Unformatted text preview: Economics—An Introduction Introduction
Chapter 1 About Economics About Graphs Chapter 2 Producing and Trading Economics Economics Macroeconomics A look at the big picture Unemployment Inflation Taxes Distribution of Income Monetary and Fiscal Policies Microeconomics A look at the smaller picture Efficiency in Production Efficiency in Consumer Choice Profit Maximization Individual firms and individual consumers and how they interact Market Equilibrium Market Introduction Introduction People have always sought ways of People producing more output from existing resources. resources. To a large extent, the quest for more To output has been driven by necessity. Introduction Economics The study of how we use our limited resources to The limited satisfy our unlimited wants. unlimited The study of how best to allocate scarce The resources among competing uses. The fact that available resources are insufficient The to satisfy all desired uses thereof. Scarcity The Economy Is Us The “The Economy” is simply an abstraction The that refers to the sum of all our individual production and consumption activities. production In this sense, the economy is us, the In aggregation of all of our supply and demand decisions. decisions. Factors of Production Factors Factors of production are resource inputs used to produce goods and services. Land, Labor, Capital, Entrepreneurial Skills Land, Factors of Production Land refers not just to the ground but to all natural resources such as crude oil, water, air and minerals. resources Labor refers to the skills and abilities to produce goods and services. and Both the quantity and the quality of human resources are Both included in the “labor” factor. included Capital includes the final goods produced for use in the production of other goods, e.g., equipment, structures. production Skills: The assembling of resources to produce new or The improved products and technologies. It’s not just a matter of what resources you have but also of how well you use them. you Limits to Output Limits No matter how an economy is organized No there is a limit to how fast it can grow. there The most evident limit is the amount of The resources available for producing goods and services. and Scarcity is the imbalance between our Scarcity desires and available resources—forces us to make economic choices. us The three core issues that must be resolved are: must WHAT to produce with our limited resources. resources. HOW to produce the goods and services we select. we FOR WHOM goods and services are produced; that is, who should get them. produced; Guns Versus Butter Guns Opportunity Cost One of the persistent choices about resource One use entails defense spending. use The U.S. government spends more than $250 The billion a year on national defense. billion From an economic view, those defense From expenditures also represent an enormous claim on scarce resources. claim The 1.5 million men and women serving in the The armed forces aren’t available to build schools, design clothes, or teach economics. design Should we produce x’s or y’s- opportunity cost Guns Versus Butter Guns Opportunity Cost The land, labor, capital, and The entrepreneurship devoted to producing military hardware are not available for producing civilian goods, thus the “guns versus butter” dilemma. Every time we choose to use scarce Every resources in one way we give up the opportunity to use them in other ways. opportunity Opportunity Costs Opportunity Opportunity cost is the most desired goods or services that are forgone in order to obtain something else. What you give up of one thing to get more of What something else. something Production possibilities are the alternative combination of final goods and services that could be produced in a given period of time with all available resources and technology. with Production Choices The Production Possibilities Curve The Production Possibilities Curve Curve
OUTPUT OF SHOES A B C D E
1 2 3 4 5 4 3 2 1 0 F OUTPUT OF TELEVISIONS Production possibilities illustrates two essential principles: principles: Scarce resources–there’s a limit to the –there’s amount we can produce in a given time period with available resources and technology. Opportunity costs–we can obtain additional –we quantities of any desired good only by reducing the potential production of another good. the We must give up increasing amounts of other We goods to get more of a particular good. goods Increasing Opportunity Costs Increasing
OUTPUT OF SHOES A Step 1: give up one shoe 4 3 2 1 0 1 B
Step 2: get two TVs Step 3: give up another shoe C D E Step 4: get one more TV OUTPUT OF TELEVISIONS 2 3 4 5 F For the second shoe, you only get one TV because of increasing opportunity cost. Not linear so it is not a 1;1 tradeoff Efficiency Efficiency Increasing opportunity costs aren’t a sign of Increasing inefficiency. inefficiency. Efficiency means getting the maximum output of a good from the resources used in production. A production possibilities curves shows production potential output, not necessarily actual output. If we are inefficient, actual output will be less If inefficient actual than the potential output. than Unemployment Unemployment
5 OUTPUT OF SHOES 4 3 2 1 0
This now represents Unemployment A X B Y C Still unattainable, Macro issue dealing with new sources of resources, Labor—Immigration 1 2 3 OUTPUT OF TELEVISIONS 4 5 Economic Growth Economic Over time, population increases and we Over get more labor. get The stock of available capital will also The increase. increase. The quality of labor and capital can also The increase if we train workers and pursue new technologies. new Economic Growth Economic
PP2 OUTPUT OF SHOES 0 PP1 OUTPUT OF TELEVISIONS Market Mechanism Market The market mechanism is the use of The market market prices and sales to signal desired outputs (or resource allocations). outputs The essential feature of the market The mechanism is the price signal. mechanism Working With Graphs Working Marginal Analysis- how does changing one Marginal thing affect the entire output thing Relationship between two variables Consider a change Equations Identify the variables Identify the sign Identify the relationship across the equal sign Express the relationship graphically Equation Example Equation Consider the demand for money Consider expressed as: MD= 500 – 1000r + 0.5Y expressed Identify the variables: Identify MD = Money demand Money r = the interest rate Y = income
Negative relationship between the money demanded Negative and the interest rate. Positive relationship from Equation Example Equation Consider the demand for money Consider expressed as: MD= 500 – 1000r + 0.5Y expressed Identify the Signs: -1000r indicates a negative relationship 1000r negative between interest rates and money demand interest money +0.5Y indicates a positive relationship 0.5Y positive between income and money demand income money Graphical Expression Graphical Consider the Consider demand for money and interest rates. interest Negative slope Inverse Inverse relationship between interest and demand for money. money.
r 8% 4% Dm 10 40 Money If there is a price change, you stay on the curve. Only demand changes shifts the curve Graphical Expression Graphical Consider the Consider demand for money and interest rates. interest Negative slope An increase in An Income will cause overall demand for money to shift. money
r 8% 4% D’ Dm 10 40 Money Graphical Expression Graphical The relationship expressed graphically The shows interest and money. shows The interest rate is the price of money. Income is a determinant of demand and Income will cause a shift of the curve. will ...
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