Transcript Lecture 1 File

Chapter 1
INDIVIDUALS AND GOVERNMENT
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1-1
Allocation of Resources
Resources are allocated between government and
private use:
• For Government Use
– Roads
– Schooling
– Fire Protection
• For Private Use
– Food
– Clothing
• Units of private goods and services are forgone
by individuals so that government can provide
goods and services.
1-2
Production Possibility Curve
1-3
The Mixed Economy
Characteristics of a mixed economy:
• Government supplies many goods and
services
• Government regulates private economic
activity
• Government expenditures equal ¼ to ½ of
GDP
• Government participates in markets as a
buyer of goods and services
1-4
Circular Flow
1-5
Government Expenditures in the U.S.
• Government purchases divert productive
resources from private use
– National defense
• Steel, labor
• Government transfer payments
redistribute purchasing power among
citizens
– Social benefits
• Social Security, Medicare
1-6
Government Expenditures, 1929–1987
1-7
Government Expenditures, 1988–2005
1-8
Government Expenditures in the U.S.
1-9
Structure of Federal Government Expenditure
1-10
Distribution of Federal Expenditures
1-11
Structure of Federal Government Expenditure
1-12
Structure of Federal Government Expenditure
1-13
State and Local Government Expenditures
1-14
State and Local Government Expenditures
1-15
Financing Government Expenditures
• Federal Government—Taxes
1-16
Financing Government Expenditures
1-17
Financing Government Expenditures
• State and local governments—Taxes, federal
grants
1-18
Financing Government Expenditures
1-19
Functions of Government
• Provide items we cannot easily make available
for ourselves or purchase from others in markets
– Law enforcement and courts
• Redistribute income and economic opportunity
– Income support for elderly, unemployed, poor
• Stabilize economic fluctuations
– Inflation
• Regulate production and consumption
– For improved health, elimination of excessive
monopolistic control over prices
1-20
How much government is enough?
How much should
governments do, and
how much should be
left to private
enterprise and
initiative through
market sale of goods
and services?
1-21
Aging Populations & Public Finance
• Percentage of U.S. residents age 65 or older:
1950 – 8.3%; 2000 – 12.3%; 2050 – 21.1%
• Significant effects on Social Security and
government-funded health care expenditures
• Tax rates to finance programs must increase or
benefits to recipients must decline to avoid
causing large federal budget deficit
1-22
Population Aging
1-23
Old-Age Dependency Ratios
1-24
Appendix I – Tools of Microeconomic Analysis
Indifference Curve Analysis
• Tool for understanding choices people make
regarding purchase and use of goods and services
• Understanding choices to give up leisure time to
obtain income through work
• Understanding choices to give up consumption
today for more consumption in the future
• Uses concept of the market basket – a combination
of various goods and services available for
consumption over a certain period
1-25
Assumptions Underlying Indifference Curve
Analysis
1. People can rank market baskets from most to
least desired.
2. If basket A is preferred to basket B and basket
B is preferred to basket C, then basket A must
be preferred to basket C.
3. People always prefer more of a good to less of
it, all other things being equal.
4. The amount of money people will give up to
obtain additional units of a given good will
decrease as more of the good is acquired.
1-26
Indifference Curve Analysis
• Indifference Curve – a graph of all
combinations of market baskets
among which a person is indifferent
• Indifference Map – a way of
describing a person’s preferences;
shows a group of indifference curves
1-27
Indifference Curves
1-28
Budget Constraint Line
1-29
Consumer Equilibrium
1-30
Changes in Income
1-31
Changes in Price of Good X
1-32
Income and Substitution Effects
1-33
The Law of Demand
• The inverse relationship between price and the
quantity of a good purchased per time period
• Demand curves slope downward, other things
being equal
• Changes in quantity demanded are movements
along the curve in response to price changes
• Change in demand is a shifting in or out of the
curve, caused by changes in income, tastes, or
the prices of substitutes or complements for the
good
1-34
The Law of Demand
1-35
Price Elasticity of Demand
Measures the percentage change in quantity
demanded due to a given percentage
change in price:
1-36
Consumer Surplus
1-37
Indifference Curves and the Allocation of Time
1-38
Production and Cost
• Production function – the maximum output
obtainable from any given combination of
inputs (land, labor, materials, capital),
given technology
• Two periods to production
– Short run (inputs cannot be varied)
– Long run (all inputs are variable)
1-39
Isoquant Analysis
Isoquants - curves that show alternative combinations of variable inputs
that can be used to produce a given amount of output
1-40
Costs
• Total cost (TC) – the value of all inputs used to
produce a given output
• Variable cost (VC) – the cost of variable inputs such
labor, machines, and materials
• Fixed cost (FC) – cost of inputs that do not vary with
output
• Average cost (AC) – equal to total cost of production
divided by the number of units produced
• Average variable cost (AVC) – variable cost divided
by the number of units produced
• Average fixed cost (AFC) – difference between
average cost and average variable cost
1-41
Short-Run Cost Curves
1-42
Competition
• Perfect competition exists when a firm is one of
many producing a small market share of a
standardized product with no difference in
quality.
• A competitive firm sells its output in a perfectly
competitive market and is a price taker, because
it takes the price of its product as given.
• Profits are maximized by producing that output
for which price is equal to marginal cost:
P = MC
1-43
Supply
• Short-run supply curve – price exceeds
minimum possible average variable costs of
production
• Long-run competitive equilibrium – economic
profits are zero so that no incentive exists for
firms to either enter or leave
• Long-run industry supply curve – a relationship
between price and quantity supplied for points at
which the industry is in equilibrium:
P = LRMC = LRACmin
1-44
Long-Run Competitive Equilibrium
1-45
Long-Run Supply
1-46
Price Elasticity of Supply
The percentage change in quantity supplied in response
to any given change in price:
1-47
Long-Run Supply
1-48