The Economic PerspectiveThe Economic Perspective

Chapter 1Chapter 1

EconomicsEconomics

• What is economics?What is economics?– Studies the allocation of limited Studies the allocation of limited

resources in response to unlimited resources in response to unlimited wantswants

– ChoiceChoice• Choices are caused by ScarcityChoices are caused by Scarcity• Scarcity – a situation in which there are Scarcity – a situation in which there are

too few resources to meet all human too few resources to meet all human wantswants

ScarcityScarcity

All resources are scarce

Making decisions at the Making decisions at the marginmargin

• Margin: the cutoff point; decision making Margin: the cutoff point; decision making at the margin refers to deciding on one at the margin refers to deciding on one more or one less of somethingmore or one less of something

• Weighing and balancing of alternativesWeighing and balancing of alternatives– Marginal benefitMarginal benefit– Marginal costMarginal cost– Benefits > CostsBenefits > Costs

Resource AllocationResource Allocation

• It is not scarcity of It is not scarcity of money that is at money that is at the root of the root of economicseconomics

• Scarce resources Scarce resources lead to scarce lead to scarce goods, whether or goods, whether or not money is not money is involvedinvolved

• Resource Resource allocation refers allocation refers to the uses which to the uses which we place on we place on resourcesresources

• Allocation Allocation depends partly depends partly upon technologyupon technology

Resource AllocationResource Allocation

• TechnologyTechnology– Which refers to the techniques of Which refers to the techniques of

productionproduction– The results of new technology The results of new technology

created, can include new ways of created, can include new ways of doing things, new product choices, doing things, new product choices, and new uses for resources.and new uses for resources.

MicroeconomicsMicroeconomics

• Analyzes the individual components of Analyzes the individual components of the economy, such as the choices made the economy, such as the choices made by people, firms, and industries.by people, firms, and industries.

• Markets – make possible the voluntary Markets – make possible the voluntary exchange of resources, goods and exchange of resources, goods and services; can take physical, electronic, services; can take physical, electronic, and other forms.and other forms.

• Market prices – serve as signals that Market prices – serve as signals that guide the allocation of resourcesguide the allocation of resources

MacroeconomicsMacroeconomics

• Analyzes economic aggregates Analyzes economic aggregates such as aggregate employment, such as aggregate employment, output, growth, and inflationoutput, growth, and inflation

• Most important is GDPMost important is GDP– Gross domestic productGross domestic product

Three basic questionsThree basic questions

• What will be produced?What will be produced?• How will it be produced?How will it be produced?• For whom will it be produced?For whom will it be produced?

• Answer depends on the economic Answer depends on the economic system involvedsystem involved

Economic systemEconomic system

• Command and controlCommand and control• Mixed economiesMixed economies• Free Free

markets/laissez-faire/capitalismmarkets/laissez-faire/capitalism

Command and controlCommand and control

• Government Government determine all determine all economic activityeconomic activity

• Determines what is Determines what is producedproduced

• Determines how Determines how producedproduced

• Determines for whomDetermines for whom

Mixed EconomyMixed Economy

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

Free marketFree market

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

• CapitalismCapitalism

Spectrum of economic Spectrum of economic systemssystems

• Reality Reality – All countries have All countries have

mixed economies mixed economies with the mix with the mix varying from varying from country to countrycountry to country

Goals of Equity and Goals of Equity and EfficiencyEfficiency

• There are two primary economic There are two primary economic objectives to guide countries in objectives to guide countries in choosing how much government to choosing how much government to mix with free markets.mix with free markets.– EquityEquity– EfficiencyEfficiency

Equity & EfficiencyEquity & Efficiency

• EquityEquity– FairnessFairness– Personal Personal

perceptionperception– What is equitableWhat is equitable

• EfficiencyEfficiency– Which means that Which means that

resources are use resources are use in ways that in ways that provide the most provide the most valuevalue

– TechnologicalTechnological– AllocativeAllocative

EfficiencyEfficiency

• TechnologicalTechnological– The greatest The greatest

quantity of output quantity of output for given inputsfor given inputs

– Least cost Least cost production production techniquetechnique

• AllocativeAllocative– Involves choosing Involves choosing

the most valuable the most valuable mix of outputs to mix of outputs to produce.produce.

Equity & EfficiencyEquity & Efficiency

• There is frequently a tradeoff There is frequently a tradeoff between efficiency and equitybetween efficiency and equity– More of one less of the otherMore of one less of the other

• What is more efficient What is more efficient – Command and controlCommand and control– Free marketFree market

• Market failureMarket failure– inefficientinefficient

Economic AnalysisEconomic Analysis

• Fallacy of compositionFallacy of composition– What is true at the micro level is also What is true at the micro level is also

true at the macro leveltrue at the macro level• What is true for the individual is true for What is true for the individual is true for

the wholethe whole

Economic AnalysisEconomic Analysis

• NormativeNormative– Having to do with Having to do with

behavioral norms behavioral norms which are which are judgments as to judgments as to what is good or what is good or badbad

– What ought to beWhat ought to be

• PositivePositive– Having to do with Having to do with

what iswhat is– Scientific thinkingScientific thinking