MACROECONOMICS EXPLORE APPLY by Ayers and Collinge CHAPTER
MACROECONOMICS: EXPLORE & APPLY by Ayers and Collinge CHAPTER 1 “The Economic Perspective” Power. Point© Presentations Prepared by Assistant Professor Paul Harris Camden County College © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 1
Learning Objectives 1. Describe how scarce resources and unlimited wants lead to the study of economics. 2. Distinguish between microeconomics and macroeconomics. 3. Identify three basic questions that all economies must answer. 4. Recognize the strengths of the market place and motivations for government involvement. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 2
Learning Objectives 4. Understand what a model is and why models are best kept simple. 5. (E&A) Explain why incentives are important for economics prosperity. 6. Appendix: Working with graphs and data. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 3
1. 1 SCARCE RESOURCES, UNLIMITED WANTS Economics studies the allocation of scarce resources in response to unlimited wants. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 4
Scarce Resources, Unlimited Wants Economics is about choice. Society is forced to choose because resources are scarce. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 5
Making Decision at the Margin When something is scarce we must choose. We make choices at the margin. At margin means “incrementally”, or in small steps. Resource allocation refers to the uses to which resources are put. How resources are used depends partly upon technology. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 6
1. 2 SURVEYING THE ECONOMIC LANDSCAPE Microeconomics: examines the individual components of the economy. Macroeconomics: examines the economy as a whole (aggregates). © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 7
1. 3 THREE BASIC QUESTIONS 1. What? What goods and services will be produced and offered for sale, and in what quantities? © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 8
Three Basic Questions 2. How? How will the goods and services be produced? © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 9
Three Basic Questions 3. For Whom? Who will consume the goods and services which are produced? © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 10
Three Basic Questions In answering the three basic questions society must choose among three kinds of economic systems: Command control: where government might make the decisions. Free markets: which are “laissez faire”, and characterized by freedom of choice in both production and consumption. Mixed economies: meaning that they choose with a combination of both markets and government. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 11
The Spectrum of Economic Systems Command Control © 2004 Prentice Hall Publishing Mixed Laissez-Faire Free Markets Ayers/Collinge, 1/e 12
• The Goals of Equity and Efficiency There are two primary economic objectives for countries in choosing how much government to mix with free markets. èEquity èEfficiency © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 13
• The Goals of Equity and Efficiency The first is objective equity, which refers to fairness. Equity is ultimately a matter of personal perception. © 2004 Prentice Hall Publishing The second objective is efficiency. Efficiency means resources are used in ways that provide the most value. Ayers/Collinge, 1/e 14
Economic Efficiency 4 Technological efficiency: getting the greatest quantity of output from the resources that are being used. 4 Allocative efficiency: choosing the most valuable mix of outputs to produce. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 15
Economic Efficiency v. Frequently, there is a tradeoff between efficiency and equity. v. More equity may result in less efficiency, which is often referred to as inefficiency. v. Likewise, less equity may result in greater efficiency. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 16
Command Control Who Needs Markets? v. Throughout history, countries have embraced central planning to help eliminate the perceived disorder of the marketplace. v. This sets production plans for most goods, which are produced by government-owned state enterprises. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 17
“The Invisible Hand” Who Needs Government? § Adam Smith described in The Wealth of Nations the invisible hand of the marketplace. § This leads the economy to produce an efficient variety of goods and services, with efficient production methods. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 18
The Price System q In the market system all participants make choices on the basis of information conveyed by market prices. q The collection of prices in product and resource markets is termed the price system. q. Prices provide information about scarcity. q. It is the price system that allocates resources in a market economy to their highest valued uses. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 19
Mixing Government With the Marketplace Market failures occur when markets fail to achieve efficiency. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 20
Market Failure Market failures include: • public goods • externalities • market power • imperfect information © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 21
Command-Control Techniques Command-Control techniques used by the government in a mixed economy: • government production • income redistribution • taxation • regulations • mandates © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 22
1. 4 ECONOMIC ANALYSIS Ø The practice of economics involves analysis and problem solving. Ø Care must be taken to avoid faulty reasoning. Ø An example of this is the fallacy of composition. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 23
Positive and Normative Economics Normative economic statements have to do with behavioral norms. They are judgments as to what is good or bad. Examples often include “ought” or “should” in them. © 2004 Prentice Hall Publishing Positive economic statements have to do with facts. They may involve current, historical, or even future facts. Examples often include what is, was or will be. Ayers/Collinge, 1/e 24
Economic Modeling: The Route to Higher-Level Understanding Models: Simplified version of reality. • They emphasize features central to the questions we are trying to answer. Theories: Statements about how the world works. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 25
Economic Modeling: The Route to Higher-Level Understanding Occam’s razor principle Argues that reasoning is improved by focusing one’s thinking on the most essential elements of an issue. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 26
Economic Modeling: The Route to Higher-Level Understanding To keep models simple, economist make assumptions. They act as though certain things are true without proving them to in fact be true. One common assumption is termed ceteris paribus: This is Latin for holding all else constant. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 27
1. 5 EXPLORE & APPLY: From Mao to Now 1978 1979 -1983 1980 1986 © 2004 Prentice Hall Publishing Transition from planned to market-oriented economy begins. Collective farming is replaced by “household responsibility system” of individual farms. Special economic zones are created to experiment with market reforms. Foreign investment law is passed. Ayers/Collinge, 1/e 28
E & A From Mao to Now 1988 1990 1993 1994 Enterprise law allows for the existence of privately owned stock companies. Chinese stock markets are established. Modern corporate system at stateowned enterprises is introduced. China allows the exchange value of its currency to be set on world markets, reflecting the common practice of market economies. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 29
E & A From Mao to Now 1999 2001 © 2004 Prentice Hall Publishing China’s economy becomes the world’s second largest, behind only that of the United States. Price controls on key items are lifted as China is admitted as member of the World Trade Organization. Ayers/Collinge, 1/e 30
Terms along the Way • • economics scarcity the margin microeconomics macroeconomics command & control free markets mixed economies © 2004 Prentice Hall Publishing • • equity efficiency technological efficiency allocative efficiency invisible hand market failures public goods externalities Ayers/Collinge, 1/e 31
Terms along the Way (continued) • • • market power normative statements positive statements © 2004 Prentice Hall Publishing • • models Occam’s razor egalitarianism original position Ayers/Collinge, 1/e 32
Test Yourself 1. Economics is primarily the study of a. stocks and bonds. b. allocating limited resources to meet unlimited wants. c. methods to eliminate scarcity. d. why consumers want what they do. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 33
Test Yourself 2. The three basic questions an economy must answer are a. why produce; how much to produce; who to produce it. b. what to produce; how to produce it; who to consume it. c. what to produce; why produce; how to produce. d. when to produce; how to produce; what to produce. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 34
Test Yourself 3. Command control economies are identified by a. reliance upon free markets. b. adherence to the principles of capitalism. c. economic freedom. d. government decision making. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 35
Test Yourself 4. In a capitalist economy, economic activities are coordinated by a. tradition. b. prices. c. government. d. business firms. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 36
Test Yourself 5. The idea that the economy should produce its outputs with the least costly combination of inputs is known as a. allocative efficiency. b. technological efficiency. c. economic efficiency. d. equity. © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 37
The End! Next Chapter 1 Appendix © 2004 Prentice Hall Publishing Ayers/Collinge, 1/e 38
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