DOCSLIB.ORG

Basic Economic Toolkit

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Basic Economic Toolkit BASIC ECONOMIC TOOLKIT The study of Global Economic Issues requires an understanding of economics. This chapter is devoted to explaining the basic economics concepts central to all studies of economics. The approach in this chapter is to expand on the definition of economics. Economics is defined as how society allocates scarce resources in the production, exchange and consumption of goods and services. The statement needs tremendous amounts of clarification. We will examine in closer detail the underlying concepts associated with some of the definition’s words. The most important word in the definition is “scarce”. It is derived from the concept of scarcity, which is due to the fact that an economy has limited or finite resources but its citizens have unlimited wants. Society can not produce everything for everybody. In other words you can’t have it all. This requires that individuals and society in general must make choices. If you devote time and resources to one activity, you must be forgoing its alternatives. In other words, the cost of making a choice, opportunity cost, is foregoing the next best alternative. SCARCITY ) CHOICE ) OPPORTUNITY COST If economics is about making choices then a decision making process is required. Economists assume that decision-makers attempt to make the best choices available given their constraints. This framework is called rational decision making, and it requires the decision-maker to weigh the costs and benefits of their choices. If the benefit of continuing an activity is greater than its opportunity cost, the rational decision-maker will continue the activity. At the point where the additional benefit of the activity is equal to its opportunity cost, the decision-maker will stop pursuing the activity. At this point, if we define profit as the difference between benefit and cost, the decision-maker will not continue to profit from the activity. In other words, he or she has extracted all possible profit and does not have the incentive to continue. We will use this concept of rational decision making throughout the course. The decision-makers will be different, as will the activities they pursue, but the means by which they choose which activity to do will be the same. RATIONAL DECISIONS ) MARGINAL BENEFIT = MARGINAL COST The second word to discuss in the definition of economics is “allocate”. How and more importantly, who decides which goods are produced, how they are produced and for whom the goods are produced. The identity of the decision-makers in these three questions defines the society’s economic system. There are three major types of economic systems: a market economy, a command economy, and a traditional economy. They differ in who makes the decisions with regards to what, how and for whom goods and services are produced. Economic Systems In the market system each individual makes self-interested choices. Acting as both consumers and producers, individuals signal their values and costs in consuming and producing goods and services through a system of markets. These markets, as we will see, are then allocated in the production of a particular good to the low cost producer and the consumption of the good to those who value it the most. In a command economy government bureaucrats make allocative decisions. The former Soviet Union had a command economic system. Five-year plans were devised, planning the production of various goods, and rewarding workers with set incomes. Prices for goods were determined by the government and were not allowed to adjust. Typically, goods were in scarce supply, leading to people having to wait in long lines for the opportunity to purchase basic staples. The last of the economic systems is the traditional economy. This economic system found in primitive societies, uses tradition as the guide for the allocation of resources. What worked in the past is used today. There is very little opportunity for change; in fact change is resisted. Generally, life in these societies is very precarious. Seeking alternative ways to produce may lead to disastrous results such as famine and starvation. Under these conditions, efficiency is traded off for reliability. In many respects no existing society employs in a pure form of only one of the three types of economic systems. The United States, for example, is primarily a market economy, but has significant government provided goods and services. Its economy is called a mixed economy. The major difference between economies is which of the three types of systems dominates. One reason why there is no pure market or command economic systems is that government economic objectives can conflict. A market system will efficiently allocate resources. In other words, markets create the largest economic pie possible. Command systems purportedly have equity as their main objective. Equity concerns focus on how the economic pie is divided. Unfortunately, the size of the pie and how evenly it is sliced are usually at odds. No government can completely ignore one policy objective for the other. Capitalist societies tend to focus on efficiency, but also include some redistribution of income policies. Socialist societies tend to focus on equity, but also need to be concerned that there is an economic pie to divide. Production Process The third word to direct our focus in the definition of economics is resources. Resources are the inputs that are used to produce goods and services. They are generally divided into different categories. One categorization is to divide resources into land, labor and capital. Land refers to nature’s bounty. This would include natural resources, arable land, temperate climate, coastlines with deep-water bays, etc. Labor refers to the human input in any form. The ability of labor to produce depends in part on how skilled it is. Depending upon the type of analysis labor can be divided into different skill categories. Capital is the name given to output used in the production of goods and services. This would include machinery, computers, factories, transportation infrastructure, etc. This capital is distinct from financial capital. Stocks and bonds are financial instruments in which investors build stocks of wealth. Capital as we refer to it will be defined in terms of real things that are used to help in production. Production is the next word of our definition to discuss. In order to produce goods and services the firm has to combine different resources in a production process. The level of technology determines the amounts of output derived from different levels of inputs. We can conceptualize the production process in the simple diagram, Figure 1. On the left are the inputs of land, labor and capital. They enter the production process and are combined transforming them into outputs. The level of technology determines the amount of output obtainable from given levels of input. The better the technology the greater the amount of output obtainable. Production Process Output Inputs Technology Consumption Goods Land Labor Capital Capital Goods Figure 1 By dividing output into two categories we can create a simple model of economic development. The output types are consumption goods, which consumers consume, and capital, which add to society’s resources to be used in the production process the next time period. We can utilize the concept of opportunity cost to examine the tradeoff between increased consumption and decreased savings (capital goods). What Figure 1 tells us is that with a certain amount of inputs society can produce both consumption and capital goods. The opportunity cost of producing more consumption goods is reduced production of capital goods. Conversely, the only way to produce capital goods is to forgo some consumption. Reducing consumption is an act of savings. With greater amounts of capital, production in the next period will be greater than in the present. Therefore, the opportunity cost of present high levels of consumption is slower economic growth in the future. The word “exchange” in our definition of economics alludes to the fact that people are not self-sufficient. In other words, we do not individually produce all the goods and services that we consume. We tend to specialize in the production of only a small number of goods or services and trade them for those goods we desire what we do not produce. This specialization will be discussed later in this chapter. Again, economics is defined as how society allocates scarce resources in the production, exchange and consumption of goods and services, as we see is far more complicated than one would guess at first blush. Production Possibilities Frontiers The production possibilities frontier (PPF) is an important tool in the study of international trade. It, also, embodies many of the concepts discussed in the definition of economics and can help clarify our understanding. A production possibilities frontier shows all combinations of goods and services a society or country can produce given: the quantity and quality of its resources, the level of its technology, and, (for now) that society uses its resources “wisely”. Because society’s resources are limited it can only produce a finite amount of goods. When all resources are fully employed in production then an increase in production of one set of goods necessarily means that production of other goods must decrease. Why? Because the resources required to increase production can only be obtained by diverting them away from other productive activities. Test your understanding of economics by associating an economic concept to the previous sentence. PPFs portrayed Pizza graphically are limited to using only B E two goods because of the dimensionality of the page (three- dimensional graphs are very hard to D A draw and four dimensions are 3 impossible). Be that as it may, PPFs are not limited conceptually to two goods, but would require a level of mathematics beyond that required for the course.
Load more

Recommended publications
  • ECO 212 – Macroeconomics Yellow Pages ANSWERS Unit 1
    ECO 212 – Macroeconomics Yellow Pages ANSWERS Unit 1 Mark Healy William Rainey Harper College E-Mail: [email protected] Office: J-262 Phone: 847-925-6352 Which of the 5 Es of Economics BEST explains the statements that follow: Economic Growth Allocative Efficiency Productive Efficiency o not using more resources than necessary o using resources where they are best suited o using the appropriate technology Equity Full Employment Shortage of Super Bowl Tickets – Allocative Efficiency Coke lays off 6000 employees and still produces the same amount – Productive Efficiency Free trade – Productive Efficiency More resources – Economic Growth Producing more music downloads and fewer CDs – Allocative Efficiency Law of Diminishing Marginal Utility - Equity Using all available resources – Full Employment Discrimination – Productive Efficiency "President Obama Example" - Equity improved technology – Economic Growth Due to an economic recession many companies lay off workers – Full Employment A "fair" distribution of goods and services - Equity Food price controls – Allocative Efficiency Secretaries type letters and truck drivers drive trucks – Productive Efficiency Due to government price supports farmers grow too much grain – Allocative Efficiency Kodak Cuts Jobs - see article below o October 24, 2001 Posted: 1728 GMT [http://edition.cnn.com/2001/BUSINESS/10/24/kodak/index.html NEW YORK (CNNmoney) -- Eastman Kodak Co. posted a sharp drop in third- quarter profits Wednesday and warned the current quarter won't be much better, adding it will cut up to 4,000 more jobs. .Film and photography companies have been struggling with the adjustment to a shift to digital photography as the market for traditional film continues to shrink. Which of the 5Es explains this news article? Explain.
    [Show full text]
  • Fall 2011 ECO 211 – Microeconomics Yellow Pages ANSWERS Unit 1
    Fall 2011 ECO 211 – Microeconomics Yellow Pages ANSWERS Unit 1 Mark Healy William Rainey Harper College E-Mail: [email protected] Office: J-262 Phone: 847-925-6352 1 Which of the 5 Es of Economics BEST explains the statements that follow: 1. Economic Growth 2. Allocative Efficiency 3. Productive Efficiency 3a. not using more resources than necessary 3b. using resources where they are best suited 3c. using the appropriate technology 4. Equity 5. Full Employment __2__ Shortage of Super Bowl Tickets – Allocative Efficiency __3a__ Coke lays off 6000 employees and still produces the same amount – Productive Efficiency __3b__ Free trade – Productive Efficiency __1__ More resources – Economic Growth __2__ Producing more music downloads and fewer CDs – Allocative Efficiency __4__ Law of Diminishing Marginal Utility - Equity __5__ Using all available resources – Full Employment __3b__ Discrimination – Productive Efficiency __4__ "President Obama Example" - Equity __1__ improved technology – Economic Growth __5__ Due to an economic recession many companies lay off workers – Full Employment __4__ A "fair" distribution of goods and services - Equity __2__ Food price controls – Allocative Efficiency __3b__ Secretaries type letters and truck drivers drive trucks – Productive Efficiency 2 __2__ Due to government price supports farmers grow too much grain – Allocative Efficiency __2__ Kodak Cuts Jobs - see article below o October 24, 2001 Posted: 1728 GMT [http://edition.cnn.com/2001/BUSINESS/10/24/kodak/index.html NEW YORK (CNNmoney) -- Eastman Kodak Co. posted a sharp drop in third- quarter profits Wednesday and warned the current quarter won't be much better, adding it will cut up to 4,000 more jobs. .Film and photography companies have been struggling with the adjustment to a shift to digital photography as the market for traditional film continues to shrink.
    [Show full text]
  • Economics - Regents Level Vocabulary
    Economics - Regents Level Vocabulary Chapter 1 Section 1: Need want economics Goods services scarcity Shortage factors of production land Labor capital physical capital Human capital entrepreneur Section 2: Trade-off guns or butter opportunity cost Thinking at the margin Section 3: Production possibilities curve production possibilities frontier Efficiency underutilization cost Law of increasing costs Chapter 2 Section 1: Economic systems factor payments patriotism Safety net standard of living traditional economy Market economy centrally planned economy command economy Mixed economy Section 2: Market specialization household Firm factor market profit Product market self-interest incentive Competition consumer sovereignty Section 3: Socialism communism authoritarian Collective heavy industry Section4: Laissez faire private property free enterprise Continuum transition privatize Chapter 3 Section 1: Profit motive open opportunity private property rights Free contract voluntary exchange competition Interest group public disclosure laws public interest Section 2: Macroeconomics microeconomics gross domestic product (GDP) Business cycle work ethic technology Section 3: Public good public sector private sector Free rider market failure externality Section 4: Poverty threshold welfare cash transfers In-kind benefits Chapter 4 Section 1: Demand law of demand substitution effect Income effect demand schedule market demand schedule Demand curve Section 2: Ceteris paribus normal good inferior good Compliments substitutes Section 3: Elasticity of
    [Show full text]
  • H.S. Economics
    Pittsford Area Schools High School Economics Curriculum Map Text: Economics- Principles in Action O’Sullivan, A. and Sheffrin, S. Prentice Hall (2001) Economics is a one-semester course designed to enhance student understanding of “economic literacy”. These concepts become increasingly important as the interconnectedness of the world cannot be avoided. Students must be able to analyze individual and societal economic decisions to function as consumers, producers, savers, investors, and responsible citizens. (Adapted from the Michigan Department of Education K-12 Social Studies Standards) Content and Text Connections State of Michigan Standards Vocabulary S UNIT 1: Fundamentals of Economics 1.1.1 Chapter 1 E Chapter 1: What is Economics? Scarcity, choice, opportunity costs, Need Want incentives Economics Goods M Chapter 2: Economic Systems 1.1.2 Services Scarcity E Additional Topics: Entrepreneurship Shortage Land S Comparative and Absolute Trade Advantage 1.1.3 Labor Capital Developed and Developing/Transitional Countries Marginal analysis Factors of production Cost T Chapter 3: American Free Enterprise 1.4.2 Physical capital Human capital E Government and Consumers Entrepreneur Trade-off R 1.4.4 Guns or butter Opportunity costs Market failure Thinking at the margin Efficiency 2.1.1 Production possibilities Underutilization C Circular flow and the national Law of increasing costs O economy U 2.1.2 Chapter 2 Economic indicators R Economic system Factor payments 2.2.1 Safety net Market economy S Government involvement in the Standard of
    [Show full text]
  • A Synthesis of Law and Economics
    SMU Law Review Volume 44 Issue 3 Article 4 1990 A Synthesis of Law and Economics John Cirace Follow this and additional works at: https://scholar.smu.edu/smulr Recommended Citation John Cirace, A Synthesis of Law and Economics, 44 SW L.J. 1139 (1990) https://scholar.smu.edu/smulr/vol44/iss3/4 This Article is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in SMU Law Review by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu. A SYNTHESIS OF LAW AND ECONOMICS by John Cirace I. INTRODUCTION ~E purpose of this Article is to effect a synthesis of law and econom- is that is acceptable to both lawyers and economists; in other words, 1 2 r1.aosynthesis acceptable to those who think like and have values of lawyers as well as those who think like3 and have values4 of economists. Section One discusses the criticisms that lawyers and economists make of each other's values and methodology, and outlines a way to synthesize these conflicting values and different methodologies. * Professor of Economics, The City University of New York; Adjunct Professor of Law, Brooklyn Law School. Harvard University, B.A., 1962; Stanford Law School, J.D., 1967; Columbia University, Ph.D., 1975. I wish to thank the students in my Law & Econom- ics classes at Brooklyn Law School, Spring, 1989 and Spring, 1990; their unremitting criticism of economic analysis of law for its nearly total disregard of equitable considerations continu- ally forced me to rethink my assumptions and approach.
    [Show full text]
  • The Role of Catholic Social Theory in Economic Policy
    THE ROLE OF CATHOLIC SOCIAL THEORY IN ECONOMIC POLICY A DISSERTATION IN Economics and the Social Science Consortium Presented to the Faculty of the University of Missouri-Kansas City in partial fulfillment of the requirements for the degree DOCTOR OF PHILOSOPHY By Jeremy J. O’Connor B.S., Rockhurst College, 1999 M.B.A., Rockhurst University, 2002 Kansas City, Missouri, 2010 © 2010 Jeremy J. O’Connor All Rights Reserved THE ROLE OF CATHOLIC SOCIAL THEORY IN ECONOMIC POLICY Jeremy J. O’Connor, Candidate for the Doctor of Philosophy Degree University of Missouri-Kansas City, 2010 ABSTRACT This dissertation examines Catholic Social Theory (CST) in the context of its relationship to and impact on economic policy. CST emerged formally in the latter part of the nineteenth century in response to social changes and movements that were dividing the world, particularly in Western Europe and the United States. These movements included the emergence of both capitalism and socialism. To address the conflict that inevitably developed in this changing world, economic policies were instituted. These policies were intended, at least the argument goes to serve the common good and were based on theoretical concepts and perceptions. One question, from the perspective of CST is: are the policies in agreement with CST? The purpose of this study is to establish what relationship there is, if any, between selected U.S. economic policies and CST. Perhaps nowhere can this question be more fully addressed than in an examination of two important economic policy movements of the last century, New Deal economic policies and recent health care reform proposals in the U.S.
    [Show full text]
  • Ebook Download Macroeconomics for Today 5Th Edition Kindle
    MACROECONOMICS FOR TODAY 5TH EDITION PDF, EPUB, EBOOK Irvin B Tucker | --- | --- | --- | 9780324407990 | --- | --- Macroeconomics for Today, by Tucker, 5th Edition | | Bookbyte You have successfully signed out and will be required to sign back in should you need to download more resources. This title is out of print. Paul G. Keat, Thunderbird Philip K. Young, Thunderbird. Availability This title is out of print. Description For managerial economics courses taught in business schools and economics departments. Example: An index of these modules can be found on the inside cover of each student text. Example: pp. Similar examples at the end of every chapter. Select only the chapters you require or supplement with recommended case studies all under one cover. New to This Edition. Table of Contents 1. Share a link to All Resources. Instructor Resources. Websites and online courses. Other Student Resources. Previous editions. Sign In We're sorry! Specialization of labor typically leads to higher levels of productive inefficiency in an economy. The world's total output will be greater the more self-sufficient each of the world's economies becomes. All of the following, except one, help explain why specialization leads to greater production than is otherwise possible. It allows the organization of production in business firms. Specialization reduces the time lost in moving from one activity to another. As workers repeat an activity over and over, they hone their skills and become more expert. Specialization allows workers to be assigned to the activities for which they have the greater natural ability. The more often workers repeat an activity, the more stimulating and enjoyable they find it.
    [Show full text]
  • Economics Pre-Assessment
    PATERSON PUBLIC SCHOOLS Economics Pre-Assessment Student: Teacher: School: Score: Date: Administered by: Economics Pre Assessment Directions: Choose the correct response for each question. Make sure that your answer is clearly marked. Each question is worth 2 points. 1. The study of how people seek to satisfy their needs and wants by making choices is the definition of a. Economics b. Scarcity c. Entrepreneur d. Macroeconomics 2. Economies that countries like China, North Korea, and Cuba are a. Market economies b. Command economies c. Mixed economies d. Traditional economies 3. The diagram below illustrates a. A circular flow model b. Lorenz curve c. Business cycle d. Demand curve 4. This Law states that as prices go up so does quantity supply. a. Law of Demand b. Law of Supply and Demand c. Law of Supply d. Law of Decreasing cost 5. When costs are known for businesses and they able to accurately account for them, these costs are known as a. Variable costs b. Mixed costs c. Law of increasing costs d. Fixed costs 6. This type of business organization is a legal entity owned by individual stockholders a. Partnerships b. Sole proprietorships c. Cooperatives d. Corporations 7. When firms supply meets their demand for products it is known as a. Equilibrium b. Disequilibrium c. Law of supply and demand d. Equilibrium wage 8. One of the most basic concepts of investing to insure one is spreading out risk is called a. Stocks b. Bonds c. Mutual funds d. Diversification 9. If an investor buys a stock for $50 per share and purchases 100 shares, what is the investor’s principal investment? a.
    [Show full text]
  • Introduction to Economics
    The universal problem of limited resources and unlimited wants creates the problem of scarcity. Introduction The study of how societies deal with scarcity is in fact to the study of the study of economics. Thus… Economics: The study of how Economics societies attempt to satisfy unlimited needs and wants with limited resources. The Foundation of Economics Terminology A Problem of Scarcity Scarce: a term used to describe items that are finite in quantity Factors of Production: (aka “economic resources”, or the “means of production”) scarce items used in the production of other goods and services. They fall into four broad categories: Land, sea, and air 1. land as well as all resources that come from it. Human effort, 2. labour be it physical, mental, or creative. Tools used in the production process, 3. capital i.e. mechanical, technological, facilities Human resource engaged in management of 4. entrepreneurship the first three economic resources More on Opportunity Cost Economic Choice: Describes any decision that one is Opportunity cost can be a bit confusing. In fact, it can forced to make when they find that they do not have remind us of the old philosophical question, “If a tree enough resources to satisfy all of their needs or wants. falls in a forest, and there is nobody there to hear it, The goal then becomes the maximization of utility (i.e. does it make a sound?” welfare, pleasure, satisfaction). Opportunity cost does “Out-of-Pocket” Cost: The cost associated with an Until a person gives not describe any price. it up, it’s not an economic decision that requires one to forfeit current opportunity cost! economic resources.
    [Show full text]
  • Chapter 02 Production Possibilities Opportunity Cost and Economic
    MULTIPLE CHOICE 1 : Which of the following is not one of the three fundamental economic questions? A : Where to produce? B : For whom to produce? C : How to produce? D : What to produce? Correct Answer : A 2 : Three basic decisions must be made by all economies. What are they? A : How much will be produced, when it will be produced, and how much it will cost. B : What the price of each good will be, who will produce each good, and who will consume each good. C : What will be produced, how goods will be produced, and for whom goods will be produced. D : How the opportunity cost principle will be applied, if and how the law of comparative advantage will be utilized, and whether the production possibilities constraint will apply. Correct Answer : C 3 : Why must every nation answer the three fundamental economic questions? A : because of differences in the distribution of resources B : because some nations have better production technology C : because some nations are wealthy and others are poor D : because of the problem of scarcity Correct Answer : D 4 : The question Should more capital goods be produced instead of consumer goods? is an example of which fundamental economic question? A : The What to Produce question. B : The Why to Produce question. C : The How to Produce question. D : The For Whom to Produce question. Correct Answer : A 5 : The question Should bank withdrawals be conducted by tellers or ATMs? is an example of which fundamental economic question? A : The What to Produce question. B : The Why to Produce question.
    [Show full text]
  • AP Microeconomics/Macroeconomics
    FIVE STEPS TO A 5 AP Microeconomics/Macroeconomics Other books in McGraw-Hill’s 5 STEPS TO A 5 series include: AP Biology AP Calculus AB/BC AP Chemistry AP Computer Science AP English Language AP English Literature AP Physics B and C AP Psychology AP Spanish Language AP Statistics AP U.S. Government and Politics AP U.S. History AP World History Writing the AP English Essay FIVE STEPS TO A5 AP Microeconomics/ Macroeconomics 2008-2009 Eric R. Dodge MCGRAW-HILL New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data- base or retrieval system, without the prior written permission of the publisher. 0-07-159598-8 The material in this eBook also appears in the print version of this title: 0-07-149795-1. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs.
    [Show full text]
  • Introduction to Economics (Pdf)
    Introduction to Economics Definition of Economics • The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human materials wants. • Human wants are unlimited, but the means to satisfy the wants are limited. The Economic Perspective • Scarcity and choice o Resources can only be used for one purpose at a time. o Scarcity requires that choices be made. o The cost of any good, service, or activity is the value of what must be given up to obtain it.(opportunity cost). • Rational Behavior o Rational self-interest entails making decisions to achieve maximum fulfillment of goals. o Different preferences and circumstances lead to different choices. o Rational self-interest is not the same as selfishness. • Marginalism:benefits and costs o Most decisions concern a change in current conditions; therefore the economic perspective is largely focused on marginal analysis. o Each option considered weighs the marginal benefit against the marginal cost. o Whether the decision is personal or one made by business or government, the principle is the same. o The marginal cost of an action should not exceed its marginal benefits. o There is "no free lunch" and there can be "too much of a good thing." Why Study Economics? • Economics for citizenship. o Most political problems have an economic aspect, whether it is balancing the budget, fighting over the tax structure, welfare reform, international trade, or concern for the environment. o Both the voters and the elected officials can fulfill their role more effectively if they have an understanding of economic principles.
    [Show full text]