Principles of Economics

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Principles of Economics
Professor Gerald Groshek5 B 34
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Seminars

• Monday 1515 1645 ? D 109
• Monday 1700 1830 ? D 109
• Friday 915 1045 D 113
• Friday 1100 1230 D 113

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Access to Online ResourcesDiscoverEcon

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  9122006

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Economics The Core Issues

• Chapter 1

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Economics

• The efficient allocation of scarce resources
  among abundant alternatives over time and under
  uncertainty
• The basic purpose of studying economics is
  understanding how economies function.
• How an economy is organized, how it behaves, and
  how successfully it achieves its basic
  objectives.

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The Basic Economic Objectives

• What to produce?
• What combination of output is to be produced?
• How to produce it?
• With which input combination is the output to be
  produced?
• For Whom to produce?
• Who will receive the output and how much will
  each receive?

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Attaining the Basic Objectives

• Cultural
• Based on traditions, customs, social norms
• The collective programming of the mind
• Political
• Based on authoritative control of resources
• Market
• Based on incentives and self-interested behavior
  of individuals via the price mechanism concerned
  with efficiency
• Adam Smith, the invisible hand, and laissez-faire

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Macro Versus Micro

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

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End Versus Means

• Economists do not formulate an economys
  objectives.
• They focus on the means available for achieving
  given goals.

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Theory Versus Reality

• The economy is much too vast and complex to
  describe and explain in one course (or one
  lifetime).
• Economists use theories, or models, of economic
  behavior to evaluate and design economic policy.
• In these theories, we typically ignore the
  possibility that many things can change at one
  time.
• Ceteris paribus is the assumption that nothing
  else is changing.

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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.

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Factors of ProductionResource inputs used to
produce goods and services

• Labor - skills and abilities to produce goods and
  services.
• Land - all natural resources such as crude oil,
  water, forests, air, and minerals.
• Capital man-made goods produced for use in the
  production of other goods, e.g., equipment,
  structures.
• Entrepreneurship the assembling of resources to
  produce new or improved products and technologies

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Limits to Output

• No matter how an economy is organized there is a
  limit to how fast it can grow.
• The most evident limit is the scarce resources
  available for producing goods and services.
• There is a limit to the amount we can produce in
  a given time period with available resources and
  technology. Scarcity
• We can obtain additional quantities of any
  desired good only by reducing the potential
  production of another good.

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Production Possibilities

• 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.

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The Production Possibilities Curve
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The Production Possibilities Curve

• Each point on the production possibilities curve
  depicts an alternative mix of output.

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The Production Possibilities Curve
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Opportunity Costs

• Opportunity cost is the most desired goods or
  services that are forgone in order to obtain
  something else.
• The next best alternative use of resources.

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

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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
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Efficiency

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

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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.

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Unemployment

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

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Inefficiency and Unemployment
A
5
B
4
C
Y
3
OUTPUT OF TRUCKS
2
1
1
2
3
4
5
0
OUTPUT OF TANKS
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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.

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Economic Growth
A
X
5
B
4
C
3
OUTPUT OF TRUCKS
2
1
1
2
3
4
5
0
OUTPUT OF TANKS
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Economic Growth

• Production possibilities increase with more
  resources or better technology.

• The production possibilities curve shifts outward.

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Economic Growth
OUTPUT OF TRUCKS
0
OUTPUT OF TANKS
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A Mixed Economy

• A mixed economy is one that uses both market
  signals and government directives to allocate
  goods and resources.
• Most economies use a combination of market
  signals and government directives to select
  economic outcomes.

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Market Failure

• A market failure is an imperfection in the market
  mechanism that prevents optimal outcomes.
• If the market signals dont give the best
  possible answers, we say that the market
  mechanism has failed.

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Government Failure

• Government intervention may move us closer to our
  economic goals or it may fail.
• A government failure is government intervention
  that fails to improve economic outcomes.

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Seeking Balance

• The challenge for society is to minimize failures
  by selecting the appropriate balance of market
  signals and government directives.

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Thinking Like an Economist

• Economics trains you to. . . .
• Think in terms of alternatives.
• Evaluate the cost of individual and social
  choices.
• Examine and understand how certain events and
  issues are related.

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The Economy A Global View

• Chapter 2

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GDP Comparisons

• Gross domestic product (GDP) is a basic measure
  of an economys size.
• the total market value of all final goods and
  services produced within a nations borders in a
  given time period.

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Comparative Output
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Per Capita GDP

• Per Capita GDP is the dollar value of GDP divided
  by total population average GDP.
• It indicates how much output the average person
  would get if all output were divided up evenly
  among the population.

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GDP Per Capita Around the World (2002)
35,060
28,070
26,070
26,180
16,480
12,600
8,540
7,820
7,570
4,390
4,070
2,570
1,500
1,280
770
720
U.S
Haiti
India
Cuba
China
Japan
Jordan
France
Mexico
Nigeria
Russia
Canada
Ethiopia
Slovakia
South Korea
World Average
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GDP Growth

• Economic growth is the increase in output (real
  GDP) an expansion of production possibilities.

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Poor Nations

• The populations of rich countries are growing
  slowly so that gains in per capita GDP are easily
  achieved.
• The populations of the poorest countries are
  still growing rapidly, making it difficult to
  raise living standards.

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Slovakia
5.5 0.13
5.37
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The Mix of Output

• A century ago, about 66 percent of U.S. output
  consisted of goods while one-third of output
  consisted of services.
• Today, nearly 75 percent of U.S. output consists
  of services, not goods.

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The Mix of Output

• The relative decline in goods production does not
  mean the U.S. is producing fewer goods than
  before.

• Manufacturing and farm output has increased
  tremendously.
• The mix of output is simply different.

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The Changing Mix of Output
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Todays Mix of Output

• The four major uses of total output are

• Consumption
• Investment
• Government services
• Net exports

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Consumer Goods and Services

• Consumer goods and services include items like
  breakfast cereals, movie rentals, and college
  education.
• This category of production accounts for over
  two-thirds of total output.

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Investment Goods and Services

• Investment includes expenditures on (production
  of) new plant, equipment, and structures
  (capital) in a given time period, plus changes in
  business inventories.
• Maintain our production possibilities by
  replacing worn out equipment and factories.
• Expand our production possibilities by increasing
  and improving our stock of capital The U.S.
  devotes 15 percent of output to investment.

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Government Services

• Only that part of federal spending used to
  acquire resources and produce services is counted
  in GDP.
• Income transfers are payments to individuals for
  which no current goods or services are exchanged.

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Net Exports

• Exports are goods and services sold to foreign
  buyers.
• Imports are goods and services purchased from
  foreign sources.
• Net Exports are the value of exports minus the
  value of imports.

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Comparative Advantage

• Comparative advantage is the ability of a country
  to produce a specific good at a lower opportunity
  cost than its trading partners.
• International trade allows countries to produce
  and export goods what they do best and import
  goods they dont produce as efficiently.

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Productivity

• Productivity is output per unit of input such as
  output per labor hour.
• The productivity of workers is more important
  than sheer numbers.

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Factors of Production

• The high productivity of an economy results from
  highly educated workers using capital-intensive
  production processes.

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Productivity and Growth

• Capital Stock
• A capital-intensive production process is one
  that use a high ratio of capital to labor inputs.
• Human Capital
• Human capital is the knowledge and skills
  possessed by the workforce.
• The high productivity of an economy results from
  using highly educated workers in
  capital-intensive production processes.

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The Education Gap Between Rich and Poor Nations
Enrollment in secondary school
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Factor Mobility and Technology

• Our continuing ability to produce the goods and
  services that consumers demand depends on our
  ability in reallocating resources from one
  industry to another.
• Whenever technology advances, an economy can
  produce more output with existing resources.