Chapter 1: Alleviating Human Misery

1. Chapter 1:Alleviating Human Misery

2. Goods & Services • Commodities we use to satisfy our needs and wants • Goods are tangible commodities we use (things we use or consume: pizza, gasoline) • Services are intangible commodities (things other people do for us: hair cut, piano lesson)

3. Scarcity • The imbalance between what we have and what we need • Goods & services are scarce because we cannot have all we want • Price is the cost of removing scarcity of goods and services

4. Economic Resources • Human: physical & mental efforts of workers in production of goods & services • Capital: goods used in production of other goods (e.g., tools, equipment, buildings) • Natural: gifts of the nature (e.g., water, minerals)

5. Economic Problem • Unlimited human needs and wants vs. • Limited economic resources • Choice must be made in satisfying unlimited human needs and wants by optimal allocation of limited resources to production of goods and services

6. Opportunity Cost • Choice: the act of selecting between alternatives • Opportunity cost is the cost of making unavoidable choices; it is measured by: • cost of foregone opportunities, or • value of best alternative sacrificed

7. Cost of College Education • Out-of-pocket costs: payments the we actually make: tuition fees, books, supplies, transportation, etc. • Opportunity costs: foregone labor income if one decided to work instead of attending college

8. Production Possibilities Curve • Maximum quantities of two good and services the economy can produce, assuming: • full employment / efficiency • fixed resources • constant technology

9. PPC Schedule A B C E Combination 100 90 50 0 Food Education 0 40 80 100

10. PPC Graph Combinations A, B, C, and E are attainable Combination D is unattainableCombination F indicates unemployment/inefficiency Food A 100 B D 90 C 50 F E 40 80 100 Education

11. Economic Growth Combination D becomes available with -more resources -technological advancement Food A 100 B D 90 C 50 E 40 80 100 Education

12. Law of Increasing Opportunity Costs Moving from A to B: lose 10 Food, but gain 40 Education O.C. = 10/40 = 0.25 Moving from B to C: lose 40 Food, but gain 40 Education O.C. = 40/40 = 1 Moving from C to E: lose 50 Food, but gain 20 Education O.C. = 50/20 = 2.5 O.C. increases because resources are not fully substitutable.

13. Cost-Benefit Analysis • Marginal Social Cost (MSC): the opportunity cost of producing an additional unit of good or service • Marginal Social Benefit (MSB): the benefit to society from consuming an additional unit of good or service

14. Decision Criterion • Optimal: MSC = MSB • Non-optimal: MSC > MSB reduce production • Non-optimal: MSB > MSC increase production

15. Gross Domestic Product • Market value of all final goods and services produced by an economy in one year • Real GDP = GDP / Price Index • Real GDP Per Capita= Real GDP / Population

16. Growth vs. Distribution • Economic Growth: Increase in Real GDP • Income Distribution: Patterns of the distribution of Real GDP between population • Growth without Distribution will increase income disparity

17. Income Distribution • Income inequality is greater in LDCs than MDCs: • Poorest 20% of population: 5.3 vs. 6.1% of income • Richest 20% of population: 52.1 vs. 41.8% of income • Middle 60% of population: 42.6 vs. 52.1% of income

18. Problems of Developing Countries • Rapid population growth • Insufficient human capital investment • Insufficient capital investment • High income inequality • Inefficient government • Reliance on natural resource exports