Ragan: Microeconomics PDF

Ragan: Microeconomics Seventeenth Canadian Edition Chapter 1 Economic Issues and Concepts Copyright © 2023 Pearson Canada Inc. 1-1 Chapter O...

Ragan: Microeconomics Seventeenth Canadian Edition Chapter 1 Economic Issues and Concepts Copyright © 2023 Pearson Canada Inc. 1-1 Chapter Outline/Learning Objectives Section Learning Objectives After studying this chapter, you will be able to 1.1 - What is Economics? 1. explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. 1.2 - The Complexity of 2. view the market economy as self-organizing in the Modern Economies sense that order emerges from a large number of decentralized decisions. 1.3 - Is There an Alternative 3. explain how specialization gives rise to the need for to the Market trade, and how trade is facilitated by money. Economy? 4. explain the importance of maximizing and marginal decisions. 5. describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Copyright © 2023 Pearson Canada Inc. 1-2 Issues of Pressing Concern COVID-19 Pandemic Population Aging Climate Change Productivity Growth and Accelerating Technological Change Rising Protectionism Growing Income Inequality Government Debt and Priorities Copyright © 2023 Pearson Canada Inc. 1-3 1.1 What Is Economics? (1 of 2) Economics is the study of the use of scarce resources to satisfy unlimited human wants. Resources Land (natural endowments) Labour (mental and physical human effort) Capital (tools, machinery, equipment) Economists call such resources factors of production. Copyright © 2023 Pearson Canada Inc. 1-4 1.1 What Is Economics? (2 of 2) Resources Factors of Production are used to produce goods and services. Goods are tangible (e.g., cars, steel). Services are intangible (e.g., legal advice). Production is the act of making them. Consumption is the act of using them. Copyright © 2023 Pearson Canada Inc. 1-5 Scarcity and Choice Relative to our desires, existing resources are scarce. There are enough resources to produce only a fraction of the goods and services that we want. Scarcity, therefore, implies the need for choice. Copyright © 2023 Pearson Canada Inc. 1-6 Opportunity Cost Making choices implies the existence of cost. The cost of the more of one thing is the amount of the other thing given up. Opportunity cost is the value of the next best alternative that is forgone when one alternative is chosen. Copyright © 2023 Pearson Canada Inc. 1-7 Choosing Between Road Repair and New Bicycle Paths (1 of 2) Budget line for repairs and new paths. There is only $12 min to spend on repairs and new paths. The price of repairs is $1 min/km and it is $500,000/km for new paths. Figure 1-1 Choosing Between Road Repair and The opportunity cost of 1 km of New Bicycle Paths road repairs is 2 km of new paths. The opportunity cost of 1 km of new paths is 0.5 km of road repairs. Copyright © 2023 Pearson Canada Inc. 1-8 Choosing Between Road Repair and New Bicycle Paths (2 of 2) Points that lie on or inside the budget line are attainable. – At point c (b) $12 min is enough to repair 9 km (6 km) of roads and build 6 km (12 km) of new paths – equal to budget of $12 min. Points that lie outside the Figure 1-1 Choosing Between Road Repair and New budget line are unattainable. Bicycle Paths – At point a $16.5 min is needed to repair 9 km of roads and build 15 km of new paths – beyond budget of $12 min. Copyright © 2023 Pearson Canada Inc. 1-9 Applying Economic Concepts 1-1 The Opportunity Cost of Your University Degree – Your university degree does not include only the out-of- pocket expenses on tuition and books. – What else are you forced to give up to attend university? Copyright © 2023 Pearson Canada Inc. 1 - 10 A Production Possibilities Boundary (PPB) The PPB illustrates: – Scarcity – Choice – Opportunity cost Points e and f show scarcity; they are unattainable. Points a, b, c, d show choice; they are all Figure 1-2 A Production Possibilities Boundary (PPB) attainable, but which one will be chosen? Point d is inefficient Copyright © 2023 Pearson Canada Inc. 1 - 11 Four Key Economic Problems (1 of 4) 1. What Is Produced and How? Resource allocation determines the quantities of various goods that are produced. What determines which goods are produced and which ones are not? Is there some combination of goods that is “better” than others? Should governments intervene to channel resources in particular direction? Copyright © 2023 Pearson Canada Inc. 1 - 12 Four Key Economic Problems (2 of 4) 2. What Is Consumed and by Whom? What determines the distribution of a nation’s total output among its people? Who gets a lot and who gets a little, and why? Should governments care about this distribution of consumption and if so, what tools do they have to alter it? Will the economy consume exactly the same goods that it produces? Copyright © 2023 Pearson Canada Inc. 1 - 13 Four Key Economic Problems (3 of 4) 3. Why Are Resources Sometimes Idle? An economy is operating inside its production possibilities boundary if some resources are idle. Why are some resources idle? Should governments worry about idle resources? Is there some reason to believe that occasional idleness is necessary for a well-functioning economy? Copyright © 2023 Pearson Canada Inc. 1 - 14 Four Key Economic Problems (4 of 4) 4. Is Productive Capacity Growing? The economic growth shifts the boundary outward makes it possible to produce more of all products. Before growth – a, b and c were on PPB and attainable; e and f were outside of PPB and unattainable. After growth – e and f are Figure 1-3 The Effect of Economic Growth on the Production Possibilities Boundary attainable; a, b and c are attainable but inefficient. Copyright © 2023 Pearson Canada Inc. 1 - 15 Microeconomics and Macroeconomics Questions 1. and 2. fall within the realm of microeconomics. – Microeconomics is the study of the causes and consequences of the allocation of resources as it is affected by the workings of the price system. Questions 3. and 4. fall within the realm of macroeconomics. – Macroeconomics is the study of the determination of economic aggregates such as total output, employment, and growth. Copyright © 2023 Pearson Canada Inc. 1 - 16 Economics and Government Policy Government policies affect the outcome of all four key economic problems. They can: – correct market failures resulting from misallocation of resources (Q 1.) – address fairness of distribution of consumption across individuals (Q 2.) – provide solutions to reduce idleness of nation’s resources (Q 3.) – promote economic growth (Q 4.) Copyright © 2023 Pearson Canada Inc. 1 - 17 1.2 The Complexity of Modern Economies: (1 of 7) The Nature of Market Economies Self-Organizing and Efficiency – Self-Organizing market economy - when individual consumers and producers act independently to pursue their own self-interests, the collective outcome is coordinated. – Efficiency in market economy - resources are organized so as to produce the various goods and services that people want to purchase and to produce them with the least possible amount of resources. Copyright © 2023 Pearson Canada Inc. 1 - 18 1.2 The Complexity of Modern Economies: (2 of 7) The Nature of Market Economies Adam Smith (1723–1790): In The Wealth of Nations, Smith was the first to develop this insight: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Adam Smith is saying that the massive number of economic interactions that characterize a modern economy are not all motivated by benevolence. Copyright © 2023 Pearson Canada Inc. 1 - 19 1.2 The Complexity of Modern Economies: (3 of 7) The Nature of Market Economies Incentives and Self-Interest – Individuals generally pursue their own self-interest. – Individuals respond to incentives. – Sellers usually want to sell more when prices are high and buyers usually want to buy more when prices are low. – Incentives and self-interest are not the only sources of motivation. Other values also play important role. Copyright © 2023 Pearson Canada Inc. 1 - 20 1.2 The Complexity of Modern Economies: (4 of 7) The Decision Makers and Their Choices Three types of decision makers operate in any economy: – Consumers – what to buy and how much? – Producers – what to produce and for whom? – Government – how to channel resources to productive use? Copyright © 2023 Pearson Canada Inc. 1 - 21 Figure 1-4 The Circular Flow of Income and Expenditure Copyright © 2023 Pearson Canada Inc. 1 - 22 1.2 The Complexity of Modern Economies: (5 of 7) Production and Trade Production process displays two characteristics: – Specialization of labour – the specialization of individual workers in the production of particular goods and services. – Division of labour – is the breaking up of a production process into a series of specialized tasks. Copyright © 2023 Pearson Canada Inc. 1 - 23 1.2 The Complexity of Modern Economies: (6 of 7) Production and Trade Money and Trade – Specialization must be accompanied by trade.  Money eliminates the cumbersome system of barter by separating the transactions involved in the exchange of products.  Money greatly facilitates trade, which facilitates specialization. Copyright © 2023 Pearson Canada Inc. 1 - 24 1.2 The Complexity of Modern Economies: (7 of 7) Production and Trade Globalization – Globalization is used loosely to mean the increased importance of international trade. – Two major causes of globalization are: 1. The rapid reduction in transportation costs 2. The revolution in information technology – Globalization comes with challenges – human rights, environmental, production standards. Copyright © 2023 Pearson Canada Inc. 1 - 25 1.3 Is There an Alternative to the Market Economy? Types of Economic Systems – There are three pure types of economic systems:  Traditional  Command  Free-Market – In practice, every economy is a mixed economy, in the sense that it combines significant elements of all three systems. Copyright © 2023 Pearson Canada Inc. 1 - 26 The Great Debate (1 of 2) Karl Marx (1818–1883) argued that free-market economies could not be relied upon to generate a “just” distribution of output. He argued the benefits of a centrally planned system. Beginning with the Soviet Union, many countries inspired by Marx adopted socialist/communist systems. Copyright © 2023 Pearson Canada Inc. 1 - 27 The Great Debate (2 of 2) Most of these countries were unable to raise living standards to that of more free-market economies. Result: Most governments replaced their systems of central planning with much freer markets. Copyright © 2023 Pearson Canada Inc. 1 - 28 Applying Economic Concepts 1-2 Economics Needs the Other Social Sciences – Economics has long been viewed as distinct discipline. – Modern economics relates to other aspects of society, such as politics, history, philosophy, law and sociology. – While focusing on traditional study of economics, the importance of other social sciences are highlighted in this textbook. Copyright © 2023 Pearson Canada Inc. 1 - 29 Government in the Modern Mixed Economy Key government-provided institutions in market economies are private property and freedom of contract. Governments also intervene to: – correct market failures – provide public goods – offset the effects of externalities Markets often work well, but sometimes government policy can improve the outcome for society as a whole. Copyright © 2023 Pearson Canada Inc. 1 - 30