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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.
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.
Three Basic QuestionsThree Basic QuestionsThree Basic QuestionsThree Basic Questions
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
• The Goals of Equity and The Goals of Equity and EfficiencyEfficiency
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.
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.
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.
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.
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
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.
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.
Economic Modeling:Economic Modeling:The Route to Higher-Level UnderstandingThe Route to Higher-Level Understanding
Economic Modeling:Economic Modeling:The Route to Higher-Level UnderstandingThe Route to Higher-Level Understanding
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.
Economic Modeling:Economic Modeling:The Route to Higher-Level UnderstandingThe Route to Higher-Level Understanding
Economic Modeling:Economic Modeling:The Route to Higher-Level UnderstandingThe Route to Higher-Level Understanding
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.
Test YourselfTest YourselfTest YourselfTest Yourself
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
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