We use this economics book, to also answer these questions:

1

• We use this economics book, to also answer these
  questions
• How are the prices of goods and services
  determined?
• How does pollution affect the economy, and how
  should government policy deal with these effects?
• Why do firms engage in international trade, and
  how do government policies affect international
  trade?
• Why does government control the prices of some
  goods and services, and what are the effects of
  those controls?

2
Economics
The study of how scarce, or limited resources are
used to satisfy unlimited material wants and
needs the study of decision making in a world of
scarcity.
3
Unlimited wants
Limited resources to satisfy wants
Choose between alternatives
4
Scarcity and Choice
Scarce Goods
Limited Resources
5
Prices
Competition for scarce goods
Causes prices to change accordingly
6
Basic Assumptions
As we study how people make choices and interact
in markets, we will return to these important
ideas
7
Basic Assumptions
1. People are rational.

1. Consumers and firms use all available information
   as they act to achieve their goals, weighing the
   benefits and costs of each action, and choosing
   an action only if the benefits outweigh the
   costseven if it is not always the best
   decision..

Consumers make rational decisions, based on costs
8
Basic Assumptions
2. Incentives matter
As personal benefits (costs) from choosing an
option increase, other things constant, a person
will be more (less) likely to choose that option.
9
MakingtheConnection
Does Health Insurance Give People an Incentive
to Become Obese?
Obesity is an increasing problem in the United
States.
By reducing some of the costs of obesity, health
insurance may give people an economic incentive
to gain weight.
10
Basic Assumptions
3. Economic reasoning focuses on the impact of
marginal changes.
Decisions will be based on marginal costs -the
cost of buying or making one more unit and
marginal benefits (utility). - The increase in
satisfaction from buying or making one more unit
11
Tradeoffs
Choices involve tradeoffs and consequences.
- give up to get It involves a value
judgment. - decide the relative
importance of alternatives
12
Opportunity Cost
What must be given up to get one more unit of
another good or service
Involves evaluating the costs and benefits of
choices.
There is no such thing as a free lunch.
13
(No Transcript)
14
(No Transcript)
15

• Trade-offs force society to make choices when
  answering the following three fundamental
  questions
• 1. What goods and services will be produced?.
  Each choice made comes with an opportunity cost,
  measured by the value of the best alternative
  given up.
• 2. How will the goods and services be produced?
  Firms often face a trade-off between using more
  workers or using more machines.
• 3. Who will receive the goods and services
  produced? There are disagreements over whether
  there should be more or less redistribution of
  income.

16
How Decisions are Made
Using an Economic System
Method of organizing the relationship between
businesses, households and the government to make
the production decisions
4 Types
17
1. Agrarian or Traditional
A. What?
What the family business has been producing (for
generations)
B. How?
Using the same method that have been used (for
generations) No incentive for change
C. For Whom?
Determined by place in society.
18
2. Market Economies
A. What?
- Goods and services that are profitable - Goods
and services consumers want.
B. How?
Efficiently- least cost combination of resources
C. For Whom?
Those who can pay.
19
3. Planned Economies
A. What?

• Goods needed to meet economic planning targets

B. How?
Aimed at achieving targets Switch resources
around to meet targets
C. For Whom?
Government decides who gets goods Bonuses for
important workers
20
4. Mixed Economies

• Combine aspects of market and planned economies
• Includes almost all economies

21
4. Mixed Economies
Coordinating Mechanism
Market System Planning
Nazi Germany
Private Public
US
Resource Ownership
Cuba
China
22
Which Market Type??
1. Businesses are free to produce what ever they
want and are always looking for cost-cutting
techniques of production.
Mixed?
Market?
Traditional?
Planned?
Market
Market
Market
23
Which Market Type??
2. A catering business goes bankrupt, but its
employees receive unemployment compensation while
they look for other jobs.
Mixed
Market?
Mixed
Mixed
Traditional?
Planned?
Mixed?
24
Which Market Type??
3. Union and management representatives submit a
deadlocked labor contract negotiation to the
government for mediation.
Mixed
Mixed
Mixed?
Traditional?
Mixed
Planned?
Market?
25
Which Market Type??
4. Workers who have lost their jobs and incomes
cut back their spending because there is no
alternative source of emergency financial support
once their savings runs out.
Market
Mixed?
Market
Market?
Traditional?
Planned?
Market
26
Which Market Type??
5. Consumers are unable to obtain fuel
injectors and windshield wiper motors for their
cars because they are not being produced, yet
accordions, which are plentiful and not in
demand, continue to be produced.
Planned
Planned
Planned
Traditional?
Planned?
Market?
Mixed?
27
Productive Efficiency
Goods and services are produced at the lowest
cost.
It also means doing the job they were trained or
designed to do
28
Equity (the distribution of economic benefits)
Should every person receives as much as every
other person?
or
Should people receive based on their relative
need for the goods and services?
or
Should people be rewarded for their contribution
to the production?
29
modeling
1. Make Assumptions
a. Principle - relationship
b. Theory string of principles
c. Law theory proven to hold true most times
30
Hypothesis
a. Inductive
Use facts to develop a model
Take a survey and study the results
b. Deductive
See if the facts support a hypothesis
Start with a theory and see if facts support it
31
facts
2. Use data to test hypothesis
Need facts to support theories and theories to
make sense of facts.
32
Predicting Behavior
Positive Economic Statements - relationships
that can be tested - The class is half full -
Unemployment is 6 - if incomes rise people
spend money
33
Normative Economic Statements - statements
about what should be or make a value judgment
- It is too hot - Unemployment should be around
4 - we should raise the minimum wage.
34
Pitfalls

• Ceteris Paribus
• other things being equal
• - only consider price changes

35
Pitfalls
2. Cause and Effect one event may not be
the cause of another
- sunrise and the rooster
- you, me and this class
36
Pitfalls
3. Fallacy of Composition what is good for
some may not be good for others - increased
wages -time of this class
37
Economic graphs

• Graphs of one Variable
• - market shares
• - bar graphs, pie charts

Figure 1A.1
Bar Graphs and Pie Charts
38
Economic graphs
2. Graphs of two Variables - price, quantity -
demand curve
39
Economic graphs

• Direct, or positive, relationship
• - Graph slopes up from left to right

• Inverse, or negative, relationship
• - Graph slopes down from left to right

3. Slope Rise Run
40
Formulas
3. Percent change new - old old
4. Area of a triangle 1\ 2 base x height
41
1. When an economist states that a good is
scarce, he means that a. Production cannot
expand the availability of the good. b. It is
rare. c. Desire for the good exceeds the amount
that is freely available from nature. d.
People would want to purchase more of the good at
any price.
2. The highest valued alternative that must be
given up in order to choose an action is called
its a. opportunity cost. b. utility c.
scarcity d. ceteris paribus
42
3) By definition, economics is the study of A)
how to make money in the stock market. B) how to
make money in a market economy. C) the choices
people make to attain their goals, given their
scarce resources. D) supply and demand.   4)
Economists assume that individuals A) behave in
unpredictable ways. B) will never take actions to
help others. C) prefer to live in a society that
values fairness above all else. D) are rational
and respond to incentives.   5) Marginal analysis
involves undertaking an activity A) until its
marginal costs start declining. B) only when its
marginal benefits are positive. C) until its
marginal benefits equal marginal costs. D) only
if its marginal costs are greater than its
marginal benefits.
43
6) The highest valued alternative that must be
given up to engage in an activity is the
definition of A) economic equity. B) marginal
benefit. C) opportunity cost. D) marginal
cost.   7) How are the fundamental economic
questions answered in a market economy? A) The
government alone decides the answers. B)
Individuals, firms, and the government interact
in markets to decide the answers to these
questions. C) Households and firms interact in
markets to decide the answers to these questions.
D) Large corporations alone decide the
answers.  8) ________ is a situation in which a
good or service is produced at the lowest
possible cost. A) Allocative efficiency B)
Productive efficiency C) Equity D) Optimal
marginalism  
44
9) Which of the following questions or statements
regarding medical school is normative? A) How do
changes in expected future incomes affect the
decisions of medical students about which
specialty to choose? B) Medical students who
enter specialized fields make a larger
contribution to society than do student who enter
primary care. C) What role does tuition play in a
student's decision about whether to attend
medical school? D) Have tuition increases had a
large effect or a small effect on the number of
applications to medical school? 10) In
economics, the accumulated skills and training
that workers have is known as A) human capital.
B)
entrepreneurship. C) physical capital.
D) innovation.   11) The
machines workers have to work with are
considered A) human capital.
B) physical capital. C)
entrepreneurship.
D) financial capital.   12) The relationship
between consumer spending and disposable personal
income is A) an inverse relationship.
B) a direct relationship. C) a
negative relationship.
D) independent.