CHAPTER
TWO
Economics: The
Creation and
Distribution of
Wealth
WHAT ARE THE 3 MAJOR
BRANCHES OF ECONOMICS?
 Economics
 Macroeconomics
 Microeconomics
ECONOMICS
Use of scarce resources to
produce goods/services,
distribute them among
competing groups/individuals
WHAT IS MACROECONOMICS?
Concentrates on the operation
of a nation's economy as a
whole
WHAT IS MICROECONOMICS?
Concentrates on
the behavior of
people and
organizations in
markets for
particular
products or
services
ECONOMIC THEORY
 Thomas
Malthus (Early 1800s)
“Too many people “

if the rich had most of the wealth and the poor had most of the
population resources would run out.
Thomas Carlyle “Dismal Science”.
Neo-Malthusians “Radical birth control”.



 Adam
Freedom is vital

•
•

Smith (1776)
Freedom to own land or property and the right to keep the profits
of a business
People will work hard if they believe they will be rewarded.
“Invisible Hand” : When self-directed gain leads to
social and economic benefits for the whole community.
SUPPLY CURVE
High
Price(P)
S
Low
Quantity(S)
High
DEMAND CURVE
High
Price(P)
D
Low
Quantity(D)
High
EQUILIBRIUM POINT
Surplus
High
Market Equilibrium
Price
S
Low
Shortage
Quantity
D
High
THREE ECONOMIC SYSTEMS
Mixed
Socialism
(Highly Controlled)
(Little Control)
Communism
Capitalism
CAPITALISM
 Private
Property
 Profit/Ownership
 Freedom of Competition
 Freedom of Choice
 Capital countries
USA
 UK
 Australia

COMMUNISM
 Public
Ownership
 Central Planning/Controlled Economy
 The Government :


makes almost all economic decisions
owns almost all the major factors of
production.
 Managers
= Mandatory Party
Membership
SOCIALIS
M
 Private
& Public Ownership
 Some Choices are Limited
 Creates Social Equality & Equality
of Results
 Reduces Individual Incentive
MIXED
ECONOMIES
 Free-Market Economy: The market largely
determines what goods and services are produced, who gets
them, and how the economy grows.

Capitalism
 Command Economy : The government largely
determines what goods and services are produced, who gets
them, and how the economy will grow.

Socialism + Communism
 Mixed Economies : Some allocation of resources is
made by the market and some by the government.
DEGREES OF
COMPETITION
Monopolistic
Oligopoly
Competition
One
Many
Sellers
Monopoly
Pure Competition
MONOPOLY = ONE
SELLER
Diamonds
Utilities

Microsoft ?
OLIGOPOLY = FEW SELLERS
Tobacco
Automobiles
MONOPOLISTIC COMPETITION
MANY SELLERS WITH PERCEIVED DIFFERENCE
Fast
Food
Colleges
PURE
COMPETITION
Sellers
(Agriculture)
Buyer
LIMITATIONS OF FREEMARKET
 Inequality
of Wealth- Causes National &
World Tension
 Potential
Environmental Damage
 Limitations
Push Country towards
Socialism = Government Regulation
GOVERNMENT’S ROLE IN
ECONOMICS
 Enforces
: Rules/Regulations
 Provides
: Public Goods
 Fosters
Competition
 Contributes
to Economic Stability
WHERE DOES THE
GOVERNMENT GET ITS MONEY
4%
4%
9%
43%
Individual Income
Taxes
Social Security &
Payroll Taxes
Corporate Taxes
Excise Taxes
40%
Source: Federal Budget for Fiscal 2001
Other