The Economic
Perspective
Chapter 1
Economics
• What is economics?
– Studies the allocation of limited
resources in response to unlimited
wants
– Choice
• Choices are caused by Scarcity
• Scarcity – a situation in which there
are too few resources to meet all
human wants
Scarcity
All resources are scarce
Making decisions at the
margin
• Margin: the cutoff point; decision
making at the margin refers to
deciding on one more or one less of
something
• Weighing and balancing of
alternatives
– Marginal benefit
– Marginal cost
– Benefits > Costs
Resource Allocation
• It is not scarcity
of money that is
at the root of
economics
• Scarce
resources lead
to scarce goods,
whether or not
money is
involved
• Resource
allocation refers
to the uses
which we place
on resources
• Allocation
depends partly
upon technology
Resource Allocation
• Technology
– Which refers to the techniques of
production
– The results of new technology
created, can include new ways of
doing things, new product choices,
and new uses for resources.
Microeconomics
• Analyzes the individual components
of the economy, such as the choices
made by people, firms, and
industries.
• Markets – make possible the
voluntary exchange of resources,
goods and services; can take
physical, electronic, and other forms.
• Market prices – serve as signals that
guide the allocation of resources
Macroeconomics
• Analyzes economic aggregates
such as aggregate employment,
output, growth, and inflation
• Most important is GDP
– Gross domestic product
Three basic questions
• What will be produced?
• How will it be produced?
• For whom will it be produced?
• Answer depends on the
economic system involved
Economic system
• Command and control
• Mixed economies
• Free markets/laissezfaire/capitalism
Command and control
• Government
determine all
economic activity
• Determines what is
produced
• Determines how
produced
• Determines for
whom
Mixed Economy
• The mixture of
free-market and
command and
control methods
of resource
allocation that
characterizes
modern
economies.
Free market
• The collective decisions
of individual buyers and
sellers that, taken
together, determine what
outputs are produced, how
those outputs are
produced, and who
receives the outputs; free
markets depend on private
property and free choice
• Capitalism
Spectrum of economic
systems
• Reality
– All countries
have mixed
economies with
the mix varying
from country to
country
Goals of Equity and
Efficiency
• There are two primary economic
objectives to guide countries in
choosing how much government
to mix with free markets.
– Equity
– Efficiency
Equity & Efficiency
• Equity
– Fairness
– Personal
perception
– What is equitable
• Efficiency
– Which means
that resources
are use in ways
that provide the
most value
– Technological
– Allocative
Efficiency
• Technological
– The greatest
quantity of
output for given
inputs
– Least cost
production
technique
• Allocative
– Involves
choosing the
most valuable
mix of outputs to
produce.
Equity & Efficiency
• There is frequently a tradeoff
between efficiency and equity
– More of one less of the other
• What is more efficient
– Command and control
– Free market
• Market failure
– inefficient
Economic Analysis
• Fallacy of composition
– What is true at the micro level is
also true at the macro level
• What is true for the individual is true
for the whole
Economic Analysis
• Normative
– Having to do
with behavioral
norms which are
judgments as to
what is good or
bad
– What ought to be
• Positive
– Having to do
with what is
– Scientific
thinking