Chapter 1 - Welcome to Economics

labor market

the market in which households sell their labor as workers to business firms or other employers

specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall production process

Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?

100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.

Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a sheet of paper and then add a foreign country as a third agent. Draw a rough sketch of the flows of imports, exports, and the payments for each on your diagram.

Draw a box outside the original circular flow to represent the foreign country. Draw an arrow from the foreign country to firms, to represents imports. Draw an arrow in the reverse direction representing payments for imports. Draw an arrow from firms to the foreign country to represent exports. Draw an arrow in the reverse direction to represent payments for imports.

1.1 What economics is and why it's important

Economics seeks to solve the problem of scarcity, which is when human wants for goods and services exceed the available supply. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want. The division of labor allows individuals and firms to specialize and to produce more for several reasons: a) It allows the agents to focus on areas of advantage due to natural factors and skill levels; b) It encourages the agents to learn and invent; c) It allows agents to take advantage of economies of scale. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. Learning about economics helps you understand the major problems facing the world today, prepares you to be a good citizen, and helps you become a well-rounded thinker

1.3 How economists use theories and models to understand economic issues

Economists analyze problems differently than do other disciplinary experts. The main tools economists use are economic theories or models. A theory is not an illustration of the answer to a problem. Rather, a theory is a tool for determining the answer.

1.2 Microeconomics and Macroeconomics

Microeconomics and macroeconomics are two different perspectives on the economy. The microeconomic perspective focuses on parts of the economy: individuals, firms, and industries. The macroeconomic perspective looks at the economy as a whole, focusing on goals like growth in the standard of living, unemployment, and inflation. Macroeconomics has two types of policies for pursuing these goals: monetary policy and fiscal policy.

The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be? Hint: It is a characteristic of command economies.

Public enterprise means the factors of production (resources and businesses) are owned and operated by the government.

What is scarcity? Can you think of two causes of scarcity?

Scarcity means human wants for goods and services exceed the available supply. Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more.

A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.

The engineer is better at computer science than at painting. Thus, his time is better spent working for pay at his job and paying a painter to paint his house. Of course, this assumes he does not paint his house for fun!

underground economy

a market where the buyers and sellers make transactions in violation of one or more government regulations

A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?

She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than it what she could save growing her vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best (i.e. specialization of labor).

1.4: How economies can be organized: An overview of economic systems

Societies can be organized as traditional, command, or market-oriented economies. Most societies are a mix. The last few decades have seen globalization evolve as a result of growth in commercial and financial networks that cross national borders, making businesses and workers from different economies increasingly interdependent.

Why might Belgium, France, Italy, and Sweden have a higher export to GDP ratio than the United States?

The United States is a large country economically speaking, so it has less need to trade internationally than the other countries mentioned. (This is the same reason that France and Italy have lower ratios than Belgium or Sweden.) One additional reason is that each of the other countries is a member of the European Union, where trade between members occurs without barriers to trade, like tariffs and quotas.

What would be another example of a "system" in the real world that could serve as a metaphor for micro and macroeconomics?

There are many physical systems that would work, for example, the study of planets (micro) in the solar system (macro), or solar systems (micro) in the galaxy (macro).

What is an example of a problem in the world today, not mentioned in the chapter, that has an economic dimension?

There are many such problems. Consider the AIDS epidemic. Why are so few AIDS patients in Africa and Southeast Asia treated with the same drugs that are effective in the United States and Europe? It is because neither those patients nor the countries in which they live have the resources to purchase the same drugs.

goods and services market

a market in which firms are sellers of what they produce and households are buyers

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

theory

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

market economy

an economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand

command economy

an economy where economic decisions are passed down from government authority and where resources are owned by the government

fiscal policy

economic policies that involve government spending and taxes

market

interaction between potential buyers and sellers; a combination of demand and supply

gross domestic product (GDP)

measure of the size of total production in an economy

monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

imports

products (goods and services) made abroad and then sold domestically

exports

products (goods and services) made domestically and sold abroad

model

see theory: a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

private enterprise

system where the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals

microeconomics

the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms

macroeconomics

the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance.

economics

the study of how humans make choices under conditions of scarcity

globalization

the trend in which buying and selling in markets have increasingly crossed national borders

division of labor

the way in which the work required to produce a good or service is divided into tasks performed by different workers

traditional economy

typically an agricultural economy where things are done the same as they have always been done

scarcity

when human wants for goods and services exceed the available supply

economies of scale

when the average cost of producing each individual unit declines as total output increases