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Chapter 1

Chapter 1. Introduction. Economic Principles. The earth’s resources Renewable vs. nonrenewable resources Insatiable wants Scarcity and choice. Economic Principles. Economics is a social science Economic model building Microeconomic and macroeconomic analysis

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Chapter 1

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  1. Chapter 1 Introduction Gottheil — Principles of Economics, 6e

  2. Economic Principles • The earth’s resources • Renewable vs. nonrenewable resources • Insatiable wants • Scarcity and choice Gottheil — Principles of Economics, 6e

  3. Economic Principles • Economics is a social science • Economic model building • Microeconomic and macroeconomic analysis • Positive and normative economics Gottheil — Principles of Economics, 6e

  4. Natural Resources A natural resource is a gift of nature. Gottheil — Principles of Economics, 6e

  5. Natural Resources Examples of natural resources include: • Land • The uncultivated produce of land • Water • Minerals Gottheil — Principles of Economics, 6e

  6. Natural Resources There are two kinds of natural resources: • Renewable • Nonrenewable Gottheil — Principles of Economics, 6e

  7. Natural Resources A renewable natural resource is one that can be replenished. Gottheil — Principles of Economics, 6e

  8. Natural Resources Renewable natural resources include: • Forests • Sea and land animals • Water • Grasses and forage on rangelands Gottheil — Principles of Economics, 6e

  9. Natural Resources A nonrenewable natural resource is one that cannot be replenished. Gottheil — Principles of Economics, 6e

  10. Natural Resources Nonrenewable natural resources include: • Metals and ores • Oil and natural gas Gottheil — Principles of Economics, 6e

  11. Natural Resources Are we running out of natural resources? • We live in a finite world Gottheil — Principles of Economics, 6e

  12. Natural Resources Are we running out of natural resources? • Our knowledge of a resource’s relative scarcity, particularly when considering its availability in the not-too-distant future, is less than exact. Gottheil — Principles of Economics, 6e

  13. Natural Resources Are we running out of natural resources? • Even though some resources are renewable, the overproduction of lands and overharvesting of resources to meet the needs of a rapidly growing human population can destroy our living resources. Gottheil — Principles of Economics, 6e

  14. Natural Resources Are we running out of natural resources? • Properly managed conservation of resources can both protect natural resources and even increase their supply. Gottheil — Principles of Economics, 6e

  15. Scarcity Scarcity is the perpetual state of insufficiency of resources to satisfy people’s unlimited wants. Gottheil — Principles of Economics, 6e

  16. Scarcity Two competing facts create scarcity: • Because we live on planet earth, the supply of resources available to us is limited. • Our wants for goods that are produced by the limited resources is unlimited. Gottheil — Principles of Economics, 6e

  17. Scarcity Examples of things that are scarce: • Super Bowl tickets Gottheil — Principles of Economics, 6e

  18. Scarcity Examples of things that are scarce: • Meals at a fine restaurant Gottheil — Principles of Economics, 6e

  19. Scarcity Examples of things that are scarce: • Admission to an elite university Gottheil — Principles of Economics, 6e

  20. Scarcity Examples of things that are not scarce: • Snow and ice in Alaska Gottheil — Principles of Economics, 6e

  21. Scarcity Examples of things that are not scarce: • Sand in a desert Gottheil — Principles of Economics, 6e

  22. Scarcity Some things that are not scarce can become scarce. • Air in the atmosphere is not scarce. • Clean, unpolluted air is scarce in many metropolitan areas, however. Gottheil — Principles of Economics, 6e

  23. Scarcity and Consumers No one will knowingly pay a positive price for something that is not scarce. If something is not scarce, there is enough to satisfy everyone’s wants and the price system is not necessary to decide who can have it and who cannot. Gottheil — Principles of Economics, 6e

  24. The Study of Economics Economics is the study of how people work together to transform resources into goods and services to satisfy their wants. Gottheil — Principles of Economics, 6e

  25. The Study of Economics Four central questions of economics: • Who decides what goods to produce? • How are goods produced? • Who gets the goods produced? • Who produces what? Gottheil — Principles of Economics, 6e

  26. Consumer Sovereignty Consumer sovereignty • The Freedom of consumers to determine what goods and services they will buy. Gottheil — Principles of Economics, 6e

  27. Consumer Sovereignty Consumer sovereignty affects the economy in several ways. • Consumer decisions ultimately determine what goods and services the economy will produce. Gottheil — Principles of Economics, 6e

  28. Consumer Sovereignty Consumer sovereignty affects the economy in several ways. • Consumer decisions determine who gets what goods. Gottheil — Principles of Economics, 6e

  29. Economic Models Economic models • Economic models are simplified abstractions of the real world. Gottheil — Principles of Economics, 6e

  30. Economic Models 1. How can economic models be expressed? • Pictorially • Graphically • Algebraically • Verbally Gottheil — Principles of Economics, 6e

  31. Economic Models Economists use models because the world is too complex to fully and comprehensively consider at one time. Gottheil — Principles of Economics, 6e

  32. Economic Models Ceteris paribus • Ceteris Paribus is a Latin phrase meaning “everything else being equal.” Gottheil — Principles of Economics, 6e

  33. Economic Models The ceteris paribus assumption allows economists to develop one-to-one, cause-and-effect relationships in isolation. Gottheil — Principles of Economics, 6e

  34. Economic Models The role of ceteris paribus: • Isolates one factor at a time in an experiment or study. • Allows researchers to identify cause-and-effect relationships removed from other factors. Gottheil — Principles of Economics, 6e

  35. EXHIBIT 1 THE CIRCULAR FLOW MODEL Gottheil — Principles of Economics, 6e

  36. Circular Flow Model There are two principal players in the circular flow model • Households • Firms Gottheil — Principles of Economics, 6e

  37. Circular Flow Model Households • A household is an economic unit of one or more persons, living under one roof, that has a source of income and uses it in whatever way it deems fit. Gottheil — Principles of Economics, 6e

  38. Circular Flow Model Firms • A firm is an economic unit that produces goods and services in the expectation of selling them to households, other firms, or the government. Gottheil — Principles of Economics, 6e

  39. Circular Flow Model Resource market • The resource market is the market in which households supply resources to firms. Gottheil — Principles of Economics, 6e

  40. Circular Flow Model These resources can include: • Land • Labor • Capital • Entrepreneurship Gottheil — Principles of Economics, 6e

  41. Circular Flow Model Firms pay for these resources with: • Wages • Rent • Interest • Profit Gottheil — Principles of Economics, 6e

  42. Circular Flow Model Product market • The product market is the market in which firms supply goods and services to households. Gottheil — Principles of Economics, 6e

  43. Circular Flow Model Product market • Households pay for goods and services they buy in the product market with the income they received from supplying resources in the resource market. Gottheil — Principles of Economics, 6e

  44. Circular Flow Model Circular flow model • In this model, households supply resources to firms, and firms supply goods and services to households. Gottheil — Principles of Economics, 6e

  45. Micro vs. Macro The study of economics is divided into two areas • Microeconomics • Macroeconomics Gottheil — Principles of Economics, 6e

  46. Micro vs. Macro Macroeconomics • Macroeconomics analyzes the behavior of the market as a whole. Gottheil — Principles of Economics, 6e

  47. Micro vs. Macro Microeconomics • Microeconomics analyzes individual and firm behavior, especially in market conditions. Gottheil — Principles of Economics, 6e

  48. Positive vs. Normative Economics There are two different approaches to the study of economics • Positive economics • Normative economics Gottheil — Principles of Economics, 6e

  49. Positive vs. Normative Economics Positive economics • Positive economics is a subset of economics that analyzes the way the economy actually operates. Gottheil — Principles of Economics, 6e

  50. Positive vs. Normative Economics Normative economics • Normative economics is a subset of economics founded on value judgments and leading to assertions of what ought to be. Gottheil — Principles of Economics, 6e

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