1.1 COMPLEXITY OF THE MODERN ECONOMY
Economy: A complex system in which scarce resources (ex. labour, land, and machines) are
allocated among competing uses.
Market economy: Self-Organizing
Who/what provides the G&S individuals desire?
Early economists noticed that the interaction of self-interested ppl (consumers/producers) creates a
spontaneous social/economic order
Efficiency: organizing available resources to produce the G&S that people most value, when they
most want them, and by using the fewest possible resources to do so
Main Characteristics of Market Economies
Self-interest guides individuals.
ppl buy and sell what’s best for them & their family
Individuals respond to incentives.
sellers want to sell more when high price, &
buyers, when low price
1.2 SCARCITY, CHOICE, & OPPORTUNITY COST
Resources/Factors of Production
Land: natural endowments (arable land, forests, crude oil, minerals)
Labour: mental/physical HRs (entreprnl capacity & mgm skills)
Capital: manu’d aids to prod’n (tools, machinery, buildings)
Outputs are goods (tangibles) or services (intangibles)
Production: making G/S
Consumption: using G/S to satisfy wants
Fundamental problem faced by all economies.
Not enough resources are available to produce all the G&S that people would like to consume.
Measures the cost of obtaining a unit of one product in terms of the number of units of other
products that could have been obtained instead.
Production possibilities boundary
Shows all the combinations of Gs that can be produced by an economy whose resources are
Movement from one point to another along the boundary requires a reallocation of resources.
Negatively sloped line provides a boundary b/w attainable & unattainable combinations
OC of getting +1 lollipop is the 2 gums that must be given up
Scarcity (d): unattainable with current resources
Choice (a & b): both attainable OC: shown by negative slope
Shape is concave to the origin
Each factor of prod’n is not equally useful in prod’ng all Gs
OC of producing one G rises as more of that G is produced
Key Economic Questions…
1. What is produced and how?
Resource allocation determines the quantities of various Gs that are produced
On a PPB, what combo will be chosen?
Will there be inefficiently used resources (where economy is inside the ppb)?
2. What is consumed and by whom?
What determines how economies distribute total output? Why do some ppl get more than others
Will the economy consume exactly what it produces?
3. Why are resources sometimes idle?
When economy is operating inside its ppb
Under what circumstances are workers seeking jobs unable to find them? Should govts worry
4. Is productive capacity growing?
Growth in productive capacity is shown in outward shift of ppb
After sufficient growth, d becomes attainabl
1.3 WHO MAKES THE CHOICES & HOW?
The Flow of Income and Expenditure
Illustrates interaction of consumers & producers
Individual consumers sell factor services to producers in factor markets & thus earn their income.
(part-time job in uni = participating in factor market)