CHAPTER TWO Economics: The Creation and Distribution of Wealth.

CHAPTER CHAPTER TWOTWO

Economics: The Economics: The Creation and Creation and

Distribution of Distribution of WealthWealth

WHAT ARE THE 3 MAJOR WHAT ARE THE 3 MAJOR BRANCHES OF BRANCHES OF ECONOMICS?ECONOMICS?

EconomicsEconomicsMacroeconomicsMacroeconomicsMicroeconomicsMicroeconomics

ECONOMICSECONOMICS

Use of scarce resources to produce goods/services, distribute them among

competing groups/individuals

WHAT IS WHAT IS MACROECONOMICS?MACROECONOMICS?

Concentrates on the Concentrates on the operation of a nation's operation of a nation's economy as a wholeeconomy as a whole

WHAT IS WHAT IS MICROECONOMICS?MICROECONOMICS?

Concentrates on the Concentrates on the behavior of people behavior of people and organizations and organizations

in markets for in markets for particular products particular products

or servicesor services

ECONOMIC THEORY Thomas Malthus (Early 1800s)Thomas Malthus (Early 1800s)

““Too many people “Too many people “ if the rich had most of the wealth and the poor had most if the rich had most of the wealth and the poor had most

of the population resources would run out.of the population resources would run out. Thomas Carlyle “Dismal Science”.Thomas Carlyle “Dismal Science”.

Neo-Malthusians “Radical birth control”.Neo-Malthusians “Radical birth control”.

Adam Smith (1776)Adam Smith (1776)Freedom is vital Freedom is vital • Freedom to own land or property and the right to keep the Freedom to own land or property and the right to keep the

profits of a businessprofits of a business

• People will work hard if they believe they will be rewarded.People will work hard if they believe they will be rewarded.

““Invisible Hand” Invisible Hand” : : When self-directed gain leads to When self-directed gain leads to

social and economic benefits for the whole community.social and economic benefits for the whole community.

SUPPLY CURVE

Quantity(S)Quantity(S)

HighHigh

HighHighLowLow

Price(P)Price(P)

SS

DEMAND CURVE

Price(P)Price(P)

Quantity(D)Quantity(D)

HighHigh

HighHighLowLow

DD

QuantityQuantity

HighHigh

HighHighLowLow

PricePrice

EQUILIBRIUM EQUILIBRIUM POINTPOINT

Market EquilibriumMarket Equilibrium

SS DD

SurplusSurplus

ShortageShortage

THREE ECONOMIC SYSTEMS

CommunismCommunism

SocialismSocialism

CapitalismCapitalism

(Highly Controlled(Highly Controlled)) (Little Control(Little Control))

MixedMixed

CAPITALISMPrivate PropertyPrivate PropertyProfit/OwnershipProfit/OwnershipFreedom of CompetitionFreedom of CompetitionFreedom of ChoiceFreedom of Choice Capital countries Capital countries

USAUSAUKUKAustralia Australia

COMMUNISM Public OwnershipPublic Ownership Central Planning/Controlled Central Planning/Controlled

EconomyEconomy The Government :The Government :

makes almost all economic decisions makes almost all economic decisions owns almost all the major factors of owns almost all the major factors of

productionproduction. . Managers = Mandatory Party Managers = Mandatory Party

Membership Membership

SOCIALISM

Private & Public OwnershipPrivate & Public OwnershipSome Choices are LimitedSome Choices are LimitedCreates Social Equality & Creates Social Equality &

Equality of ResultsEquality of ResultsReduces Individual IncentiveReduces Individual Incentive

MIXED ECONOMIES Free-Market Economy: Free-Market Economy: The market largely The market largely

determines what goods and services are produced, who determines what goods and services are produced, who gets them, and how the economy grows.gets them, and how the economy grows.CapitalismCapitalism

Command Economy : Command Economy : The government largely The government largely determines what goods and services are produced, who determines what goods and services are produced, who gets them, and how the economy will grow.gets them, and how the economy will grow.Socialism + CommunismSocialism + Communism

Mixed Economies : Mixed Economies : Some allocation of resources Some allocation of resources is made by the market and some by the government.is made by the market and some by the government.

DEGREES OF COMPETITION

SellersSellers

OneOne ManyMany

MonopolyMonopoly

OligopolyOligopoly

Monopolistic Monopolistic

CompetitionCompetition

Pure CompetitionPure Competition

MONOPOLY = ONE MONOPOLY = ONE SELLERSELLER

DiamondsDiamonds

UtilitiesUtilities

Microsoft ? Microsoft ?

OLIGOPOLY = FEW OLIGOPOLY = FEW SELLERSSELLERS

TobaccoTobacco

AutomobilesAutomobiles

MONOPOLISTIC MONOPOLISTIC COMPETITION COMPETITION

MANY SELLERS WITH MANY SELLERS WITH PERCEIVEDPERCEIVED DIFFERENCESDIFFERENCES

Fast FoodFast Food

CollegesColleges

PURE COMPETITION

BuyerBuyer

SellersSellers(Agriculture)

LIMITATIONS OF FREE-MARKET

Inequality of Wealth- Causes National & World Tension

Potential Environmental Damage

Limitations Push Country towards Socialism = Government Regulation

GOVERNMENT’S ROLE IN GOVERNMENT’S ROLE IN ECONOMICSECONOMICS

Enforces : Rules/RegulationsEnforces : Rules/Regulations

Provides : Public GoodsProvides : Public Goods

Fosters CompetitionFosters Competition

Contributes to Economic StabilityContributes to Economic Stability

WHERE DOES THE WHERE DOES THE GOVERNMENT GET ITS GOVERNMENT GET ITS MONEYMONEY

Source: Federal Budget for Fiscal 2001

4%4%

9%

40%

43%

Individual IncomeTaxes

Social Security &Payroll Taxes

Corporate Taxes

Excise Taxes

Other