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Principles of economics openstax chapter1

# Chapter
1 Welcome
to Economics!
PowerPoint Image Slideshow

Figure 1.1

Economics is greatly impacted by how well information travels through society. Today, social media giants Twitter, Facebook, and Instagram are major
forces on the information super highway. (Credit: modification of work by Manuel Iglesias/Flickr Creative Commons)

Chapter summary




Economic concepts

Resources used in production of goods and

Labor or Human Resources
Land or Natural Resources
Capital or Capital Resources

Economic concepts

Scarcity: Not freely available

Resources are scarce; they are limited in supply.

In order to use resources to produce more of one
good, we must be ready to produce less of another

Economic concepts

Homeless people are a stark reminder that scarcity of resources is real

Economic concepts

Opportunity Cost: The unavoidable cost of making

Value of the best alternative forgone
What you give up to get something

Economic concepts

Economics: the study of allocation and use of
scarce resources to satisfy unlimited human

To solve the economic problem, the society has
to make choices

Economic concepts

Microeconomics: study of economic behavior of
individual consumer and producer and market
Macroeconomics: study of economic behavior of
the entire unit and its problems (e.g., inflation,
unemployment, recession)

Adam Smith, The Wealth of Nations, 1776

Division of Labor: Divide a
job into discrete tasks and
have each worker perform
an assigned task, thus
becoming more productive
(e.g., the assembly line).

Division of labor

Workers on an assembly line are an example of the divisions of labor.
(Credit: Nina Hale/Flickr Creative Commons)

John Maynard keynes
A capitalistic economy can get stock in a
deep downturn with massive
To recover, the government must play
an active role by spending money to
create jobs and incomes.

The circular flow of income

Circular Flow: A model depicting interactions
between economic actors within markets

Markets are where buyers and sellers
negotiate transactions

Actors are market participants: Households,
Firms, Government

The circular flow of income
Goods and Services Market: Where buyers and sellers
of goods and services negotiate and conduct exchange
Labor Market: Where buyers and sellers of labor
resources negotiate for wages and hours of work
Capital Market: Where banks and financial institutions
provide loanable funds for households and firms

The circular flow of income

The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor
market. The direction of the arrows shows that in the goods and services market, households receive goods and
services and pay firms for them. In the labor market, households provide labor and receive payment from firms through
wages, salaries, and benefits.

Basic Economic questions

1. What to Produce: kind of goods and services people
need or want (guns vs. butter)

2. How to Produce: kind of methods used in production of
goods and services (labor-intensive vs. capital-intensive)

3. For Whom to Produce: kind of people benefiting from
distribution of goods and services (rich, poor, or middle

Economic systems

1. Tradition: Customs and the way of life answering the basic

2. Command and Control: Government makes a plan to
determine what, how and for whom to produce (i.e.,

3. Market Orientation: The market system based on
interaction between buyers and sellers answer the basic
questions (i.e., Capitalism)

Example of commend and control

Ancient Egypt was an example of a command economy

Market orientation

Nothing says “market” more than
The New York Stock Exchange

Capitalism & Freedom

Benefits of Market Orientation

Freedom to choose
Freedom to compete
Freedom to trade
Rule of law
Enforcement of contracts
Creation of a large middle class

Capitalism & Freedom

Cargo ships are one mode of transportation for shipping goods in the
global economy.

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