The Basic Economic Problem
How societies forge and maintain bonds which
guarantee their material survival is the basic
problem of economics.
A society must organize a system for producing
the goods and services its needs for its own
Typical families in the
UK, Mexico, and Mali
Production and Growth
= output/labor input
A nations standard of living is
determined by the productivity of its
The Factors of Production
The Consumer Price Index
Consumer price index (CPI)
Measure of the overall cost of goods &
Bought by a typical consumer
How the consumer price index is
1.Fix the basket
2.Find the prices
3.Compute the baskets cost
The Consumer Pr
You are thinking of buying a six-acre lot for $70,000.
The lot will be worth $100,000 in five years.
A. Should you buy the lot if r = 0.05?
B. Should you buy it if r = 0.10?
Use FVt = future value at time t
Figure 1 The Circular-Flow
The Measurement of GDP
GDP is the market value of all
final goods and services
produced within a country in a
given period of time.
What Is Not Counted in GDP?
GDP excludes most items that are
A Competitive Market
A competitive market is a market. . .
with many buyers and sellers.
that is not controlled by any one
in which a narrow range of prices are
established that buyers and sellers