National Economy National Economy An economy is a

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National Economy • National Economy An economy is a mechanism comprised of decision makers

National Economy • National Economy An economy is a mechanism comprised of decision makers (such as households, firms & the government) and institutions (such as markets & a legal system with established property rights) that allocates scarce resources among alternative uses. 1

NATIONAL ECONOMY 2

NATIONAL ECONOMY 2

National Economy • Household Any group of people living together as a decision making

National Economy • Household Any group of people living together as a decision making unit Examples: Roommates ordering a pizza; a family at the grocery store 3

National Economy • Firm An organization that uses resources to produce goods and services

National Economy • Firm An organization that uses resources to produce goods and services Examples: Lemonade Stand Vs. IBM 4

National Economy • Government An organization that establishes & maintains the institutions which enable

National Economy • Government An organization that establishes & maintains the institutions which enable the smooth functioning of the economy Examples: Federal, State & Local governments 5

National Economy • Technology A recipe or formula for combining raw materials and goods

National Economy • Technology A recipe or formula for combining raw materials and goods into other goods Examples: Lemonade recipe Vs. Formula for the next generation chip 6

National Economy • Factors of production Given a technology anything that can be used

National Economy • Factors of production Given a technology anything that can be used to produce a good is called a factor of production Examples: Land, Labor, Capital & Entrepreneurial Ability 7

National Economy • Types of Capital Financial Capital Stocks, bonds, shares etc. Physical Capital.

National Economy • Types of Capital Financial Capital Stocks, bonds, shares etc. Physical Capital. All the equipment, buildings & tools & goods used to produce other goods & services Human Capital Education, on the job training etc. Entrepreneurial Ability A human resource that organizes the other factors of production & bears the business risk 8

National Economy • Factors of Production & Compensation Land, Capital Rental rate Labor Wage

National Economy • Factors of Production & Compensation Land, Capital Rental rate Labor Wage rate Entrepreneurs (Residual) Profits i. e the profits left after paying the other factors of production 9

National Economy • Market A market refers to any situation in which the buyers

National Economy • Market A market refers to any situation in which the buyers & sellers can negotiate the exchange of some good or service. Examples: Byerly’s Vs. International Stock Exchange 10

Global Economy • An economy composed of several national economies that trade amongst themselves.

Global Economy • An economy composed of several national economies that trade amongst themselves. • Trade Deficit: When Imports exceed exports there is said to be a trade deficit • Financial Surplus: Since U. S. borrowing (via bonds) exceeds U. S. lending there tends to be a financial surplus. 11

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Philosophy, Art or Science? Carefully study it. Systematic Observation & Measurement Observe a Phenomenon

Philosophy, Art or Science? Carefully study it. Systematic Observation & Measurement Observe a Phenomenon Confirm / Re-examine Not Prove or Disprove Develop a theory to explain the data Check the implications of your theory against new data from similar circumstances 13

Positive Vs. Normative Economics • Positive Economics Statements of fact & logical deductions Ex:

Positive Vs. Normative Economics • Positive Economics Statements of fact & logical deductions Ex: If it rains the football field will get wet. • Normative Economics Statements about what should be (value judgments) Example: The football field is better when it is wet. 14

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