Chapter One

Roadmap for Economics

 Economics

Economics studies the

allocation of scarce resources
in response to unlimited wants.
 Economics

Economics is about choice.

Society is forced to choose
because resources are scarce.
Deciding at the Margin - The
cutoff point ..(decision making at
the margin refers to deciding on more
or less of something)
.
resource allocation: the way in
which resources are used
 The Economic Landscape

Microeconomics: examines the

individual components of the
economy.
Macroeconomics: examines the
economy as a whole (aggregates).
 Three Basic Questions

1. What?
What goods and services will be
produced and offered for sale,
and in what quantities?
 Three Basic Questions

2. How?
How will the goods and services
be produced?
 Three Basic Questions

3. For Whom?
Who will consume the goods and
services which are produced?
 Two Primary
Economic Objectives

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

Allocative efficiency: choosing

the most valuable mix of outputs to
produce
Command Laissez-Faire
Mixed
and Free Markets
Control

The Spectrum of Economic

Systems
 The Invisible Hand

Adam Smith described in The Wealth of

Nations, how the invisible hand of the
marketplace leads the economy to
produce an efficient variety of goods
and services, with efficient production
methods as well.
 Market Failure

Market failures occur when

markets fail to achieve
efficiency.
 Market Failure

Market failures include:

public goods
externalities
market power
imperfect information
 Command-and-Control
Techniques
Command-and-Control techniques
used by the government in a
mixed economy:
government production
income redistribution
taxation
regulations
mandates
Economic Theories and Models
Models: Simplified versions of
reality that emphasize features
central to the questions we are
trying to answer.

Theories: Statements about how the

world works.
Normative vs. Positive Economics

Normative ... Value judgments

as to do with what is good or
bad (opinions)

Positive ... Statements regarding

fact (can be verified)