OUTLINE -- CHAPTER 1

The Nature and Method of Economics and the 4 Es

I. What Is Economics?

the study of how we choose to use limited resources to obtain the maximum satisfaction of unlimited human wants

"study of"
choice
scarcity
maximizing satisfaction

II. "Study Of" -- Using theories (pp. 4-5)

A. based on facts
B. simplifications
C. generalizations
D. abstractions
E. ceteris paribus

III. Why Study Economics? (pp. 2-3)

IV. The Economic Perspective: Scarcity and Choice

A. Scarcity -- Limited resources and Unlimited wants
B. The necessity of choice
1. options for dealing with scarcity
a. Economic growth ( the first "E")
1) Definition: an increase in the ABILITY to produce goods and services

2) caused by:

a) more resources
b) better resources
c) better technology

b. reducing wants
c. use existing resources wisely = maximizing satisfaction

V. Maximizing Satisfaction -- Four More Es (pp. 23-24 + LECTURE)

A. Productive Efficiency
1. definition: producing at a minimum cost

2. Prod. Eff. and Scarcity:

By producing at a minimum cost, FEWER RESOURCES are used and MORE can be produced

3. HOW?

a. not using more resources than necessary
b. using resources where they are best suited
c. using appropriate technology

4. Examples

a. not using more resources than necessary
(1) How does this MAXIMIZE SOCIETY'S SATISFACTION?
(a) amount produced
(b) price

(2) Examples:

(a) Janitors at Harper
(b) Grocery stores:USSR
(c) Motorla/Sears/AT&T/etc. lay off 1,000s

(d) Other

b. using resources where they are best suited

(1) How does this MAXIMIZE SOCIETY'S SATISFACTION?
(a) amount produced
(b) price

(2) Examples:

(a) secretaries/truck drivers
(b) doctors/engineers
(c) IL-corn/Ala-cotton
(d) ND-potatos/Honduras-sugar
(e) free trade
  • (f) discrimination

c. using appropriate technology

(1) What is appropriate?
(a) appropriate = min. cost
(b) best technology?

(2) How does this MAXIMIZE SOCIETY'S SATISFACTION?

(a) amount produced
(b) price

(3) Examples:

(a) farming: US/Kenya
(b) farming: tractors/helicopter
(c) Chicago/Beijing airport
(d) Other

B. Allocative Efficiency

1. definition
using our limited resources to produce:
  • THE RIGHT MIX OF GOODS
  • MORE OF WHAT PEOPLE WANT
  • LESS OF WHAT PEOPLE DON'T WANT

2. How does this MAXIMIZE SOCIETY'S SATISFACTION and REDUCE SCARCITY?

3. examples

a. steel: horseshoes or cars
b. crude oil: gasoline or kerosene
c. small cars or SUVs

4. Allocative inefficiency

a. producing TOO MUCH or TOO LITTLE
shortages and surpluses

b. How does allocative inefficiency affect scarcity?

c. examples:

(1) US agriculture: mountains of grain
(2) long lines in Poland
(3) Super bowl tickets
(4) Natural disasters: "price-gouging"

(5) food price controls
(6) gasoline

(a) WWII
(b) 1970s: Arab oil embargo
(c) during Gulf War

c. WHAT CAN BE DONE?

5. The importance of prices

a. What is a shortage?
  •  
  • b. gasoline
    c. Super Bowl tickets
    d. scalpers
    d. food price controls and famine

C. Equity

1. definition: a "fair" distribution of income, or goods and services
2. Equity vs. Equality
3. examples
a. US:http://www.census.gov/ftp/pub/hhes/income/histinc/h02.html
b. World:

4. How does equity help society achieve the maximum possible satisfaction from its limited resources?

a. President Clinton example
b. the role of Diminishing Marginal Utility

D. Full Employment

1. definition: using ALL available resources
a. labor: FE = about 5% unemployment
http://stats.bls.gov/wh/cpsbref3.htm
http://www.publicpurpose.com/oecdunem.htm
b. capital utilization rate: FE = about 85%
c. land
d. entrepreneurial ability

2. How does full employment help society achieve the maximum satisfaction from its limited resources

E. REVIEW - The 4 Es

VI. Structural Adjustment Revisited

A. Definition (Again)
B. Why?
1.Goal: Reduce Scarcity: The 5 Es
2.Capitalism and the 5 Es
a. Economic growth
b. Productive Efficiency
c. Allocative Efficiency
d. Equity
e. Full Employment

3. Command Economies and the 5 Es

a. Economic growth
b. Productive Efficiency
c. Allocative Efficiency
d. Equity
e. Full Employment

4. Summary:

WHY structural adjustment?

  • Capitalism provides the incentives (profit) for an EFFICIENT use of resources, both PRODUCTIVE efficiency and ALLOCATIVE efficiency
  • Capitalism provides the incentives (profit) for an EFFICIENT use of resources, both PRODUCTIVE efficiency and ALLOCATIVE efficiency
  • The move toward capitalism has resulted in high rates of ECONOMIC GROWTH in many countries

PROBLEMS with structural adjustment:

  • Capitalism does not have a mechanism to assure EQUITY.
  • Economists disagree over whether capitalism will guarantee FULL EMPLOYMENT.
  • INFLATION

     

VII. Limited resources: The Four Factors of Production

A. What is a resource?

B. Types of Resources

1. Land
a. examples
b. definition

2. Capital

a. examples
b. definition

3. Land

a. examples
b. definition

4. Entrepreneurial Ability

a. examples
b. definition

C. Resource Quiz

D. Resources and Resource Payments

1. land -- rent
2. capital -- interest
3. labor -- wages
4. entepreneurial ability -- profits or losses

VIII. Economic Models (appendix -pp. 14-17)

A. Demonstrating economic concepts
B. Line Graphs

1. construction
2. inverse and direct relationships
3. slope

a. linear (straight) graph
b. nonlinear (bent) graph