redistribution
taxation
regulations
mandates

28. Government as a Percentage of Gross Domestic Product

29. 1.4 ECONOMIC ANALYSIS
The practice of economics involves analysis and problem solving.
Care must be taken to avoid faulty reasoning.
An example of this is the fallacy of composition.

30. Positive and Normative Economics
Normative economic statements have to do with behavioral norms.
They are judgments as to what is good or bad.
Examples often include “ought” or “should” in them.
Positive economic statements have to do with facts.
They may involve current, historical, or even future facts.
Examples often include what is, was or will be.

31. Economic Modeling: The Route to Higher-Level Understanding
Models: Simplified version of reality.
They emphasize features central to the questions we are trying to answer.
Theories: Statements about how the world works.

32. Economic Modeling: The Route to Higher-Level Understanding
Occam’s razor principle
Argues that reasoning is improved by focusing one’s thinking on the most essential elements of an issue.

33. More on Models
As a science, economists develop models and deliberately simplify accounts of how cause and effect work in some part of the economy. Based on assumptions of what is important, models are created and used to make suggestions about policy and improve basic economic outcomes. Policy involves decisions about scientific theories, personal values and particular circumstances.

34. Economic Modeling: The Route to Higher-Level Understanding
To keep models simple, economist make assumptions.
They act as though certain things are true without proving them to in fact be true.
One common assumption is termed ceteris paribus:
This is Latin for holding all else constant.

35. 1.5 EXPLORE & APPLY: From Mao to Now
1978
Transition from planned to market-oriented economy begins.
Collective farming is replaced by “household responsibility system” of individual farms.
1980
Special economic zones are created to experiment with market reforms.
1986
Foreign investment law is passed.

36. E & A From Mao to Now
1988
Enterprise law allows for the existence of privately owned stock companies.
1990
Chinese stock markets are established.
1993
Modern corporate system at state-owned enterprises is introduced.
1994
China allows the exchange value of its currency to be set on world markets, reflecting the common practice of market economies.

37. E & A From Mao to Now
1999
China’s economy becomes the world’s second largest, behind only that of the United States.
2001
Price controls on key items are lifted as China is admitted as member of the World Trade Organization.

38. Terms along the Way economics scarcity the margin microeconomics
macroeconomics
command & control
free markets
mixed economies
equity
efficiency
technological efficiency
allocative efficiency
invisible hand
market failures
public goods
externalities

39. Terms along the Way (continued)
market power
normative statements
positive statements
models
Occam’s razor
egalitarianism
original position

40. Test Yourself Economics is primarily the study of stocks and bonds.
allocating limited resources to meet unlimited wants.
methods to eliminate scarcity.
why consumers want what they do.

41. Test Yourself 2. The three basic questions an economy must answer are
why produce; how much to produce; who to produce it.
what to produce; how to produce it; who to consume it.
what to produce; why produce; how to produce.
when to produce; how to produce; what to produce.

42. Test Yourself 3. Command and control economies are identified by
reliance upon free markets.
adherence to the principles of capitalism.
economic freedom.
government decision making.

43. Test Yourself
4. In a capitalist economy, economic activities are coordinated by
tradition.
prices.
government.
business firms.

44. Test Yourself
5. The idea that the economy should produce its outputs with the least costly combination of inputs is known as
allocative efficiency.
technological efficiency.
economic efficiency.
equity.

45. The End!
Next Chapter 1
Appendix