The Economic Perspective

1. The Economic Perspective Chapter 1

2. Economic Problem • The problem is that, although your wants, or desires, are virtually unlimited, the resources available to satisfy these wants are scarce.

3. Scarcity All resources are scarce

4. Scarcity • Means limited goods and services • Restricts options and demands choices • Price > ZERO

5. Rational Self-Interest • Means that individuals try to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit Marginal Benefit > Marginal Cost

6. Making decisions at the margin • Margin: the cutoff point; decision making at the margin refers to deciding on one more or one less of something • Weighing and balancing of alternatives • Marginal benefit • Marginal cost • Benefits > Costs

7. Scientific Method • Elements • Observation of real-world behavior and outcomes • Formulation of hypothesis • Testing of this explanation by comparing the outcomes of specific events to predict outcome • The acceptance, rejection, or modification of the hypothesis • The continued testing of the hypothesis against the facts.

8. Microeconomics • Analyzes the individual components of the economy, such as the choices made by people, firms, and industries. • Markets – make possible the voluntary exchange of resources, goods and services; can take physical, electronic, and other forms. • Market prices – serve as signals that guide the allocation of resources

9. Macroeconomics • Analyzes economic aggregates such as aggregate employment, output, growth, and inflation • Most important is GDP • Gross domestic product

10. Normative Economics • A statement that represents an opinion, which cannot be proved or disproved • What ought to be • Ethical value judgments

11. Positive Economics • A statement that can be proved or disproved by reference to facts • What is • Scientific portion

12. Society’s Economizing Problem • The need to make choices because economic wants exceed economic means

13. Scarce resources • Society has limited economic resources

14. Resources • The inputs, or factors of production, used to produce the goods and services that people want resources • Also called factors of production

15. Land • Includes all the natural resources used in the production process

16. Labor • The physical and mental effort used to produce goods and services

17. Labor - mental • Mental effort • Consists of the knowledge and skill people acquire to enhance their productivity

18. Capital • The buildings, equipment, and human skill used to produce goods and services • Physical capital • Human capital

19. Capital • Physical capital • Consists of factories, machines, tools, buildings, airports, highways, and other human creation

20. Entrepreneurial Ability • Managerial and organizational skills needed to start a firm, combined with the willingness to take risks

21. Entrepreneur takes the initiative in combining the resources of land, labor, and capital The entrepreneur makes the strategic business decisions that set the course of an enterprise Innovator Risk bearer Functions of Entrepreneur

22. Entrepreneurs • Pick Anita Roddick William H. Gates

23. Payments to Resources • Wages • Payment to resource owners for their labor • Interest • Payment to resource owners for the use of their capital • Rent • Payment to resource owners for the use of their natural resources. • Profits • The reward for entrepreneurial ability.

24. Production Possibilities Frontier • Assumptions • Output is limited to two products: consumer goods and capital goods • Resources are FIXED in both quantity and quality during that period • Technology does not change • Full employment

25. Production Possibilities Frontier • A curve showing alternative combinations of goods that can be produced when available resources are used fully and efficiently.

26. Production Possibilities Frontier Consumer goods D. Unattainable A B C Inefficient Points on line are efficient Production possibilities curve 0 Capital Goods

27. Production Possibilities Frontier • Efficient points • Any point found on the production possibilities frontier such as A and B • Inefficient points • Inside the curve • Unattainable • Outside the curve

28. Economic growth • An increase in the economy’s ability to produce goods and services • An outward shift of the production possibilities frontier • Caused by • Changes in resource availability • Increases in capital stock • Technological change

29. Economic Growth Caused by • Increases in capital stock • Technological change

30. Economic Growth Consumer goods Production possibilities curve Shift in PPF 0 Capital Goods

31. Economic Analysis • Fallacy of composition • What is true at the micro level is also true at the macro level • What is true for the individual is true for the whole • Fallacy of that association is causation • The incorrect idea that if two variables are associated in time, one must necessarily cause the other

32. Economic Analysis • Secondary Effects • Unintended consequences of economic actions that may develop slowly over time as people react to events.