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CChapter hapter 11IntroductionIntroduction

Gottheil - Principles of Economics, 4e© 2005

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Economic PrinciplesEconomic Principles

The earth’s resources

Renewable vs. nonrenewable resources

Insatiable wants

Scarcity and choice


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Economic PrinciplesEconomic Principles

Economic model building

Microeconomic and macroeconomic analysis

Positive and normative economics


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Natural ResourcesNatural Resources

A natural resource is a gift of nature.


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Examples of natural resources include:• Land• The uncultivated produce of land• Water• Minerals


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There are two kinds of natural resources:• Renewable• Nonrenewable


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• A renewable natural resource is one that can be replenished.


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Renewable natural resources include:• Forests• Sea and land animals• Water• Grasses and forage on rangelands


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• A nonrenewable natural resource is one that cannot be replenished.


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Nonrenewable natural resources include:• Metals and ores• Oil and natural gas


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Are we running out of natural resources?• We live in a finite world


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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.


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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.


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Are we running out of natural resources?

• Properly managed conservation of resources can both protect natural resources and even increase their supply.


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ScarcityScarcity

Scarcity is the perpetual state of insufficiency of resources to satisfy people’s unlimited wants.


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ScarcityScarcity

Two competing facts create scarcity:

• Because we live on planet earth, the supple of resources available to us is limited.• Our wants for goods that are produced by the limited resources is unlimited.


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ScarcityScarcity

Examples of things that are scarce:• Super Bowl tickets


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ScarcityScarcity

Examples of things that are scarce:• Meals at a fine restaurant


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ScarcityScarcity

Examples of things that are scarce:• Admission to an elite university


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ScarcityScarcity

Examples of things that are not scarce:• Snow and ice in Alaska


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ScarcityScarcity

Examples of things that are not scarce:• Sand in a desert


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ScarcityScarcity

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.


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Scarcity and Scarcity and ConsumersConsumers

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.


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The Study of The Study of EconomicsEconomics

Economics is the study of how people work together to transform resources into goods and services to satisfy their wants.


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The Study of The Study of EconomicsEconomics

Four central questions of economics:• Who decides what goods to produce?• How are goods produced?• Who gets the goods produced?• Who produces what?


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Consumer Consumer SovereigntySovereignty

Consumer sovereignty

• The Freedom of consumers to determine what goods and services they will buy.


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Consumer sovereignty affects the economy in several ways.

• Consumer decisions ultimately determine what goods and services the economy will produce.


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Consumer sovereignty affects the economy in several ways.

• Consumer decisions determine who gets what goods.


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Economic ModelsEconomic Models

Economic models

• Economic models are simplified abstractions of the real world.


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1. How can economic models be expressed?• Pictorially• Graphically• Algebraically• Verbally


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Economists use models because the world is too complex to fully and comprehensively consider at one time.


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Ceteris paribus

• Ceteris Paribus is a Latin phrase meaning “everything else being equal.”


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The ceteris paribus assumption allows economists to develop one-to-one, cause-and-effect relationships in isolation.


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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.


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Circular Flow ModelCircular Flow Model

There are two principal players in the circular flow model• Households• Firms


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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.


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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.


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Resource market

• The resource market is the market in which households supply resources to firms.


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These resources can include:

• Land• Labor• Capital• Entrepreneurship


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Firms pay for these resources with:

• Wages• Rent• Interest• Profit


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Product market

• The product market is the market in which firms supply goods and services to households.


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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.


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Circular flow model

• In this model, households supply resources to firms, and firms supply goods and services to households.


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Micro vs. MacroMicro vs. Macro

The study of economics is divided into two areas• Microeconomics• Macroeconomics


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Macroeconomics

• Macroeconomics analyzes the behavior of the market as a whole.


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Microeconomics

• Microeconomics analyzes individual and firm behavior, especially in market conditions.


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Positive vs. Positive vs. Normative EconomicsNormative Economics

There are two different approaches to the study of economics• Positive economics• Normative economics


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Positive economics

• Positive economics is a subset of economics that analyzes the way the economy actually operates.


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Normative economics

• Normative economics is a subset of economics founded on value judgments and leading to assertions of what ought to be.

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