Transcript Principles of Economics Third Edition by Fred Gottheil

Chapter 1
Introduction
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Economic Principles
The earth’s resources
Renewable vs. nonrenewable
resources
Insatiable wants
Scarcity and choice
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Economic Principles
Economic model building
Microeconomic and
macroeconomic analysis
Positive and normative
economics
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Natural Resources
A natural resource is a gift of
nature.
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Natural Resources
Examples of natural resources
include:
• Land
• The uncultivated produce of land
• Water
• Minerals
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Natural Resources
There are two kinds of natural
resources:
• Renewable
• Nonrenewable
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Natural Resources
• A renewable natural resource is
one that can be replenished.
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Natural Resources
Renewable natural resources
include:
• Forests
• Sea and land animals
• Water
• Grasses and forage on rangelands
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Natural Resources
• A nonrenewable natural
resource is one that cannot be
replenished.
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Natural Resources
Nonrenewable natural resources
include:
• Metals and ores
• Oil and natural gas
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Natural Resources
Are we running out of natural
resources?
• We live in a finite world
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Natural Resources
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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Natural Resources
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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Natural Resources
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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Scarcity
Scarcity is the perpetual state of
insufficiency of resources to satisfy
people’s unlimited wants.
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Scarcity
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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Scarcity
Examples of things that are
scarce:
• Super Bowl tickets
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Scarcity
Examples of things that are
scarce:
• Meals at a fine restaurant
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Scarcity
Examples of things that are
scarce:
• Admission to an elite university
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Scarcity
Examples of things that are not
scarce:
• Snow and ice in Alaska
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Scarcity
Examples of things that are not
scarce:
• Sand in a desert
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Scarcity
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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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 Economics
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 Economics
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 Sovereignty
Consumer sovereignty
• The Freedom of consumers to determine
what goods and services they will buy.
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Consumer Sovereignty
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
Consumer sovereignty affects the
economy in several ways.
• Consumer decisions determine who
gets what goods.
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Economic Models
Economic models
• Economic models are simplified
abstractions of the real world.
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Economic Models
1. How can economic models be
expressed?
• Pictorially
• Graphically
• Algebraically
• Verbally
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Economic Models
Economists use models because
the world is too complex to fully
and comprehensively consider at
one time.
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Economic Models
Ceteris paribus
• Ceteris Paribus is a Latin phrase
meaning “everything else being equal.”
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Economic Models
The ceteris paribus assumption
allows economists to develop oneto-one, cause-and-effect
relationships in isolation.
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Economic Models
The role of ceteris paribus:
• Isolates one factor at a time in an
experiment or study.
• Allows researchers to identify causeand-effect relationships removed from
other factors.
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EXHIBIT 1
THE CIRCULAR FLOW MODEL
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Circular Flow Model
There are two principal players in
the circular flow model
• Households
• Firms
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Circular Flow Model
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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Circular Flow Model
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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Circular Flow Model
Resource market
• The resource market is the market in
which households supply resources to
firms.
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Circular Flow Model
These resources can include:
• Land
• Labor
• Capital
• Entrepreneurship
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Circular Flow Model
Firms pay for these resources with:
• Wages
• Rent
• Interest
• Profit
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Circular Flow Model
Product market
• The product market is the market in
which firms supply goods and services to
households.
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Circular Flow Model
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
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. Macro
The study of economics is divided
into two areas
• Microeconomics
• Macroeconomics
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Micro vs. Macro
Macroeconomics
• Macroeconomics analyzes the behavior
of the market as a whole.
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Micro vs. Macro
Microeconomics
• Microeconomics analyzes individual
and firm behavior, especially in market
conditions.
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Positive vs. Normative
Economics
There are two different approaches
to the study of economics
• Positive economics
• Normative economics
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Positive vs. Normative
Economics
Positive economics
• Positive economics is a subset of
economics that analyzes the way the
economy actually operates.
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Positive vs. Normative
Economics
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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