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The Principals of Economics

The Principals of Economics. Chapters 1-2. Economics. The effort to satisfy unlimited wants with limited means Choice Needs Wants. Value. Everything has value Goods Services Scarcity defines value All goods and services have scarcity High Scarcity = High Value

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The Principals of Economics

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  1. The Principals of Economics Chapters 1-2

  2. Economics • The effort to satisfy unlimited wants with limited means • Choice • Needs • Wants

  3. Value • Everything has value • Goods • Services • Scarcity defines value • All goods and services have scarcity • High Scarcity = High Value • Low Scarcity = Low Value • Scarcity v. Shortage • Example- • The US Dollar • Inflation

  4. Production • The Factors of Production • Land • Labor • Capital • Physical Capital • Human Capital • Entrepreneur

  5. Cost • Decisions have ramifications: • Cost • Opportunity Cost • Trade-Offs • Example: Guns or Butter • Cost-Benefit Analysis • Decision • Benefits • Cost • Opportunity Cost • Benefits Forgone • Thinking at the Margins

  6. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 a (0,15) 8 14 b (8,14) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Maximizing Productivity • Production Possibilities Curve • Frontier

  7. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 8 14 c (14,12) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) d (18,9) 0 5 10 15 20 25 Watermelons (millions of tons) Cost • The Law of Increasing Costs

  8. Production Possibilities Graph 25 20 15 10 5 S Shoes (millions of pairs) a (0,15) b (8,14) c (14,12) g (5,8) d (18,9) A point of underutilization e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Efficiency and Underutilization

  9. Production Possibilities Graph 25 20 15 10 5 Future production Possibilities frontier T S a (0,15) Shoes (millions of pairs) b (8,14) c (14,12) d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) The Future Frontier • Increases in Land, Labor or Capital

  10. Types of Economic Systems • Three Key Questions • What goods and services should be produced? • How should goods and services be produced? • Who should consume these goods and services?

  11. Economic Goals • Economic efficiency • Economic freedom • Economic security and predictability • Economic equity • Economic growth and innovation • Other goals • Ex- Environmental Protection, National Security

  12. The Four Economic Systems • Traditional • Market • Command • Mixed

  13. The Market • ALL ACTIONS ARE SELFISH ACTIONS

  14. The Self-Regulating Market • Self-Interest • Competition • Incentives • The Invisible Hand

  15. Market Economics • Actors • Households • Firms • Markets • Factor Markets • Product Markets

  16. Circular Flow Diagram of a Market Economy Households pay firms for goods and services. monetary flow physical flow Firms supply households with goods and services. Households supply firms with land, labor, and capital. Households Firms physical flow Firms pay households for land, labor, and capital. monetary flow The Circular Flow of the Market Product market Factor market

  17. Advantages of the Free Market • Efficiency • Freedom • Growth • Consumer Sovereignty • Widest possible array of goods and services

  18. Command Economics • The “Central Planners” make the decisions • Socialism • Communism • Mandated Equality • Lack of Incentives

  19. Ex- The Two St. Jeans Capitalist Communist • A • B • C • D • F • B

  20. The USSR • Marxist-Leninist • Collective Farming • Peasant Control • Government Goals • Failure • 5-year plans • Heavy Industry • Soviet Consumers • Shortages • The “Black Market”

  21. The Mixed Market • Limits of Laissez Faire • Market Failures • Private Property vs. Public Property • Catch-up Time • Control vs. Freedom

  22. Circular Flow Diagram of a Mixed Economy monetary flow physical flow taxes government purchases Government expenditures expenditures Firms Households government-owned factors taxes physical flow monetary flow Circular Flow of the Mixed Market Product market Factor market

  23. Continuum of Mixed Economies Centrally planned Free market Iran South Africa France United Kingdom Hong Kong North Korea China Botswana Canada Singapore Cuba Russia Greece Peru United States Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick The Continuum of Mixed Markets • Transitions • Privatization • Ex: Margret Thatcher and GB • Nationalization • Ex: Fidel Castro and Cuba

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