©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 1 PowerPoint© Presentations Prepared by...

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e1

PowerPointPowerPoint© Presentations Prepared by Assistant © Presentations Prepared by Assistant Professor Paul HarrisProfessor Paul Harris

Camden County CollegeCamden County College

PowerPointPowerPoint© Presentations Prepared by Assistant © Presentations Prepared by Assistant Professor Paul HarrisProfessor Paul Harris

Camden County CollegeCamden County College

MACROECONOMICS: MACROECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

MACROECONOMICS: MACROECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

CHAPTER 1CHAPTER 1“The Economic Perspective”“The Economic Perspective”

CHAPTER 1CHAPTER 1“The Economic Perspective”“The Economic Perspective”


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

1.1. Describe how scarce resources and unlimited Describe how scarce resources and unlimited wants lead to the study of economics.wants lead to the study of economics.

2.2. Distinguish between microeconomics and Distinguish between microeconomics and macroeconomics.macroeconomics.

3.3. Identify three basic questions that all Identify three basic questions that all economies must answer.economies must answer.

4.4. Recognize the strengths of the market place Recognize the strengths of the market place and motivations for government involvement.and motivations for government involvement.

1.1. Describe how scarce resources and unlimited Describe how scarce resources and unlimited wants lead to the study of economics.wants lead to the study of economics.

2.2. Distinguish between microeconomics and Distinguish between microeconomics and macroeconomics.macroeconomics.

3.3. Identify three basic questions that all Identify three basic questions that all economies must answer.economies must answer.

4.4. Recognize the strengths of the market place Recognize the strengths of the market place and motivations for government involvement.and motivations for government involvement.


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

4.4. Understand what a model is and why models Understand what a model is and why models are best kept simple.are best kept simple.

5.5. (E&A) Explain why incentives are important (E&A) Explain why incentives are important for economics prosperity.for economics prosperity.

6.6. Appendix: Working with graphs and data.Appendix: Working with graphs and data.

4.4. Understand what a model is and why models Understand what a model is and why models are best kept simple.are best kept simple.

5.5. (E&A) Explain why incentives are important (E&A) Explain why incentives are important for economics prosperity.for economics prosperity.

6.6. Appendix: Working with graphs and data.Appendix: Working with graphs and data.


1.1 1.1 SCARCE RESOURCES, UNLIMITED SCARCE RESOURCES, UNLIMITED WANTSWANTS

1.1 1.1 SCARCE RESOURCES, UNLIMITED SCARCE RESOURCES, UNLIMITED WANTSWANTS

EconomicsEconomics studies the studies the allocation of scarce resources allocation of scarce resources

in response to unlimited wants.in response to unlimited wants.


Economics is aboutEconomics is about choicechoice.. Society is forced to chooseSociety is forced to choose

becausebecause resourcesresources are are scarcescarce..

Scarce Resources, Scarce Resources, Unlimited WantsUnlimited Wants

Scarce Resources, Scarce Resources, Unlimited WantsUnlimited Wants


When something is scarce we must choose.When something is scarce we must choose.

We make choices at the We make choices at the marginmargin..

At margin means “incrementally”, or in At margin means “incrementally”, or in small steps.small steps.

Resource allocationResource allocation refers to the uses to which refers to the uses to which resources are put.resources are put.

How resources are used depends partly upon How resources are used depends partly upon technologytechnology..

When something is scarce we must choose.When something is scarce we must choose.

We make choices at the We make choices at the marginmargin..

At margin means “incrementally”, or in At margin means “incrementally”, or in small steps.small steps.

Resource allocationResource allocation refers to the uses to which refers to the uses to which resources are put.resources are put.

How resources are used depends partly upon How resources are used depends partly upon technologytechnology..

Making Decision at the MarginMaking Decision at the MarginMaking Decision at the MarginMaking Decision at the Margin


1.2 1.2 SURVEYING THE ECONOMIC SURVEYING THE ECONOMIC LANDSCAPELANDSCAPE

1.2 1.2 SURVEYING THE ECONOMIC SURVEYING THE ECONOMIC LANDSCAPELANDSCAPE

Microeconomics:Microeconomics: examines the examines the individual components of the individual components of the economy.economy.

Macroeconomics:Macroeconomics: examines the examines the economy as a whole (aggregates).economy as a whole (aggregates).

Microeconomics:Microeconomics: examines the examines the individual components of the individual components of the economy.economy.

Macroeconomics:Macroeconomics: examines the examines the economy as a whole (aggregates).economy as a whole (aggregates).


1.31.3THREE BASIC QUESTIONSTHREE BASIC QUESTIONS1.31.3THREE BASIC QUESTIONSTHREE BASIC QUESTIONS

1. What?1. What?

What goods and services will be What goods and services will be produced and offered for sale, produced and offered for sale,

and in what quantities?and in what quantities?


Three Basic QuestionsThree Basic QuestionsThree Basic QuestionsThree Basic Questions

2. How?2. How?

How will the goods and services How will the goods and services be produced?be produced?



3. For Whom?3. For Whom?

Who will consume the goods and Who will consume the goods and services which are produced?services which are produced?


In answering the three basic questions society In answering the three basic questions society must choose among three kinds of must choose among three kinds of economic economic systems:systems:

Command and controlCommand and control: where government : where government might make the decisions.might make the decisions.Free marketsFree markets: which are “laissez faire”, and : which are “laissez faire”, and characterized by freedom of choice in both characterized by freedom of choice in both production and consumption.production and consumption.Mixed economiesMixed economies: meaning that they choose : meaning that they choose with a combination of both markets and with a combination of both markets and government.government.

In answering the three basic questions society In answering the three basic questions society must choose among three kinds of must choose among three kinds of economic economic systems:systems:

Command and controlCommand and control: where government : where government might make the decisions.might make the decisions.Free marketsFree markets: which are “laissez faire”, and : which are “laissez faire”, and characterized by freedom of choice in both characterized by freedom of choice in both production and consumption.production and consumption.Mixed economiesMixed economies: meaning that they choose : meaning that they choose with a combination of both markets and with a combination of both markets and government.government.



CommandCommand

and and

ControlControl

CommandCommand

and and

ControlControl

Laissez-FaireLaissez-Faire

Free MarketsFree MarketsLaissez-FaireLaissez-Faire

Free MarketsFree MarketsMixedMixedMixedMixed

The Spectrum of Economic The Spectrum of Economic SystemsSystems

The Spectrum of Economic The Spectrum of Economic SystemsSystems


There are two primary economic objectives for There are two primary economic objectives for countries in choosing how much government to countries in choosing how much government to mix with free markets.mix with free markets.

There are two primary economic objectives for There are two primary economic objectives for countries in choosing how much government to countries in choosing how much government to mix with free markets.mix with free markets.

• The Goals of Equity and The Goals of Equity and EfficiencyEfficiency


EquityEquity

EfficiencyEfficiency


The first is objective The first is objective equityequity,, which refers which refers to fairness.to fairness.

Equity is ultimately Equity is ultimately a matter of personal a matter of personal perception.perception.

The first is objective The first is objective equityequity,, which refers which refers to fairness.to fairness.

Equity is ultimately Equity is ultimately a matter of personal a matter of personal perception.perception.

The second objective The second objective is is efficiencyefficiency..

Efficiency means Efficiency means resources are used in resources are used in ways that provide ways that provide the most value.the most value.

The second objective The second objective is is efficiencyefficiency..

Efficiency means Efficiency means resources are used in resources are used in ways that provide ways that provide the most value.the most value.




Technological efficiency:Technological efficiency: getting getting the greatest quantity of output from the greatest quantity of output from the resources that are being used.the resources that are being used.

Allocative efficiency:Allocative efficiency: choosing the choosing the most valuable mix of outputs to most valuable mix of outputs to produce.produce.

Technological efficiency:Technological efficiency: getting getting the greatest quantity of output from the greatest quantity of output from the resources that are being used.the resources that are being used.

Allocative efficiency:Allocative efficiency: choosing the choosing the most valuable mix of outputs to most valuable mix of outputs to produce.produce.

Economic EfficiencyEconomic EfficiencyEconomic EfficiencyEconomic Efficiency


Frequently, there is a tradeoff between Frequently, there is a tradeoff between efficiency and equity.efficiency and equity.More equity may result in less More equity may result in less

efficiency, which is often referred to as efficiency, which is often referred to as inefficiency.inefficiency.

Likewise, less equity may result in Likewise, less equity may result in greater efficiency.greater efficiency.

Economic EfficiencyEconomic EfficiencyEconomic EfficiencyEconomic Efficiency


Command and ControlCommand and ControlWho Needs Markets?Who Needs Markets?

Command and ControlCommand and ControlWho Needs Markets?Who Needs Markets?

Throughout history, countries have Throughout history, countries have embraced embraced central planningcentral planning to help to help eliminate the perceived disorder of the eliminate the perceived disorder of the marketplace. marketplace.

This sets production plans for most This sets production plans for most goods, which are produced by goods, which are produced by government-owned state enterprises.government-owned state enterprises.


““The Invisible Hand”The Invisible Hand”Who Needs Government?Who Needs Government?““The Invisible Hand”The Invisible Hand”

Who Needs Government?Who Needs Government? Adam Smith described in Adam Smith described in The Wealth of The Wealth of

NationsNations the the invisible handinvisible hand of the of the marketplace. marketplace.

This leads the economy to produce an This leads the economy to produce an efficient variety of goods and services, efficient variety of goods and services, with efficient production methods.with efficient production methods.


The Price SystemThe Price SystemThe Price SystemThe Price System

In the market system all participants make In the market system all participants make choices on the basis of information conveyed by choices on the basis of information conveyed by market prices.market prices.

The collection of prices in product and resource The collection of prices in product and resource markets is termed themarkets is termed the price system. price system.Prices provide information about scarcity.Prices provide information about scarcity.It is the price system that allocates resources It is the price system that allocates resources

in a market economy to their highest valued in a market economy to their highest valued uses.uses.

In the market system all participants make In the market system all participants make choices on the basis of information conveyed by choices on the basis of information conveyed by market prices.market prices.

The collection of prices in product and resource The collection of prices in product and resource markets is termed themarkets is termed the price system. price system.Prices provide information about scarcity.Prices provide information about scarcity.It is the price system that allocates resources It is the price system that allocates resources

in a market economy to their highest valued in a market economy to their highest valued uses.uses.


Mixing Government With the Mixing Government With the MarketplaceMarketplace

Mixing Government With the Mixing Government With the MarketplaceMarketplace

Market failuresMarket failures occur when occur when markets fail to achieve markets fail to achieve

efficiencyefficiency..


Market FailureMarket FailureMarket FailureMarket Failure

Market failures include:Market failures include:• public goodspublic goods

• externalitiesexternalities

• market powermarket power

• imperfect informationimperfect information

Market failures include:Market failures include:• public goodspublic goods

• externalitiesexternalities

• market powermarket power

• imperfect informationimperfect information


Command-and-Control Command-and-Control TechniquesTechniques

Command-and-Control Command-and-Control TechniquesTechniques

Command-and-ControlCommand-and-Control techniques used techniques used

by the government in a mixed economy:by the government in a mixed economy:

• government productiongovernment production

• income redistributionincome redistribution

• taxationtaxation

• regulationsregulations

• mandatesmandates

Command-and-ControlCommand-and-Control techniques used techniques used

by the government in a mixed economy:by the government in a mixed economy:

• government productiongovernment production

• income redistributionincome redistribution

• taxationtaxation

• regulationsregulations

• mandatesmandates


1.41.4ECONOMIC ANALYSISECONOMIC ANALYSIS

1.41.4ECONOMIC ANALYSISECONOMIC ANALYSIS

The practice of economics involves The practice of economics involves analysis and problem solving. analysis and problem solving.

Care must be taken to avoid faulty Care must be taken to avoid faulty reasoning.reasoning.

An example of this is An example of this is the fallacy of the fallacy of composition.composition.

The practice of economics involves The practice of economics involves analysis and problem solving. analysis and problem solving.

Care must be taken to avoid faulty Care must be taken to avoid faulty reasoning.reasoning.

An example of this is An example of this is the fallacy of the fallacy of composition.composition.


Positive and Normative Positive and Normative EconomicsEconomics

Positive and Normative Positive and Normative EconomicsEconomics

Normative economic Normative economic statementsstatements have to do have to do with behavioral with behavioral norms.norms.They are judgments They are judgments as to what is good or as to what is good or bad.bad.Examples often Examples often include “ought” or include “ought” or “should” in them.“should” in them.

Normative economic Normative economic statementsstatements have to do have to do with behavioral with behavioral norms.norms.They are judgments They are judgments as to what is good or as to what is good or bad.bad.Examples often Examples often include “ought” or include “ought” or “should” in them.“should” in them.

Positive economic Positive economic statementsstatements have to do have to do with facts.with facts.

They may involve They may involve current, historical, or current, historical, or even future facts. even future facts. Examples often include Examples often include what is, was or will be.what is, was or will be.

Positive economic Positive economic statementsstatements have to do have to do with facts.with facts.

They may involve They may involve current, historical, or current, historical, or even future facts. even future facts. Examples often include Examples often include what is, was or will be.what is, was or will be.


Economic Modeling:Economic Modeling:The Route to Higher-Level UnderstandingThe Route to Higher-Level Understanding


Models:Models: Simplified version of reality.Simplified version of reality.• They emphasize features central to the They emphasize features central to the

questions we are trying to answer.questions we are trying to answer.

Theories:Theories: Statements about how the Statements about how the world works.world works.

Models:Models: Simplified version of reality.Simplified version of reality.• They emphasize features central to the They emphasize features central to the

questions we are trying to answer.questions we are trying to answer.

Theories:Theories: Statements about how the Statements about how the world works.world works.


Occam’s razor principleOccam’s razor principle

Argues that reasoning is improved by Argues that reasoning is improved by focusing one’s thinking on the most focusing one’s thinking on the most essential elements of an issue.essential elements of an issue.

Occam’s razor principleOccam’s razor principle

Argues that reasoning is improved by Argues that reasoning is improved by focusing one’s thinking on the most focusing one’s thinking on the most essential elements of an issue.essential elements of an issue.




To keep models simple, economist make To keep models simple, economist make assumptions.assumptions.

They act as though certain things are true They act as though certain things are true without proving them to in fact be true.without proving them to in fact be true.

One common assumption is termed One common assumption is termed ceteris paribusceteris paribus::

This is Latin for holding all else constant.This is Latin for holding all else constant.

To keep models simple, economist make To keep models simple, economist make assumptions.assumptions.

They act as though certain things are true They act as though certain things are true without proving them to in fact be true.without proving them to in fact be true.

One common assumption is termed One common assumption is termed ceteris paribusceteris paribus::

This is Latin for holding all else constant.This is Latin for holding all else constant.




1.5 EXPLORE & APPLY:1.5 EXPLORE & APPLY:From Mao to NowFrom Mao to Now1.5 EXPLORE & APPLY:1.5 EXPLORE & APPLY:From Mao to NowFrom Mao to Now

19781978 Transition from planned to Transition from planned to market-oriented economy begins.market-oriented economy begins.

1979-19831979-1983 Collective farming is replaced by Collective farming is replaced by “household responsibility system” “household responsibility system” of individual farms.of individual farms.

19801980 Special economic zones are Special economic zones are created to experiment with created to experiment with market reforms.market reforms.

19861986 Foreign investment law is passed.Foreign investment law is passed.


E & A From Mao to NowE & A From Mao to NowE & A From Mao to NowE & A From Mao to Now

19881988 Enterprise law allows for the existence Enterprise law allows for the existence of privately owned stock companies.of privately owned stock companies.

19901990 Chinese stock markets are established.Chinese stock markets are established.

19931993 Modern corporate system at state-Modern corporate system at state-owned enterprises is introduced.owned enterprises is introduced.

19941994 China allows the exchange value of its China allows the exchange value of its currency to be set on world markets, currency to be set on world markets, reflecting the common practice of reflecting the common practice of market economies.market economies.


E & A From Mao to NowE & A From Mao to NowE & A From Mao to NowE & A From Mao to Now

19991999 China’s economy becomes the China’s economy becomes the world’s second largest, behind world’s second largest, behind only that of the United States.only that of the United States.

20012001 Price controls on key items are Price controls on key items are lifted as China is admitted as lifted as China is admitted as member of the World Trade member of the World Trade Organization. Organization.


Terms along the WayTerms along the WayTerms along the WayTerms along the Way

• economicseconomics• scarcityscarcity• the marginthe margin• microeconomicsmicroeconomics• macroeconomicsmacroeconomics• command & controlcommand & control• free marketsfree markets• mixed economiesmixed economies

• economicseconomics• scarcityscarcity• the marginthe margin• microeconomicsmicroeconomics• macroeconomicsmacroeconomics• command & controlcommand & control• free marketsfree markets• mixed economiesmixed economies

• equity equity • efficiencyefficiency• technological technological

efficiencyefficiency• allocative efficiencyallocative efficiency• invisible handinvisible hand• market failuresmarket failures• public goodspublic goods• externalitiesexternalities

• equity equity • efficiencyefficiency• technological technological

efficiencyefficiency• allocative efficiencyallocative efficiency• invisible handinvisible hand• market failuresmarket failures• public goodspublic goods• externalitiesexternalities


Terms along the WayTerms along the Way(continued)(continued)

Terms along the WayTerms along the Way(continued)(continued)

• market powermarket power• normative statementsnormative statements• positive statementspositive statements

• market powermarket power• normative statementsnormative statements• positive statementspositive statements

• modelsmodels• Occam’s razorOccam’s razor• egalitarianismegalitarianism• original positionoriginal position

• modelsmodels• Occam’s razorOccam’s razor• egalitarianismegalitarianism• original positionoriginal position


Test YourselfTest YourselfTest YourselfTest Yourself

1.1. Economics is primarily the study ofEconomics is primarily the study ofa.a. stocks and bonds.stocks and bonds.

b.b. allocating limited resources to meet allocating limited resources to meet unlimited wants.unlimited wants.

c.c. methods to eliminate scarcity.methods to eliminate scarcity.

d.d. why consumers want what they do.why consumers want what they do.

1.1. Economics is primarily the study ofEconomics is primarily the study ofa.a. stocks and bonds.stocks and bonds.

b.b. allocating limited resources to meet allocating limited resources to meet unlimited wants.unlimited wants.

c.c. methods to eliminate scarcity.methods to eliminate scarcity.

d.d. why consumers want what they do.why consumers want what they do.



2. 2. The three basic questions an economy must The three basic questions an economy must answer areanswer are

a.a. why produce; how much to produce; who to why produce; how much to produce; who to produce it.produce it.

b.b. what to produce; how to produce it; who to what to produce; how to produce it; who to consume it.consume it.

c.c. what to produce; why produce; how to what to produce; why produce; how to produce.produce.

d.d. when to produce; how to produce; what to when to produce; how to produce; what to produce.produce.

2. 2. The three basic questions an economy must The three basic questions an economy must answer areanswer are

a.a. why produce; how much to produce; who to why produce; how much to produce; who to produce it.produce it.

b.b. what to produce; how to produce it; who to what to produce; how to produce it; who to consume it.consume it.

c.c. what to produce; why produce; how to what to produce; why produce; how to produce.produce.

d.d. when to produce; how to produce; what to when to produce; how to produce; what to produce.produce.



3. 3. Command and control economies are Command and control economies are identified byidentified by

a.a. reliance upon free markets.reliance upon free markets.

b.b. adherence to the principles of adherence to the principles of capitalism.capitalism.

c.c. economic freedom.economic freedom.

d.d. government decision making.government decision making.

3. 3. Command and control economies are Command and control economies are identified byidentified by

a.a. reliance upon free markets.reliance upon free markets.

b.b. adherence to the principles of adherence to the principles of capitalism.capitalism.

c.c. economic freedom.economic freedom.

d.d. government decision making.government decision making.



4. 4. In a capitalist economy, economic In a capitalist economy, economic activities are coordinated byactivities are coordinated by

a.a. tradition.tradition.

b.b. prices.prices.

c.c. government.government.

d.d. business firms.business firms.

4. 4. In a capitalist economy, economic In a capitalist economy, economic activities are coordinated byactivities are coordinated by

a.a. tradition.tradition.

b.b. prices.prices.

c.c. government.government.

d.d. business firms.business firms.



5. 5. The idea that the economy should The idea that the economy should produce its outputs with the least costly produce its outputs with the least costly combination of inputs is known as combination of inputs is known as

a.a. allocative efficiency.allocative efficiency.

b.b. technological efficiency.technological efficiency.

c.c. economic efficiency.economic efficiency.

d.d. equity.equity.

5. 5. The idea that the economy should The idea that the economy should produce its outputs with the least costly produce its outputs with the least costly combination of inputs is known as combination of inputs is known as

a.a. allocative efficiency.allocative efficiency.

b.b. technological efficiency.technological efficiency.

c.c. economic efficiency.economic efficiency.

d.d. equity.equity.


The End!The End!Next Chapter 1Next Chapter 1

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