Economics is the study of mankind in the ordinary business of life.

1
Ch 1 - Economics The Core Issues

• Economics is the study of mankind in the
  ordinary business of life.
• Alfred Marshall

2
Ch 1 - Economics The Core Issues

• . . .it is a method rather than a doctrine,
  an apparatus of the mind, a technique which
  helps its possessor to draw
  correct conclusions.
• John Maynard Keynes

3
Ch 1 - Economics The Core Issues

• Economics is the study of how best to allocate
  scarce resources among competing uses.

4
Ch 1 - Economics The Core Issues

• The study of how economic agents make choices.
• Consumers maximize utility
• Firms maximize profits
• Governments maximize welfare

5
Three core issues must be resolved

• WHAT to produce with our limited resources.
• HOW to produce the goods and services we select.
• FOR WHOM goods and services are produced that
  is, who should get them.

6
The Economy Is Us

• The economy is an abstraction that refers to the
  sum of all our individual production and
  consumption activities.
• The economy is us the aggregation of all of our
  supply and demand decisions.

7
Factors of Production

• Factors of production are resource inputs used to
  produce goods and services.

• Land - all natural resources such as crude oil,
  water, air, and minerals (anything NOT man made).

• Labor - skills and abilities to produce goods and
  services.

8
Factors of Production

• Factors of production are resource inputs used to
  produce goods and services.

• Capital - goods produced for use in the
  production of other goods, e.g., equipment,
  structures.

• Enterprise - assembling of resources to produce
  new or improved products and technologies.

9
Opportunity Costs

• Opportunity cost - the most desired goods or
  services that are forgone in order to obtain
  something else.
• It is what is given up in order to get something
  else.

10
Production Possibilities

• Production possibilities - alternative
  combination of final goods and services that
  could be produced, assuming
• Fixed moment in time
• Fixed amount of resources
• Fixed technology

11
The Production Possibilities Curve
12
The Production Possibilities Curve
13
Production Possibilities Illustrates Two
Essential Principles

• Scarce resources theres a limit to the amount
  we can produce in a given time period with
  available resources and technology.

• Opportunity costs we can obtain additional
  quantities of any desired good only by reducing
  the potential production of another good.

14
Law of Increasing Opportunity Costs

• Resources do not transfer perfectly from the
  production of one good to another.
• Increasing quantities of any good can be obtained
  only by sacrificing ever-increasing quantities of
  other goods.

15
Law of Increasing Opportunity Costs
A
Step 1 give up one truck
5
B
4
Step 3 give up another truck
Step 2 get two tanks
C
3
OUTPUT OF TRUCKS
Step 4 get one more tank
D
2
E
1
F
0
1
2
3
4
5
OUTPUT OF TANKS
16
The Cost of North Koreas Military

• North Koreas inability to feed itself is due in
  part to its large army.
• Resources used for the military arent available
  for producing food.

17
The Cost of North Koreas Military
A
P
G
Reduced food output
N
C
FOOD OUTPUT
Military buildup
O
B
D
H
MILITARY OUTPUT
18
The Military Share of Output
Percent of Output Allocated to Military
19
Efficiency

• Efficiency - getting the maximum output of a good
  from the resources used in production.
• Every point on a production possibilities curve
  is efficient.

20
Inefficiency

• A production possibilities curves shows potential
  output, not necessarily actual output.
• If we are inefficient, actual output will be less
  than the potential output.

• Countries may end up inside their production
  possibilities curve if resources are
  inefficiently combined or not all used.

21
Unemployment
A
5
B
4
C
Y
3
OUTPUT OF TRUCKS
2
1
1
2
3
4
5
0
OUTPUT OF TANKS
22
Economic Growth

• A point outside the production possibilities
  curve suggests that we could get more goods than
  we are capable of producing!
• Economic growth is an increase in output (real
  GDP) an expansion of production possibilities.

23
Economic Growth
A
X
5
B
4
C
3
OUTPUT OF TRUCKS
2
1
1
2
3
4
5
0
OUTPUT OF TANKS
24
Economic Growth
OUTPUT OF TRUCKS
0
OUTPUT OF TANKS
25
Basic Decisions

• Production possibilities define the output
  choices confronting a nation
• WHAT to produce
• HOW to produce
• FOR WHOM to produce

26
The Invisible Hand of a Market Economy

• The market mechanism is the use of market prices
  and sales to signal desired outputs (or resource
  allocations).
• The market decides the mix of output in an
  economy.

• Laissez faire leave it alone nonintervention
  by government in the market mechanism.

27
Continuing Debates

• The core of most debates is some variation of the
  WHAT, HOW, or FOR WHOM questions.
• Conservatives favor Adam Smiths laissez-faire
  approach.
• Liberals tend to think government intervention is
  likely to improve the answers.

28
A Mixed Economy

• Mixed economy - uses both market signals and
  government directives to allocate goods and
  resources.
• Most economies are mixed economies.

29
Macro Versus Micro

• Macroeconomics - the study of aggregate economic
  behavior, of the economy as a whole.
• Microeconomics - the study of individual behavior
  in the economy, of the components of the larger
  economy.

30
Ceteris Paribus assumption

• Ceteris paribus
• All other things held constant