CHAPTER CHAPTER TWOTWO
Economics: The Economics: The Creation and Creation and
Distribution of Distribution of WealthWealth
WHAT ARE THE 3 MAJOR WHAT ARE THE 3 MAJOR BRANCHES OF BRANCHES OF ECONOMICS?ECONOMICS?
EconomicsEconomicsMacroeconomicsMacroeconomicsMicroeconomicsMicroeconomics
ECONOMICSECONOMICS
Use of scarce resources to produce goods/services, distribute them among
competing groups/individuals
WHAT IS WHAT IS MACROECONOMICS?MACROECONOMICS?
Concentrates on the Concentrates on the operation of a nation's operation of a nation's economy as a wholeeconomy as a whole
WHAT IS WHAT IS MICROECONOMICS?MICROECONOMICS?
Concentrates on the Concentrates on the behavior of people behavior of people and organizations and organizations
in markets for in markets for particular products particular products
or servicesor services
ECONOMIC THEORY Thomas Malthus (Early 1800s)Thomas Malthus (Early 1800s)
““Too many people “Too many people “ if the rich had most of the wealth and the poor had most if the rich had most of the wealth and the poor had most
of the population resources would run out.of the population resources would run out. Thomas Carlyle “Dismal Science”.Thomas Carlyle “Dismal Science”.
Neo-Malthusians “Radical birth control”.Neo-Malthusians “Radical birth control”.
Adam Smith (1776)Adam Smith (1776)Freedom is vital Freedom is vital • Freedom to own land or property and the right to keep the Freedom to own land or property and the right to keep the
profits of a businessprofits of a business
• People will work hard if they believe they will be rewarded.People will work hard if they believe they will be rewarded.
““Invisible Hand” Invisible Hand” : : When self-directed gain leads to When self-directed gain leads to
social and economic benefits for the whole community.social and economic benefits for the whole community.
SUPPLY CURVE
Quantity(S)Quantity(S)
HighHigh
HighHighLowLow
Price(P)Price(P)
SS
DEMAND CURVE
Price(P)Price(P)
Quantity(D)Quantity(D)
HighHigh
HighHighLowLow
DD
QuantityQuantity
HighHigh
HighHighLowLow
PricePrice
EQUILIBRIUM EQUILIBRIUM POINTPOINT
Market EquilibriumMarket Equilibrium
SS DD
SurplusSurplus
ShortageShortage
THREE ECONOMIC SYSTEMS
CommunismCommunism
SocialismSocialism
CapitalismCapitalism
(Highly Controlled(Highly Controlled)) (Little Control(Little Control))
MixedMixed
CAPITALISMPrivate PropertyPrivate PropertyProfit/OwnershipProfit/OwnershipFreedom of CompetitionFreedom of CompetitionFreedom of ChoiceFreedom of Choice Capital countries Capital countries
USAUSAUKUKAustralia Australia
COMMUNISM Public OwnershipPublic Ownership Central Planning/Controlled Central Planning/Controlled
EconomyEconomy The Government :The Government :
makes almost all economic decisions makes almost all economic decisions owns almost all the major factors of owns almost all the major factors of
productionproduction. . Managers = Mandatory Party Managers = Mandatory Party
Membership Membership
SOCIALISM
Private & Public OwnershipPrivate & Public OwnershipSome Choices are LimitedSome Choices are LimitedCreates Social Equality & Creates Social Equality &
Equality of ResultsEquality of ResultsReduces Individual IncentiveReduces Individual Incentive
MIXED ECONOMIES Free-Market Economy: Free-Market Economy: The market largely The market largely
determines what goods and services are produced, who determines what goods and services are produced, who gets them, and how the economy grows.gets them, and how the economy grows.CapitalismCapitalism
Command Economy : Command Economy : The government largely The government largely determines what goods and services are produced, who determines what goods and services are produced, who gets them, and how the economy will grow.gets them, and how the economy will grow.Socialism + CommunismSocialism + Communism
Mixed Economies : Mixed Economies : Some allocation of resources Some allocation of resources is made by the market and some by the government.is made by the market and some by the government.
DEGREES OF COMPETITION
SellersSellers
OneOne ManyMany
MonopolyMonopoly
OligopolyOligopoly
Monopolistic Monopolistic
CompetitionCompetition
Pure CompetitionPure Competition
MONOPOLY = ONE MONOPOLY = ONE SELLERSELLER
DiamondsDiamonds
UtilitiesUtilities
Microsoft ? Microsoft ?
OLIGOPOLY = FEW OLIGOPOLY = FEW SELLERSSELLERS
TobaccoTobacco
AutomobilesAutomobiles
MONOPOLISTIC MONOPOLISTIC COMPETITION COMPETITION
MANY SELLERS WITH MANY SELLERS WITH PERCEIVEDPERCEIVED DIFFERENCESDIFFERENCES
Fast FoodFast Food
CollegesColleges
PURE COMPETITION
BuyerBuyer
SellersSellers(Agriculture)
LIMITATIONS OF FREE-MARKET
Inequality of Wealth- Causes National & World Tension
Potential Environmental Damage
Limitations Push Country towards Socialism = Government Regulation
GOVERNMENT’S ROLE IN GOVERNMENT’S ROLE IN ECONOMICSECONOMICS
Enforces : Rules/RegulationsEnforces : Rules/Regulations
Provides : Public GoodsProvides : Public Goods
Fosters CompetitionFosters Competition
Contributes to Economic StabilityContributes to Economic Stability
WHERE DOES THE WHERE DOES THE GOVERNMENT GET ITS GOVERNMENT GET ITS MONEYMONEY
Source: Federal Budget for Fiscal 2001
4%4%
9%
40%
43%
Individual IncomeTaxes
Social Security &Payroll Taxes
Corporate Taxes
Excise Taxes
Other