Introductory Economics

Arleen J Hoag, John H Hoag

• Editorial: WSPC
• Año: 2006
• ISBN:
  9789814365468
• Edición: 4
• Categoría: Economics
• Categoría: Economic Theory

This carefully constructed textbook empowers the reader with an understanding of fundamental economic concepts. There are 31 “one-concept” chapters. Each short chapter highlights one economic principle. The student can study one concept and be reinforced by the learning process before proceeding to another. The writing is lucid and at the student's level. Self-review exercises conclude each chapter. The text is well integrated to show the relationship among the basic concepts and to offer a comprehensive overview of economics. The one-concept chapters provide organizational flexibility for the instructor. There are eight modules: The Economic Problem; Price Determination; Behind the Supply Curve; Measuring the Economy, The Level of Income; Money; Trade; Conclusion.

A study guide is available on line without charge. Each chapter in the text has a corresponding chapter in the study guide as well as an introduction to graphing.

The Instructor Manual, Test Bank and Power Point slides are available upon request for all instructors who adopt this book as a course text. Please send your request to [email protected].

Contents:

• The Economic Problem:
  • The Meaning of Economics
  • Methods
  • Production Possibilities
  • Economic Systems
• Price Determination:
  • Demand
  • Supply
  • Market Equilibrium
  • Price Elasticity
• Behind the Supply Curve:
  • Diminishing Returns
  • Cost
  • Revenue
  • Profit
  • Perfectly Competitive Supply
  • Monopoly
  • Imperfect Competition
  • Demand for Inputs
• Measuring the Economy:
  • Unemployment and Inflation
  • Gross Domestic Product
  • Price Indexes
  • Business Cycles
• The Level of Income:
  • Consumption and Investment
  • Macro Equilibrium
  • Government
  • The Keynesian Cross
  • Fiscal Policy
• Money:
  • Money
  • Monetary Tools
  • Money and the Level of Income
  • Economic Policy
• Trade:
  • Trade without Money
  • Trade with Money

Readership: Undergraduates in micro and macroeconomics.

Module

1

THE ECONOMIC PROBLEM

 

 

 

The first four chapters in this book are a module. This book has seven modules. Each module focuses on a particular aspect of the economic problem. The first module introduces you to the economic problem. We will have more to say about the contents of this module in a moment. But first you should understand that each module consists of chapters containing topics that are closely related. We have grouped the chapters according to ideas which are most useful with each other. There will be an introduction such as this for each module to provide the basic framework that you will need for that module. Each chapter will reveal an important economic concept that is related to the other chapters in the module. The topics in one module are also related to ideas in other modules, so there is a strong common thread running throughout all the modules. You will continue to expand your knowledge as you progress through this textbook. Economics is not merely a collection of facts but is a unified approach to problem solving.

This introductory module involves two basic ideas. First, choices must be made among the different ways of using resources. Second is the idea that different societies may choose different ways of making these decisions. These decisions involve all aspects of our lives and are constantly being made and remade. Questions must be answered such as, How much land should be used for wheat production? If more wheat is grown, what will we give up? How much national defense should be provided? What are we willing to give up to get more defense? If we want more aid for the poor and disadvantaged, who will have to do with less? These questions, and others like them, are similar to those faced by our grandparents and those that will be faced by our grandchildren. These perpetual questions will constantly require our attention and will not go away. We cannot avoid making these decisions; one way or another, they will be made. How will they be made?

Decisions are made by the society and the individuals in the society weighing the costs of an action against the benefits of that action. This view — that weighing costs and benefits is an appropriate way to decide how the world will be — is what economics is about. You can think of economics as trying to answer those perpetual questions. But rather than providing answers, economics provides a method: ask what the costs and benefits are and upon whom they fall. Needless to say, what one thinks are benefits may be costs to another. So, economics cannot provide solutions to questions, but it can provide a stage on which the debate over the issues can be clearly understood. You cannot afford to sit back and let others attend the debate in your place. You have too much at stake to not listen and contribute.

We are surrounded by economic activity. In fact, it is so common that we may not recognize it when we see it. And even if we do not see them, economic forces are constantly shaping our lives.

In this first module, you can begin to look for and recognize economic forces and begin your orientation to economics. This module is largely an introductory overview of the economic problem. As you will learn, the challenge that each society faces is how to use the resources that are available to it. This is the economic problem. The meaning of economics is given in the first chapter. There the economic problem is fully discussed. Chapter 2 provides more detail, if desired, on the methods of economics. An example of the method used by economists is given in the third chapter, which also serves to unify and illustrate the preceding two chapters. The fact that every society must face certain decisions, and that every society has different ways to make these decisions, is the content of Chapter 4. One of the goals of this text is to provide you with the tools needed to understand the economic problem.

Chapter

1

THE MEANING OF ECONOMICS

Key Topics

resources

scarcity

choices

opportunity cost

Goals

understand the scope of economics recognize the existence of scarcity

examine the relation of scarcity, choice, and opportunity cost

What is economics? The subject matter of economics is introduced in this chapter. We want to give you an overview of the subject and an idea of how economists view the world. Of course, you should not expect to understand all of economics after just one chapter. However, let us see if by the end of this chapter you can achieve a basic understanding of the meaning of economics.

This chapter starts with a definition of economics. In each of the remaining sections, one concept in the definition will be discussed. We must take the definition apart before it can be put together in a meaningful way. The definition will be developed into a clear description of the science of economics. Every time you come to a new section, look back to the definition to see where and why the new material fits into the definition.

Economics is a social science that studies how society chooses to allocate its scarce resources, which have alternative uses, to provide goods and services for present and future consumption.

The definition starts “Economics is, ” and that is what is being defined. So the remaining words need to be understood to make sense of economics. Let us start with “goods and services”.

Goods and Services

What exactly are goods and services? A good is anything that satisfies a want. That is the purpose of production – to provide goods that satisfy wants. So goods are produced, and the consumption of those goods satisfies wants. Goods can be tangible or intangible. Tangible goods are physical items such as bulldozers or pizzas. Intangible goods such as medical care or education are called services. Both goods and services satisfy wants and therefore can be called goods.

Resources

The satisfaction of wants can only be accomplished by using up resources, the inputs, the so-called factors of production or means of production. These resources can be classified as land, labor, capital, and entrepreneurship.

Land is land itself and anything that grows on it or can be taken from it – the “natural resources.” Imagine producing anything from a pizza to a medical doctor without the use of land somewhere along the productive process. Labor, another resource, is human effort, both physical and mental.

The resource capital is also known as capital goods. An economist's use of capital is not a reference to money but to a resource. Capital is a man-made tool of production; it is a good that has been produced for use in the production of other goods. Goods are produced for one of two purposes. A good may be a consumer good used for the satisfaction of wants, which is the ultimate purpose of production. Or a good may be a capital good produced not for consumption but for use in producing more goods, either consumer or capital. So capital goods, such as a mechanic's wrench or a school building, are resources that have been produced and that will combine with other resources, such as land and labor, to produce more output.

Some goods may be a consumer good in one use and a capital good in another use. For example, consider a personal computer. When the computer is used to play solitaire, it is a consumer good. On the other hand, when it is used as a word processor to write a textbook, it is a capital good. To tell whether a good is a consumer good or a capital good, ask yourself a question: Is the good going to be consumed directly or will it be used to produce more goods? If it is to be consumed directly and purchased by consumers, it is a consumer good; if it is to be used to produce other goods and purchased by business, it is a capital good.

Entrepreneurship is human effort again. Entrepreneurs are the risk takers. They are more than managers, although they use managerial ability. Entrepreneurs reap the profits or bear the losses of their undertakings. Entrepreneurship is the organizational force that combines the other factors of production – land, labor, and capital – and transforms them into the desired output. The output may be capital or consumer goods, but ultimately consumer goods are produced to satisfy wants.

Scarcity

Resources are scarce. Scarcity is a relationship between how much there is of something and how much of it is wanted. Resources are scarce compared to all of the uses we have for them. If we want to use more than there is of an item, it is scarce. Note that this meaning is different from the usual meaning of scarce, which is “rarely found in nature.” How are they different? Consider this example. Is water scarce? How could anyone argue that water is scarce in the usual sense? Water covers nearly two-thirds of the earth's surface. Yet an economist would say that water is scarce. Why? The reason is that there are so many competing uses for water that more water is wanted than is available. If you find this hard to believe, ask farmers and ranchers in the West, where water rights are jealously guarded. As soon as someone is willing to pay for a good, or a resource, it is scarce by the economist's definition.

Consider scarcity from another point of view. What if scarcity did not exist? Then all goods would be free goods. Free goods would mean that you could have all you want of everything without having to give up something else you also want. Can you think of goods that are not scarce? There may be some. Take air, for example. Isn't it free? What do you have to give up to get air? In some locations, it probably is free. But, in other locations, it is not, especially if air means clean air. You could make a fortune if you could find a way to provide clean air on a smoggy day in Los Angeles. People pay to avoid the smog: they don't go out when the smog is bad, they car pool, and so on. So even air may not be free. In fact, it is hard to think of goods or resources that are free.

The production of goods to satisfy a want will reduce the amount of the available resources. Resources are limited. There is only so much land, labor, capital, and entrepreneurship in existence at any point in time. Resources are therefore scarce because there is not enough of them to go around to produce all the things that we would like to produce to satisfy all our wants. Hence goods are scarce, too. Scarce resources yield scarce goods.

On the one hand, resources are limited, but on the other hand, human wants are unlimited. Wants are unlimited or nearly so. How can that be? Everyone has wants, and if the truth were known, each individual has nearly unlimited wants. Examine my wish list. It certainly includes more goods and services than I have right now. I would like to live in some exciting places. Paris would be acceptable, but not all the time. I would also like a home in Hawaii or on the Monterey peninsula. And of course a place in the Alps for skiing. And because these places are far away from each other, and I do not want to depend on commercial airlines – a private jet would be nice. And probably a Rolls-Royce or a Mercedes for the family and a Ferrari or Porsche for me. Too, I would not want to spend all my time cleaning house or cooking, so each home would need a complete staff. The list is fairly long already, and I haven't gotten to my special passion – hats! You can easily see that if each member of society made up a wish list, the wants of all people added up would be enormous. Nearly unlimited. The point is that wants exceed what can be produced from our limited resources.

Unlimited wants alone are not a problem, but certainly a problem exists when unlimited wants are combined with a limited means of satisfying those wants. The production of any good on our wish list uses up resources. Then scarcity sets in. We can never satisfy all of society's unlimited wants with limited resources and the consequently limited goods.

Unlimited wants reflect human nature. The limitation of resources is imposed upon us by nature. Therefore, unlimited wants competing for limited resources creates the basic economic problem of scarcity. This is a difficulty that cannot be overcome by cleverness or good fortune. Scarcity, the interaction of unlimited wants with limited resources, has been called the economic problem.

In fact, you are starting the study of economics, which would not exist except for scarcity. If that makes you think that scarcity might be the cause of many of your problems, you are right. Scarcity is the economic problem. Therefore, choices must be made.

Choices

We must choose how to use our scarce resources. Scarcity forces choice. And economics, which deals with scarcity, is often called the study of choosing. We cannot have all we want of everything we want. Scarcity. Scarcity is imposed by limited factors of production yielding limited output of goods relative to unlimited wants. Choices must be made.

Now you see that since we do not have enough capital goods to assist in the production of all those consumer goods to satisfy our unlimited wants, capital is a scarce resource. And we must choose how to use capital. For similar reasons, we must choose how to use land, labor, and entrepreneurship. The fact that choices must be made in turn reflects the fact that scarcity does ...