Unit I: Basic
Economic Concepts
 

What is Economics in General?

• Economics is the science of scarcity
scarcity..
• Scarcity is the condition in which our wants
are greater than our limited resources.
• Since we are unable to have everything we
desire, we must make choices on how we will
use our resources.
• In economics we will study the choices of
individuals, firms, and governments.

Economics is the study of _________.

choices
 

Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on welfare.

Economics Defined
Economics--Social science concerned with the
Economics
efficient use of limited
limited resour
resources
ces to achieve
maximum satisfaction of economic wants.
(Study of how individuals and societies deal
with ________)
scarcity
 

Micro vs. Macro

MICROeconomics
MICROeconomics--
Stud
tudy small
y of sma ll economi
conomicc units
u nits suc
suchha
ass
ind ividua
indivi duals,ls, firms
firms,, and ind
indust
ustrie
ries
s (com
compe petit
titive
ive
mark
ma rkeets
ts,, la
labo
borr ma
markrke
ets,
ts , pe
pers
rson
onaal de
deci
cisi
sion
on
making
maki ng,, etc.
tc .)

MACROeconomics
MACROeconomics--
Stud
tudyy of th
thee la
larg e eco
rge cono
nomy
my as a wh whololee or in
its ba
basic
sic sub
subdiv
divisi
isions
ons (Natio
tiona
nall Econ
Economiomic c
Gro
rowt
wth,
h, Gov
Gove ern
rnment
ment SSpendi
pending
ng,, Inf
nflatio
lation,
n,
Unemployment, etc.)
 

How is Economics used?

• Economists use the scientific method to make
generalizations and abstractions to develop
theories. This is called theor
theoretical
etical economics.
• These theories are then applied to fix problems
or meet economic goals. This is called policy
economics.

Positive
Statements-- Based
Positive Statements
vs. Normative
Based on facts.
facts. Avoids
voids value
value

 judgements (what is).

(what is). - Incl
Statements
Normative Statements- Include
udess value
value judge
judgeme
ments
nts
(what ought to be).
be).
 

Thinking at the Margin

# Times Benefit Cost
Watching Movie

1st $30 $10

2nd $15 $10
3rd $5 $10
Total $50 $30

Would you see the movie three times?

Notice that the total benefit is more than the
total cost but you would NOT watch the movie
the 3rd time.
 

Marginal Analysis
In eco
econo
nomi
mics
cs th
thee te
term
rm ma
marg
rgin
inaal = add
addit
itio
iona
nall

“ Thi
hink
nkin ing
go onn tthe
he marg
margin in”” , or MARG
ARGIINAL ANANAL
ALY YSIS
involv
inv olve es mma akin
king g de
d ecis
cision
ions sb ba
ase
seddo
onn tthe
he addi
dditio
tiona
nall
bene
be nefifitt vs
vs.. th
thee addit
dd itio
iona
nall cost
co st..

For Exampl
xamplee:

You have bee

been
n sho
s hopp
ppin
ing
g at the
th e mall for
f or a half hou
h ourr, th
thee
addit
dditional
ional bene
benefit
fit of shop
shopping
ping for an additiona
addition al ha
half-
lf-hour
hour
might outw
outweeigh the
t he addit
dditiona
ionall cost
c ost (the opportunity
opportu nity cost).

 A f t er t h r ee ho
 Af h o u r s , th
t h e add
ad d i t i o n al b en
enef
efii t f r o m s t ay
ayii n g an
addi
dditiotionanall half-hou
half-hourr would wo uld likely
l ikely be le less
ss tha t hann the
th e addidditio
tiona
nall
cost.
 

5 Key Economic Assumptions

1. Society’
Society’ss wants are
are unlimited,
unlimited, but ALL resources
(scarcity).
are limited (scarcity ).

2. Due to scarcity,
scarcity, choices must be made. Every choice
has a cost (a trade-off ).
).

3. Everyone’s
Everyone’ s goal isEveryone
their satisfaction. to make choices
acts in that
theirmaximize
own “self-
interest.”
4. Everyone acts rationally by comparing the marginal
costs and marginal benefits of every choice
5. Real-life situations can be explained and analyzed
through simplified models and graphs.
 

Given the following assumptions, make a rational

choice in your
else constant)… own self-interest (hold everything

1. You want to visit your friend for the

weekend
2. You work every weekday earning $100

3. per
Youday
have three flights to choose from:
Thursday Night Flight = $300
Friday Early Morning Flight = $345
Friday Night Flight = $380

Which fli
flight
ght shoul
s hould
d you choose
ch oose?
? Why?
Why?
9
 

Trade-offs
ALL decisions involve trade-offs.

Trade-offs
whenever wearechoose
all theone
alternatives
course ofthat weover
action give others.
up
(Examples: going to the movies)

The most desirable alternative given up as a result of a

decision is known as opportunity cost.
cost.

What are trade-offs

trade-offs of deciding to go to college?

What is the opportunity cost of going to college?

10
 

The Factors of Production

11
 

The Production
Possibilities
(PPC) Curve
Using Economic Models…

Step 1: Explain concept in words

Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph
12
 

What is the Pr
Production
oduction Possibilities Curve?
• A production possibilities graph (PPG) is a
model that shows alternative ways that an
economy can use its scarce resources
• This model graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency.

4 Key Assumptions

•• Only two goods can

Full employment be produced
of resources
• Fixed Resources (Ceteris Paribus)
• Fixed
Fixe d Tech
Technol
nology
ogy
13
 

Production “Possi
“Possibilities
bilities”
” Table
Table
a b c d e f 
Bikes 14 12 9 5 0 0
Computers 0 2 4 6 8 10

Each point represents

combination a specific
of goods that can be
produced
produced given full employment of
resources.

NOW GRAPH IT: Put bikes on y-axis and

computers on x-axis
14
 

PRODUCTION POSSIBILITI
POSSIBILITIES
ES
Howtrade-offs,
does the PPG graphically
opportunity demonstrates
costs, scarcity,
scarcity,
and efficiency?
Impossible/Unattainable
14  A (given cur
current
rent re
resou
sources)
rces)

B
12
G
10 C
  s
  e
   k
   i
8
Efficient
   B 6 D

4
Inefficient/
Unemployment
2

0 E
0 2 4 6 8 10
Computers 15
 

Opportunity Cost
Example:
1. The opp
opport
ortuni
unity
ty cost
co st of
moving from a to b is… 2 Bi Bikes
kes
2.The opp
opport
ortuni
unity
ty cost
cos t of
moving from b to d is… 7 Bi Bikes
kes

3.The opp
opport
ortuni
unity
ty cost
cos t of
moving from d to b is… 4 Com Compu
puter 
ter 

4.The opp
opport
ortuni
unity
ty cost
cos t of
moving from f to c is… 0 Com Compu
puters
ters
5.What can you say abo
about
ut poi
point
nt G?
Unattainable

16
 

The Production Possibilities

Curve (or Frontier)

17
 

PRODUCTION POSSIBILITI
POSSIBILITIES
ES
 A B C D E
CA L ZONES 4 3 2 1 0

PIZZA 0 1 2 3 4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Constant Opportunity Cost-
Cost- Re
Reso
sour
urce
cess ar
aree
easily adaptable for producing either good.
• Result is a straight line
line PPC (not common)

18
 

PRODUCTION POSSIBILITI
POSSIBILITIES
ES
 A B C D E
PIZZA 18 17 15 10 0
ROB OTS 0 1 2 3 4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Law of Increasing Opportunity Cost-
Cost-
• As you produce more of any good, the
opportunity cost (forgone pr
production
oduction of
another good) will increase.
• Why? Resources are NOT easily adaptable
to producing both goods.
• Result is a bowed out (Concave) PPC
 

PER UNIT Opportunity Cost

How much
muc h each
each ma
margi
rgina
nall = Opportunity Cost
unit costs Uni
nits
ts Gain
ineed

Example:
1. The PE
PER
R UN
UNIT
IT op
oppo
port
rtun
unit
ityy cos
c ostt
of moving from
f rom a to b is…
1 Bik
Bike
e
2.The PER
2.The PER UNIT op
oppo
port
rtun
unit
ity
y
cost of moving from b to c is…
1.5 (3/
(3/2)
2) Bik
Bi k es
3.
3.The
TheofPER
cost Pmoving
ER UNI
NIT
Tfrom
op port
oppocrtun
tounit
dity
y
is…
2 Bi
Bikes
kes
4.The
4.The PER
PER UNI
NIT
T oppo
op port
rtun
unit
ity
y

cost of moving from d to e is…

2.5 (5/
(5/2)
2) Bik
Bi k es

NOT
NOTICE:
ICE: Incre
Incr easing
asi ng Oppor
pportunit
tunity
y Costs
Costs 20
 

Shifting the Production

Possibilities Curve

21
 

PRODUCTION POSSIBILITI
POSSIBILITIES
ES
4 Key Assumptions Revisited
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (4 Factors)
• Fix
Fixed
ed Tech
Technol
nology
ogy
What if there is a change?
3 Shifters of the PPC
1. Change in resource
resource quantity or quality
2. Change in Techno
Technology
logy
3. Change in Trade
Trade 22
 

PRODUCTION POSSIBILITI
POSSIBILITIES
ES
Q 14 What happens if
13
there is an increase
12
11
10 in population?
9
  s
  o 87
   t
   b 6
  o 5
   R
4
3
2
1

1 2 3 4 5 6 7 8 Q
Pizzas 23
 

PRODUCTION POSSIBILITI
POSSIBILITIES
ES
Q 14  A’ What happens if
13 B’
there is an increase
12
11
10
C’
in population?
9
  s
  o 87
   t
   b 6
  o 5 D’
   R
4
3
2
1
E’
1 2 3 4 5 6 7 8 Q
Pizzas 24
 

PRODUCTION POSSIBILITI
POSSIBILITIES
ES
Q 14
13 Technology
12
11 improvements
improvements in pizza
10
9 ovens
  s
  o 87
   t
   b 6
  o 5
   R
4
3
2
1

1 2 3 4 5 6 7 8 Q
Pizzas 25
 

The Curve
Production Possibilities
and Efficiency
 26
 

Two Typ
Types
es of Eff
Effic
icien
iency
cy
Pr
Productive
oductive Efficiency
Efficiency--
• Products are being produced in the
least costly way.
• This is any point
point ON the Production
Possibilities Curve
Allocative Efficiency-
Efficiency-
• The products being produced are the
ones most desired by society.
• This optimal point on the PPC depends
on the desires of society.
 27
 

Pr
Productive
oductive and Allocative Efficiency
Whi
Whic
hich
hichh po
ch point
areints
a soca
all are
are
lloc atiproduc
pro
tive lyductiv
vely fftive
effic ely
icie
ient e
?ffi
nt?fficie
cient?
nt?

Productively Efficient
 A
14
B
points are A through D
12
G
Allocative Efficient
10
  s
  e points depend on the
   k
   i
8
wants of society
C
   B 6 E (What if this represents a
4 country with no electricity?)
F
2
D
0
0 2 4 6 8 10
Computers
 28
 

Capital Goods and Future Growth

Pan am a - FAVORS Mexic
xi c o - FAVORS
CONSUMER GOODS CAPIT
CA PITAA L GOODS
GOODS
CURRENT
  s CURVE FUTURE
   d CURVE
  o
  o FUTURE   s
   G    d
   l  CURVE   o
  a   o
   t
   i    G CURRENT
  p    l 
  a   a CURVE
   C    t
   i
  p
  a
   C
Consumer
onsu mer goods
goo ds Consumer
onsu mer goods
good s

Panama Mexico
 29
 

PPC Practice
Draw a PPC showing changes for each of the
following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza

3. Mad cow disease kills 85% of cows

Consumer goods and Capital Goods (4)

4. BP Oil Spill in the Gulf 

5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education
 30
 

Question #1

QNew robot making technology

A shift only for Robots

  s
   t
  o
   b
  o
   R

Q
Pizzas
 31
 

Question #2
Decrease
Q
in the demand for pizza
The curve doesn’t shift!
A change in demand
demand
doesn’t shift the curve
  s
   t
  o
   b
  o
   R

Q
Pizzas
 32
 

Question #3
Mad
Q cow disease kills 85% of cows

A shift inward only for

  s
   t
  o Pizza
   b
  o
   R

Q
Pizzas
 33
 

Question #4

Q BP Oil Spill in the Gulf 

   )
  s
  n
  u Decrease in resources
   G
   (
decrease production
  s
   d
  o
possibilities for both
  o
   G
 
   l
  a
   t
   i
  p
  a
   C
Q
Consu
on sume
merr Goo
Goods
ds (Butt
Bu tte
er)
 34
 

Question #5

Q Faster computer hardware

   ) Quality of a resource
  s
  n
  u improves shifting the
   G
   ( curve outward
  s
   d
  o
  o
   G
 
   l
  a
   t
   i
  p
  a
   C
Q
Consu
on sume
merr Goo
Goods
ds (Butt
Bu tte
er)
 35
 

Question #6

Q Many workers unemployed

   )
  s The curve doesn’t shift!
  n
  u Unemployment is just a
   G
   ( point inside the curve
  s
   d
  o
  o
   G
   l
 
  a
   t
   i
  p
  a
   C
Q
Consu
on sume
merr Goo
Goods
ds (Butt
Bu tte
er)
 36
 

Question #7
Significant
Q increases in education
   )
  s
  n
  u The quality
improved. of labor
Curve is
shifts
   G
   (
  s
outward.
   d
  o
  o
   G
   l
 
  a
   t
   i
  p
  a
   C
Q
Consu
on sume
merr Goo
Goods
ds (Butt
Bu tte
er)
 Consu
on sume
merr Goo
Goods
ds (Butt
Bu tte
er) 37
 

International Trade
Why do countries trade and
what is specialization?
 38
 

Per Unit Opportunity Cost Review

Per Unit Opportuni
Opport unity
ty Cost = Opportunity Cost
Uni
nits
ts Gain
ineed
Assume it costs you $50 to produce 5 t-shirts. What is
your PER UNIT cost for each shirt?
$10 per shirt

Now, take money our of the equation. Instead of

producing
producing 5 shirts you could have made 10 hats.

1. What is your
your PER UN UNITIT O
OPPOR
PPORTUNITY
TUNITY COST for
each shirt in terms of hats given up?
1 shirt costs 2 hats
2. What is your
your PER UN UNITIT O
OPPOR
PPORTUNITY
TUNITY COST for
each hat in terms of shirts given up?
 1 hat costs a half of a shirt 39
 

Per Unit Opportunity Cost Review

Ronald McDonald
Papa John cancan produce
produce 10020 pizzas
pizzas oror
200200 burgers
burgers
1. Wh
What
at is Ro
Rona
nald
ld’’s opp
oppor
ortu
tuni
nity
ty co
cost
st fo
forr on
onee piz
pizza
za in
terms of burgers given up? 1 pizza cost 10 burgers
2. Wh
What
at is Rona
Ronald
ld’’s oppor
opportu
tuni
nity
ty cost
cost for
for on
onee burge
burgerr in
in
terms of pizza given up? 1 burger costs 1/10 pizza
3. Wh
What
at is
is Papa
Papa John
John’’s oppor
opportu
tunit
nity
y cost
cost for
for on
onee pizza
pizza in
in
terms of burgers given up? 1 pizza costs 2 burgers

4. in
Wh
Whatat is of
terms Papa
Pa pa Jo
John
pizza hn’
’s oppo
givenopport
up?rtun
unit
ity
y cos
costt for
for on
onee bur
burge
1 burger costs 1/2 pizza
gerr

Ronald has a COMPARA

COMPARATIVETIVE ADV
ADVANTGE
ANTGE in the
production of burgers
Papa John
John has a COMPARA
COMPARATIVETIVE ADVANT
ADVANTAGE
AGE in the
 40
 

d ti f i
Absolute and Comparative Advantage
Absolute Advantage
•The producer that can produce the most output OR
requires
requir es the least amount of inputs (resources)
•Ex: Papa
Papa John
John has an absolu
absolute
te advant
advantage
age in pizzas
pizzas
because he can produce 100 and Ronald can only
make 20.
Comparative Advantage
•The producer with the lowest opportunity cost.
•Ex: Ronald
Ronald has a comparati
comparative
ve advanta
advantage
ge in burgers
burgers
because he has a lowest PER UNIT opportunity cost.
Countries should trade if they have a
relatively lower opportunity cost.
They should specialize in the good that is “cheaper” for
 them to produce. 41
 

Benefits of Specialize
and
an dT
Trrad
adee
 42
 

International Trade
Trade: 1 Wheat for
for 1.5 Sugar
Sugar
S W S W
0 30 45 USA Brazil 20 0
1.5 29 40 18.5 1
3 28 The US Specializes and Brazil Makes 17 2
35
4.5 27 15.5 3
makes ONLY Wheat ONLY Sugar
6 26    ) 30    ) 30 14 4
  s   s
7.5 25   n25   n 12.5 5
  o   o 25
   t
   t
   (    (
9 24   r   r 11 6
  a20   a 20
  g
10.5 23   g
  u   u 9.5 7
   S15    S 15
12 22 8 8
13.5 21 10 10 6.5 9

15 20 5 5 5 10
16.5 19 3.5 11
0 0
18 18
 5 10 15 20 25 30 5 10 15 20
43
 

19 5 17 Wh eat (t o n s ) Wh eat (t o n s )

International Trade
TRADE SHIFTS THE PPC!
45 USA Brazil
40

35  AFTER
 A FTER TRADE
TRA DE

   ) 30    ) 30
  s   s
  n25   n
  o   o 25
   t
   t
   (    (
  r   r
  a20   a 20  AFTER
 A FTER TRA
TRADE
DE
  g
  g
  u   u
   S15    S 15

10 10

5 5

0 0
 5 10 15 20 25 30 5 10 15 20
44
 

Wh eat (t o n s ) Wh eat (t o n s )

Wh eat Su g ar  

USA 30 (1W c o s t s 1S) 30 (1S c o s t s 1W)

Brazil 10 (1W c o s t s 2S) 20 (1S c o s t s 1/2W)
Which country has a comparative advantage in wheat?
45

40
1. Whic
Wh
   )35
ich
h coun
countr
try
y shou
should
ld   )EXP
EXPORORT
T Sug
Sugar
ar?
?
  s
2. Wh
Whic
  n ichh coun
countr
try
y should  s
should E
EXP
  n
  o
XPOR
30 ORT
T Whea
Wh eat?
t?
  o
   t    t
   (30    (
  r
  a 25
3. Whic
Wh
  g25ich
  r
  a
  u
h coun
countr
try
y shou
should
ld IMP
IMPOR
ORT
T Wh
Whea
eat?
t?   g
  u
   S    S20
20
15

15
10
 5 10 15 20 25 30 5 10 15 20
Wheat (tons) Wheat (tons) 45
 

Outp
utput
ut Que
uesti
stions
ons::
OOO=
Out
utpu
put:
t: Oth
theer g
goes
oes O
Over 
ver 
 46
 

Inp
nput
ut Que
Quest
stio
ions
ns::

IOU=
Inp
nput
ut:: Oth
theer g
goes
oes U
Und
ndeer 
 47
 

Comparative Advantage Practice

Create
First-- aIden
•First chart
Identify for
tify if each
it is
it ofut
the
a output
outp orfollowing
followin g problems.
input questi
input question
on
•Second-
Second-Identify
Identify who has the ABSOLUTE ADVANT
ADVANTAGE
AGE

••Third-Identify
Fourth-
Fourth- Ident who
Identify
ify has
how
how thaeyCOMPARATIVE
they should speci
should alizeADVANTAGE
specialize
1. Sara gives 2 haircuts or 1 perm and hour. Megan gives 3 haircuts
or 2 perms per hour.
2. Justin fixes 16 flats or 8 brakes per day
day.. Tim fixes 14 flats or 8
brakes per day
day..
3. Hannah takes 30 minutes to wash dishes and 1 hour to vacuum
the house. Kevin takes 15 minutes to wash dishes and 45 minutes to
vacuum.
4. Americans produce 50 computers or 50 TVs per hour. Chinese
 produce 30 computers or 40 TVs per hour. 48
 

Unit 1: Basic
Economic Concepts
 49
 

Scarcity Means There Is Not Enough For

Everyone

Government must step in to help allocate

 (dis
(distr
trib
ibut
ute)
e) resou
esourrce
cess 50
 

Every
very soci
so cie
ety must
mu st answe
ns werr thr
t hre
ee que
qu estio
st ions
ns::

The Three Economic Questions

1. What goods and services should be
produced?
2. How should these goods and services be
produced?
3. Who consumes these goods and services?

Thede
wterm
ay
dete t hese
these
rmin
ine tqu
que
heeest
es the stii onomi
cono
co nsmic
arce sys
sayste
nsw
ns wm
temer ed
An economic system is the method used by a
society to produce and distribute goods and
 services. 51
 

Economic Systems
1. Centrally-Planned
(Command) Economy
2. Free Ma
Market Ec
Economy
3. Mixed Economy
 52
 

Centrally-Planned
Economies
(aka Communism)
 53
 

Centrally Planned Economies

In a centrally planned economy (communism)
the government…
1. own
wnss all
all th
thee res
reso
our
urce
ces.
s.
2. de
deci
cide
dess what
what toto prod
produc
uce,
e, how
how muc
much
h to
produce, and who will receive it.
Examples:
 –  Cuba, China, North Korea, former Soviet Union

Why do centrally planned economies face

problems
problems of poor
poor-quality
-quality goods,
goods, shortages,
and unhappy citizens?
NO PROFIT MEANS NO INCENTIVES!!
 54
 

Advantages and Disadvantages

What is GOOD about What is BAD about
Communism? Communism?
1. Low unemployment- 1. No incentive to work
everyone has a job harder

2. Great Job Security-

the government 2. No incentive
innovate to up
or come
doesn’t go out of with good ideas
business 3. No Competition keeps
3. Equal incomes means quality of goods poor.
no extremely poor 4. Corrupt leaders
people 5. Few individual
freedoms
 4. Free Health Care
55
 

Free Market System

(aka Capitalism)
 56
 

Characteristics of Free Market

1. Litt
Li ttle
le go
gove
vern
rnmementnt invo
in volvlve
ement
ment in th
thee eco
cono
nomy
my..
(L ai s s ez Fai r e = L et i t b e)
2. Ind
ndiv
ivid
iduals
uals OW
OWNN resourc
resou rce
es and ans
nswer
wer the
th e th
three
ree
econom
conomic ic question
questions.
s.
3. The op
oppo
port
rtun
unit
ityy to
t o ma
m ake PROFIT gi gives
ves peop
peoplele
INCENTIVE to prod
pr oduc uce
e qu
quaality
li ty ite
it ems eff
ffic
icient
iently
ly..

4. Wide
id e va
vari
rie
ety of good
go ods
s avail
availaable
bl e to co
cons
nsum
umeers
rs..
5. Com
ompe
peti
titi
tion
on and Self
lf--Int
nteere
rest
st wo
work
rk to
toge
geth
theer to
regul ate the
regula th e econo
co nomy
my (kee
keep
pppri
rices
ces dow
downna
and
nd
qualit
qua lity
y up)
up)..
 Rewor
wordd for Communism
Communis m 57
 

Example of Free Market

Exampl
xample e of how
ho w tthe
he fr
freee market re
regu
gulate
lates
s iits
tseelf:
lf :
If consum
co nsume ers wa
want
nt comp
compute uters
rs and only
o nly one company
company
is ma
m aki
king
ng the
t hem…
m…
Oth
theer bubusi
siness
nessees have the th e IN
INCENTIVE to st
staar t
m ak i n g com
c omp
p ut
uteer s to
t o ear
ear n PRO
PROFIT.
Th i s l ea
ead
d s t o m o r e COM
COMPE PETI
TITI
TION
ON…. ….
Whihich
ch mea
meansns lolower
wer pric
pr ice
es, bett
betteer qualit
q uality
y, and mo
more
re
prod
pr oducuctt vari
varieety
ty..
We pr
prod
oduce
uce the goods
good s and service
servic es tha
t hatt soci
s ocie
ety
wants
wa nts beca
because
use “ re
resource
sources
s follow profits”
pr ofits” .

The End Re Resul

sult:
t: Most eff
ffic
icie
ient
nt pro
p roduc
ducti
tion
on of the
t he
goods
goo ds tha
t hatt consu
co nsume
mers
rs wa
w ant, pr
produ
oduceced
d at
at the
th e low
lowe est
 price
pri ces
s and
and th
thee hi
highest
ghest qua
qu ali
lity
ty..
58
 

The Invisible Hand

The concept that society’s goals will be met as
individuals seek their own self-interest.

Example: Society wants fuel efficient cars…

•Profit seeking producers will make more.
•Competition between firms results in low
prices, high quality, and greater efficiency.
•The government doesn’t need to get involved
since the needs of society are automatically
automatically
met.
Competition and self-interest
self-interest act as an invisible
hand
han d that
that re
regul
gulate
atess the free
free ma
marke
rket.
t.
 59
 

The difference between North and South Korea at night.

North Korea's GDP is $40 Billion
 South Korea's GDP is $1.3 Trillion (32 times greater).
 

Connection to the PPC

Communism in the Free Markets in the
Long Run Long Run
CURRENT
FUTURE
  s CURVE
   d
  o CURVE
  o FUTURE   s
   G    d
   l  CURVE   o
  a
   t   o
   i    G CURRENT
  p    l 
  a   a
   t CURVE
   C    i
  p
  a
   C
Consumer
ons umer goods
goo ds Consumer
ons umer goods
goo ds

Cuba Puerto Rico

 61
 

The Circular Flow Model

 62
 

Households pay
firms for goods Product market
and services.

Firms supply
households with
goods and services.

Households supply firms

with land, labor, and
capital.

Firms pay
households for
land, labor, and
capital.
Factor