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CChapter hapter 11IntroductionIntroduction
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Economic PrinciplesEconomic Principles
The earth’s resources
Renewable vs. nonrenewable resources
Insatiable wants
Scarcity and choice
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Economic PrinciplesEconomic Principles
Economic model building
Microeconomic and macroeconomic analysis
Positive and normative economics
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Natural ResourcesNatural Resources
A natural resource is a gift of nature.
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Natural ResourcesNatural Resources
Examples of natural resources include:• Land• The uncultivated produce of land• Water• Minerals
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Natural ResourcesNatural Resources
There are two kinds of natural resources:• Renewable• Nonrenewable
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Natural ResourcesNatural Resources
• A renewable natural resource is one that can be replenished.
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Natural ResourcesNatural Resources
Renewable natural resources include:• Forests• Sea and land animals• Water• Grasses and forage on rangelands
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Natural ResourcesNatural Resources
• A nonrenewable natural resource is one that cannot be replenished.
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Natural ResourcesNatural Resources
Nonrenewable natural resources include:• Metals and ores• Oil and natural gas
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Natural ResourcesNatural Resources
Are we running out of natural resources?• We live in a finite world
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Natural ResourcesNatural Resources
Are we running out of natural resources?
• Our knowledge of a resource’s relative scarcity, particularly when considering its availability in the not-too-distant future, is less than exact.
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Natural ResourcesNatural Resources
Are we running out of natural resources?• Even though some resources are renewable, the overproduction of lands and overharvesting of resources to meet the needs of a rapidly growing human population can destroy our living resources.
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Natural ResourcesNatural Resources
Are we running out of natural resources?
• Properly managed conservation of resources can both protect natural resources and even increase their supply.
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ScarcityScarcity
Scarcity is the perpetual state of insufficiency of resources to satisfy people’s unlimited wants.
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ScarcityScarcity
Two competing facts create scarcity:
• Because we live on planet earth, the supple of resources available to us is limited.• Our wants for goods that are produced by the limited resources is unlimited.
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ScarcityScarcity
Examples of things that are scarce:• Super Bowl tickets
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ScarcityScarcity
Examples of things that are scarce:• Meals at a fine restaurant
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ScarcityScarcity
Examples of things that are scarce:• Admission to an elite university
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ScarcityScarcity
Examples of things that are not scarce:• Snow and ice in Alaska
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ScarcityScarcity
Examples of things that are not scarce:• Sand in a desert
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ScarcityScarcity
Some things that are not scarce can become scarce.• Air in the atmosphere is not scarce.• Clean, unpolluted air is scarce in many metropolitan areas, however.
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Scarcity and Scarcity and ConsumersConsumers
No one will knowingly pay a positive price for something that is not scarce.
If something is not scarce, there is enough to satisfy everyone’s wants and the price system is not necessary to decide who can have it and who cannot.
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The Study of The Study of EconomicsEconomics
Economics is the study of how people work together to transform resources into goods and services to satisfy their wants.
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The Study of The Study of EconomicsEconomics
Four central questions of economics:• Who decides what goods to produce?• How are goods produced?• Who gets the goods produced?• Who produces what?
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Consumer Consumer SovereigntySovereignty
Consumer sovereignty
• The Freedom of consumers to determine what goods and services they will buy.
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Consumer Consumer SovereigntySovereignty
Consumer sovereignty affects the economy in several ways.
• Consumer decisions ultimately determine what goods and services the economy will produce.
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Consumer Consumer SovereigntySovereignty
Consumer sovereignty affects the economy in several ways.
• Consumer decisions determine who gets what goods.
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Economic ModelsEconomic Models
Economic models
• Economic models are simplified abstractions of the real world.
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Economic ModelsEconomic Models
1. How can economic models be expressed?• Pictorially• Graphically• Algebraically• Verbally
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Economic ModelsEconomic Models
Economists use models because the world is too complex to fully and comprehensively consider at one time.
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Economic ModelsEconomic Models
Ceteris paribus
• Ceteris Paribus is a Latin phrase meaning “everything else being equal.”
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Economic ModelsEconomic Models
The ceteris paribus assumption allows economists to develop one-to-one, cause-and-effect relationships in isolation.
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Economic ModelsEconomic Models
The role of ceteris paribus:
• Isolates one factor at a time in an experiment or study.
• Allows researchers to identify cause-and-effect relationships removed from other factors.
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EXHIBIT 1 THE CIRCULAR FLOW MODEL
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Circular Flow ModelCircular Flow Model
There are two principal players in the circular flow model• Households• Firms
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Circular Flow ModelCircular Flow Model
Households
• A household is an economic unit of one or more persons, living under one roof, that has a source of income and uses it in whatever way it deems fit.
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Circular Flow ModelCircular Flow Model
Firms
• A firm is an economic unit that produces goods and services in the expectation of selling them to households, other firms, or the government.
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Circular Flow ModelCircular Flow Model
Resource market
• The resource market is the market in which households supply resources to firms.
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Circular Flow ModelCircular Flow Model
These resources can include:
• Land• Labor• Capital• Entrepreneurship
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Circular Flow ModelCircular Flow Model
Firms pay for these resources with:
• Wages• Rent• Interest• Profit
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Circular Flow ModelCircular Flow Model
Product market
• The product market is the market in which firms supply goods and services to households.
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Circular Flow ModelCircular Flow Model
Product market
• Households pay for goods and services they buy in the product market with the income they received from supplying resources in the resource market.
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Circular Flow ModelCircular Flow Model
Circular flow model
• In this model, households supply resources to firms, and firms supply goods and services to households.
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Micro vs. MacroMicro vs. Macro
The study of economics is divided into two areas• Microeconomics• Macroeconomics
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Micro vs. MacroMicro vs. Macro
Macroeconomics
• Macroeconomics analyzes the behavior of the market as a whole.
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Micro vs. MacroMicro vs. Macro
Microeconomics
• Microeconomics analyzes individual and firm behavior, especially in market conditions.
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Positive vs. Positive vs. Normative EconomicsNormative Economics
There are two different approaches to the study of economics• Positive economics• Normative economics
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Positive vs. Positive vs. Normative EconomicsNormative Economics
Positive economics
• Positive economics is a subset of economics that analyzes the way the economy actually operates.
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Positive vs. Positive vs. Normative EconomicsNormative Economics
Normative economics
• Normative economics is a subset of economics founded on value judgments and leading to assertions of what ought to be.