Chapter 2
Decisions
These slides supplement the
textbook, but should not
replace reading the textbook
Opinion?
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Ethanol in gasoline?
Interest rates?
Coal?
Constitution?
Equality?
Safety?
2
What is
absolute advantage?
The ability to produce
something with fewer
resources than other
producers use.
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What is
comparative advantage?
The ability to produce
something at a lower
opportunity cost than
other producers face.
4
Should you paint your
bedroom yourself or
hire someone?
That depends on your
opportunity cost. Compare
what you would have to pay
someone and how much
you are giving up if you
paint the room yourself.
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The Big Picture
Is it cheaper for a company
to move to Mexico and
pay a worker $2 an hour
or stay in America and
pay $20.00 an hour?
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Who are the
decision makers?
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Consumers
Investors
Foreign
Government
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What is a
characteristic of the
consumption sector?
Very stable because people
are habitual and reluctant to
give up what they have been
accustomed to having.
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What is a
characteristic of the
investment sector?
Very unstable because
investors make decisions
based on their expectations
of the future and compare it
with anticipated costs.
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What is a
characteristic of the
foreign sector?
The foreign sector can add
to the economy if exports
are greater than imports,
a subtraction if imports
are greater than exports.
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Is the foreign sector
a stabilizing or
destabilizing force?
Both. It can stabilize the
economy if foreign demand
remains high in a declining
economy. Destabilizing if
foreign markets decline.
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What is a
characteristic of the
government sector?
The U.S. is a democracy in
a republic. A democracy is
ruled by majority votes, a
republic is ruled by law.
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What is a danger in a
pure democracy?
The majority can take
everything away
from the minority.
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What is a republic?
A system based on
law whereby the
minority is protected
from the majority.
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What are the main
ideas of the
Declaration of
Independence 1776?
Our rights come from God
and that liberty is fragile
Declaration of Independence
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What is the
biggest threat to
our freedom?
Centralized power
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How does our
constitution protect
our freedom?
It spreads the allocation of
power among several
agencies, it decentralizes
the power base
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What are the three
branches of
government?
 President
 Congress (house/senate)
 Supreme Court
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What is the unofficial
fourth branch of our
political system?
A free press
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What is an
economic system?
A set of social institutions
and mechanisms
organized to answer the
three economic questions.
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What are the three
basic questions?
1) What?
2) For whom?
3) How?
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What is a
command economy?
An economic system
characterized by public
ownership of resources
and centralized
economic planning.
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What is
pure capitalism?
An economic system
characterized by private
ownership of resources and
the use of prices to
coordinate economic activity
in unregulated markets.
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What is an oligarchy?
Power by a group
dictates the rule of man
in oligarchy, decisions
are centralized.
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What is
crony capitalism?
A system where success in
business depends on close
relationships between big
business and government.
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What is rent seeking?
Businesses financially
support politicians for
the purpose of
influencing legislation.
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What is
moral hazard?
Occurs when businesses
are insulated from risk and
therefore are encouraged
to take undo risks.
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Who was Adam Smith?
Father of modern day
economics who wrote The
Wealth of Nations in 1776
about the invisible hand of
the free market.
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What role do prices
play in a free
market system?
 Convey information.
 Give incentives.
 Allow for profit.
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What is a
mixed capitalist economy?
An economic system
characterized by private
ownership of some resources
and public ownership of
others; some markets are
regulated, others are not.
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Why have we modified the
free market system?
• A free market cannot provide
us with everything we need.
• Satisfy political goals.
• Fairness.
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8 basic goals?
 Growth.
 Full employment.
 Stable prices.
 Economic efficiency.
 Fairness.
 Reduce negative externalities.
 Economic freedom.
 Economic security.
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What is the most
important goal?
Because we live in a physical
world things deteriorate over
time. Therefore, if we do not
continually replace what we
have, we experience less
and less. All other goals
depend on sufficient growth.
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What leads to
growth?
• Decrease costs.
• Decrease price.
• Increase sales.
• Increase profits.
• Increase jobs.
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What two opinions
concerning growth?
Keynesians believe in
macroeconomic policies of
stimulating demand.
Austrians believe in
microeconomic policies to
encourage saving and private
investing to promote growth.
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What is the Full
Employment Act of 1946?
The federal government was
mandated to do everything in
its authority to achieve full
employment, it set goals
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What were the objections
to the Full Employment
Act of 1946?
 Business cycles are natural.
 Lag effects.
 Difficulty in forecasting.
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What is the Full
Employment and Balanced
Growth Act of 1978?
Among other things the Federal
Reserve was mandated to do
everything in its authority to
achieve full employment and
stable prices.
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Downside of inflation?
• Diminishes buying power.
• Distorts price signals.
• Destroys confidence.
• Leads to economic decline.
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Why is efficiency
important?
• High costs lead to higher
prices.
• Higher prices lead to
decline in demand.
• Lower demand leads to
unemployment.
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What is the downside
of fairness?
An emphasis on fairness
detracts from economic
efficiency – it is a goal
that can lead to
economic decline.
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Why can’t the free market
reduce negative
externalities?
Businesses with a social
conscience would be at an
economic disadvantage.
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What is the danger in
too much government
involvement?
Government agencies
can overreach their
influence and can cause
economic stagnation.
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What is
economic freedom?
You reach economic
freedom when you
have money to do what
you want, when you
want, and with whom.
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What are limitations to
economic freedom?
• Personal debt.
• National debt.
• Lack of jobs.
• Fewer opportunities.
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Student Loans
Students owe more on their
loans than all credit card
debt, over one trillion
dollars, the average per
student graduate is
$24,000 while 93% is owed
to the federal government.
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Economic Security
Governments cannot create
jobs, growth, or economic
security. Governments
can only take what the
economy produces and
redistribute it.
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Conflicting goals?
Money is scarce, the more
for government the less
for private use, we always
have opportunity costs
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Where does the money
come from to pay for
business losses?
The government gets
money from three
sources: taxes, borrow,
or it creates the money.
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If the government
borrows money do we
pay for it now or later ?
A dollar spent today is
paid for today
regardless of where the
money comes from.
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What does it mean that the
U.S. Dollar is the world’s
standard currency?
Other nations convert their
currencies to the American
dollar when buying from
foreign countries.
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What happens when
we modify the system
too much?
Communication between
its different parts
become blurred and
the system falters.
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What does private
gains but social
losses mean?
When big business is
bailed out of a bad
situation the tax payer
picks up the tab.
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How much has the
national debt
increased?
Much of the money has
been borrowed, our
national debt increased
40% in 2010!
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What happens with
a more intrusive
government and
higher taxes?
The free market
system breaks down.
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What happens when
we chose between
less government and
more government?
We incur an
opportunity cost.
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END