Author: John Bouman

What’s in This Chapter? In this unit, we define economics and describe fundamental economic concepts. We study economics to explain important economic relationships and to determine how to best improve a nation’s standard of living and citizens’ happiness. In this definition, improving a nation’s standard of living includes increasing tangible (cars, houses, food), as well as intangible goods and services (protection from violence, clean air, entertainment, leisure time). The production possibilities curve in this unit shows us the production choices we face given a certain amount of resources. No matter how abundant our resources are, they are limited, and we have to make choices regarding what and how much we want to produce and for whom. In section 4, we look at the circular flow model. This model paints a picture of the main economic activities and groups in a country. In free market economies, the decision as to what and how much to produce is made by the buyers and sellers of the products. Governments in free market economies play an important role in setting certain rules and protecting people and private properties, but exert relatively little control over prices of products and factors of production. Section 5 discusses the three main economic systems, which reflect the various degrees of government involvement: capitalism, socialism, and communism. Section 6 defines and explains important fundamental economic concepts, such as the...

The Definition of Economics What is economics? Is it the study of money? Is it about trade-offs and scarce resources? Is it about inflation, unemployment, and government budget deficits? Is it about eliminating poverty? All of the above are important topics in the study of economics, but the main objective of economics is its ability to explain how we can most optimally achieve the highest standard of living and citizens’ happiness. Therefore: Economics is the study of how we can best increase a nation’s standard of living and citizens’ happiness with the resources that we have available to us. Standard of living in this definition includes tangible products, such as cars and houses, as well as intangible products, such as more leisure time, access to health care, and cleaner air. How Can We Best Increase Our Nation’s Standard of Living? There is substantial disagreement over how a country can best achieve the optimum standard of living. Some economists support considerable government involvement, price controls, and government rules and regulations. Others believe that government involvement should be minimal and limited to essential tasks including the provision of a legal system, military, police and fire protection, and providing certain public goods. Many believe that a combination of moderate government involvement and private initiative works best. Controversial issues in economics include the role of profits, income and wealth distribution, unions, and government...

  Production Choices A country’s standard of living is in great part determined by its ability and effectiveness to produce goods and services. In order to produce, a country must use its resources, including land, labor, capital, and raw materials efficiently. A production possibilities curve represents production combinations that can be produced with a given amount of resources. Let’s say that a very small hypothetical country uses 100 acres of land, 20 machines, and 50 workers, and is able to produce two products: guns and roses. You can think of “guns” as representing the category of military products. “Roses” represents all consumer products. This country has some choices (possibilities) regarding how it uses its resources. It can produce 500 units of guns and 350 units of roses (point C on the graph below). However, it can also, with the same resources, produce 400 units of guns and 500 units of roses (point B). Or it can produce 300 units of guns and 580 units of roses (point A). Numerous other combinations (for example, points D, E, G or points in-between), are possible.                 Points on the Curve and Trade-offs If an economy is operating at a point on the production possibilities curve, it is operating at full employment. All resources are used, and they are utilized as efficiently as possible (points E,...

Causes of Economic Growth Economic growth occurs when the economy realizes greater production capabilities. In the graph below, the production possibilities curve shifts outward to the right (for instance, through point F), so that the country’s production capacity rises. For the curve to shift outward, resources (land, labor, capital, and raw materials) must increase, or we must improve the way we use these resources (technology). Therefore, economic growth is made possible by advances in technology and/or increases in resources, such as natural resources (land, oil, trees, etc.), workers, and capital goods, including machinery, equipment, assembly lines, office buildings, factories, roads, highways, and airports. How does a country increase its capital goods, and how does it achieve advances in technology? Let’s take a look at increases in capital goods first. Increases in Capital Goods Capital goods are produced just like other goods, such as cars or food. If a country is producing at full employment (operating on the curve), more capital goods can be produced only if the country produces fewer consumption goods. Looking at the diagram in the previous section, this is reflected by a move from a point on the curve from the lower right to the upper left (for example, from point D to point A, or from point B to point C). A government can encourage more production of capital goods by, for example, providing tax...