SAYRE | MORRIS
Seventh Edition
CHAPTER 1
The Economic Problem
© 2012 McGraw-Hill Ryerson Limited
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CHAPTER 1
The Economic Problem
Learning Objectives:
LO1: Understand the relevance of economics
LO2: Define economics, microeconomics, and
macroeconomics and understand the importance of
the scientific method
LO3: Realize that scarcity, choice, and opportunity cost
are at the heart of economics and that efficiency is a
cornerstone
© 2012 McGraw-Hill Ryerson Limited
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CHAPTER 1
The Economic Problem
Learning Objectives:
LO4: Understand why trade results in economies being
more productive
LO5: Explain the three fundamental questions and the
four ways economies can be organized
LO6: Use the production possibilities model to explain
choice, opportunity cost, efficiency, and unemployment
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CHAPTER 1
The Economic Problem
Learning Objectives:
LO7: List the economic goals of society and explain why
they are often difficult to achieve
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LO1
Relevance of Economics
Controversies:
1.
2.
3.
4.
5.
6.
Economic growth
Income redistribution
Road pricing
Globalization
Provision of health care
Carbon trading systems
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LO2
What is Economics?
Positive Statement
– Can be verified with empirical data
Normative Statement
– Based on a person’s beliefs or value system
– Cannot be verified with data
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LO2
Self-Test
Identify each of the following statements as either
positive (P) or normative (N)
a. The federal government’s budget this year is
the largest in history.
b. The national debt is at a manageable level
and therefore is nothing to worry about.
c. The price of gasoline is higher than it needs
to be.
d. Rising Canadian exports are creating many
new jobs in the country.
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LO2
Self-Test
Identify each of the following statements as either
positive (P) or normative (N)
a. The federal government’s budget this year is
the largest in history. P
b. The national debt is at a manageable level
and therefore is nothing to worry about. N
c. The price of gasoline is higher than it needs
to be. N
d. Rising Canadian exports are creating many
new jobs in the country. P
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LO2
What is Economics?
Economic Theory
– Looks at how positive statements are related
– Uses the scientific method:
• Set up a hypothesis
• Define terms, state assumptions
• Gather data to test hypothesis
• Accept, reject, or modify theory
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LO2
What is Economics?
Macroeconomics
– How the major components of an economy interact
– Unemployment, inflation, interest rates
Microeconomics
– Outcomes of decisions by people and firms
– Supply and demand, costs of production, market
structures
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LO2
Self-Test
Identify which of the following topics would likely appear
in a microeconomics course and which in a
macroeconomics course.
a.
b.
c.
d.
The price of iPods
Unemployment rates
The presence of monopolies
The rate of economic growth
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LO2
Self-Test
Identify which of the following topics would likely appear
in a microeconomics course and which in a
macroeconomics course.
a.
b.
c.
d.
The price of iPods Micro
Unemployment rates Macro
The presence of monopolies Micro
The rate of economic growth Macro
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LO3
Scarcity and Choice
Resources are Scarce:
– Resources, or “factors of production”, are
anything used to produce goods and services
– Do not have enough resources to produce
everything everybody wants
– Must have some way to ration scarce resources
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LO3
Economic Resources
Labour - Human mental and physical effort
Land – Any natural resource used to produce
goods or services
Capital – Tools, equipment, factories, and
buildings used in production process
Enterprise – The human resource that innovates
and takes risks
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LO3
Economic Resources
RESOURCE:
EARNS:
Labour
Wages
Land
Rent
Capital
Interest
Enterprise
Profit
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LO3
Self-Test
Indicate whether the resource in question is
labour (L), capital (K), land (N), or enterprise (E):
a.
b.
c.
d.
e.
f.
A bar-code scanner in a supermarket
Fresh drinking water
Copper deposits in a mine
The work of a systems analyst
The first application of e- technology to an
economics textbook
An office building
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LO3
Self-Test
Indicate whether the resource in question is
labour (L), capital (K), land (N), or enterprise (E):
a.
b.
c.
d.
e.
f.
A bar-code scanner in a supermarket K
Fresh drinking water N
Copper deposits in a mine N
The work of a systems analyst L
The first application of e- technology to an
economics textbook E
An office building K
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LO3
Economic Resources
Technology
- Method of production
- Way in which resources are combined to produce
goods and services
Opportunity Cost
- The value of the next-best alternative that is given
up as a result of making a particular choice
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LO4
Efficiency
Productive Efficiency
- Production of an output at the lowest possible
average cost
Allocative Efficiency
- Production of that combination of outputs that
best satisfies consumers’ demands
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LO4
Trade
- Voluntary trade benefits both parties
- The more trade, the greater the benefits
- Applies to individuals as well as to nations
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LO4
Benefits of Trade
Maximum Output:
Bread
Athens
Sparta
20
10
Plows
OR
OR
10
20
Without Trade:
Bread
Athens
Sparta
Total Output
10
5
15
Plows
AND
AND
AND
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10
15
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LO4
Benefits of Trade
Maximum Output:
Bread
Athens
Sparta
20
10
Plows
OR
OR
10
20
With Trade:
Bread
Athens
Sparta
Total Output
20
0
20
Plows
AND
AND
AND
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0
20
20
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LO5
Three Fundamental Questions
1. What to produce
2. How to produce
3. For whom
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LO5
Four Types of Economies
1.
2.
3.
4.
Cooperation
Custom
Command
Competition
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LO6
Production Possibilities Model
Production Possibilities Curve:
– A graphical representation of the various
combinations of maximum output that can be
produced from the available resources and
technology
– Assumptions:
• Full employment
• Use of the best technology available
• Productive efficiency
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LO6
Production Possibilities Model
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LO6
Wheat
20
19
a
Unattainable
b
x
- points on the curve
represent maximum
output possible with
available resources
c
17
Attainable
d
13
e
8
Figure 1.1
f
10
18
24 28 30
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Cars
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LO6
Production Possibilities Model
Scarcity
– Represented by points outside the curve
Choice
– Represented by points on the curve (efficient) and
points within the curve (inefficient)
Opportunity Cost
– Represented by the downward slope of the curve
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LO6
Law of Increasing Opportunity Costs
– Factors of production are not equally
suitable
– As output increases, the per unit costs of
additional units increases
– Gives the production possibilities curve its
bowed out shape
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LO6
Law of Increasing Opportunity Costs
- as more cars are produced,
an increasing amount of
wheat must be given up
Wheat
20
19
a
+8
b
-2
+6
17
c
-4
+4
d
13
8
-5
e
Figure 1.2
f
10
18
24 28 30
© 2012 McGraw-Hill Ryerson Limited
Cars
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LO6
•
•
If society produces 1000 units of butter, how many guns
can it produce?
If society is at “b” on the PPC, what is the cost of 1000
more units of butter?
Is opportunity cost
b
400
greater for move
c
from “c” to “d”
300
compared to a
move from “b” to
“c”?
150
Quantity of guns per period
•
Self-Test 5
d
1000
2000
3000
Quantity of butter per period
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LO6
•
•
If society produces 1000 units of butter, how many guns
can it produce? 400 units of guns
If society is at “b” on the PPC, what is the cost of 1000
more units of butter? 100 units of guns
Is opportunity cost
b
400
greater for move
c
from “c” to “d”
300
compared to a
move from “b” to
“c”?
150
b to c – 100 guns per 1000
units of butter
c to d – 150 guns per 1000
units of butter
Quantity of guns per period
•
Self-Test 5
d
1000
2000
3000
Quantity of butter per period
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LO6
PPC and Economic Growth
Growth means
the economy is
able to produce
more of
everything
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LO6
PPC and Technological Change
- Improvement in
technology shifts
curve to PP2
- can produce
more of either
good, or more of
both
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Self-Test 6
LO6
Quantities per Year
A
B
C
D
Grain
50
40
25
0
Tools
0
4
8
12
a. Draw a PPC1 with tools on the horizontal axis
Now, assume new technology that can be used only in the
tool industry is developed, which increases tool output
by 50%.
b. Draw a new PPC2 that reflects this new technology
c. If Finhorn produced 12 units of tools per year, how many
units of grain could be produced after the introduction of
the new technology
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LO6
Self-Test 6 Solution
New technology allows 50% increase in tool production
Grain
50
a
b
40
b2
c
25
c2
PP2
d
4
8
12
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d2
Tools
18
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LO7
Macroeconomic Goals
•
•
•
•
•
•
•
Improved standard of living
Economic growth
Full employment
Stable prices
Viable balance of international trade
Equitable distribution of income
Manageable government debt & deficit
© 2012 McGraw-Hill Ryerson Limited
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Chapter 1 Summary
•
•
•
•
•
Understand why economics is such a relevant discipline
in our society
Learn a definition of economics and distinction between
micro and macro
Appreciate that groups of people can have differing
underlying values
Realize that scarcity, choice and opportunity cost are at
the heart of economics
Understand why greater trade results in economies being
more productive
© 2012 McGraw-Hill Ryerson Limited
1-38
Chapter 1 Summary
•
•
•
•
Explain the three fundamental questions that all
societies must address
Understand the four different ways that economies
can be organized
Use the production possibilities model to illustrate
opportunity cost, efficiency, and unemployment
List the economic goals of society and understand
why they are often difficult to achieve
© 2012 McGraw-Hill Ryerson Limited
1-39