The Economic Perspective

1. The Economic Perspective Chapter 1

2. Economics • What is economics? • Studies the allocation of limited resources in response to unlimited wants • Choice • Choices are caused by Scarcity • Scarcity – a situation in which there are too few resources to meet all human wants

3. Scarcity All resources are scarce

4. 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

5. It is not scarcity of money that is at the root of economics Scarce resources lead to scarce goods, whether or not money is involved Resource allocation refers to the uses which we place on resources Allocation depends partly upon technology Resource Allocation

6. Resource Allocation • Technology • Which refers to the techniques of production • The results of new technology created, can include new ways of doing things, new product choices, and new uses for resources.

7. 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

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

9. Three basic questions • What will be produced? • How will it be produced? • For whom will it be produced? • Answer depends on the economic system involved

10. Economic system • Command and control • Mixed economies • Free markets/laissez-faire/capitalism

11. Command and control • Government determine all economic activity • Determines what is produced • Determines how produced • Determines for whom

12. Mixed Economy • The mixture of free-market and command and control methods of resource allocation that characterizes modern economies.

13. Free market • The collective decisions of individual buyers and sellers that, taken together, determine what outputs are produced, how those outputs are produced, and who receives the outputs; free markets depend on private property and free choice • Capitalism

14. Spectrum of economic systems • Reality • All countries have mixed economies with the mix varying from country to country

15. Goals of Equity and Efficiency • There are two primary economic objectives to guide countries in choosing how much government to mix with free markets. • Equity • Efficiency

16. Equity Fairness Personal perception What is equitable Efficiency Which means that resources are use in ways that provide the most value Technological Allocative Equity & Efficiency

17. Technological The greatest quantity of output for given inputs Least cost production technique Allocative Involves choosing the most valuable mix of outputs to produce. Efficiency

18. Equity & Efficiency • There is frequently a tradeoff between efficiency and equity • More of one less of the other • What is more efficient • Command and control • Free market • Market failure • inefficient

19. 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

20. Normative Having to do with behavioral norms which are judgments as to what is good or bad What ought to be Positive Having to do with what is Scientific thinking Economic Analysis