Fundamental Concepts

UNIT 1 - Fundamental Concepts
Marginal Benefit
is the additional satisfaction or value one obtains from an activity or product.
Marginal Cost
is the additional cost or sacrifice one makes of participating in an activity or purchasing a product.

UNIT 1 - Fundamental Concepts
Economic Decision-Making
You decide to participate in an activity (going to college, buying something, etc.) as long as your marginal benefit exceeds your marginal cost.

UNIT 1 - Fundamental Concepts
The Production Possibilities Curve
A production possibilities curve represents outcome or production combinations that can be produced with a given amount of resources.

UNIT 1 - Fundamental Concepts
The Production Possibilities Curve
E
A
B
C
F
G
D
GUNS
ROSES
600
500
400
300
580
500
350
700

UNIT 1 - Fundamental Concepts
Economic Growth
If an economy is operating at a point on the production possibilities curve, all resources are used, and they are utilized as efficiently as possible.
E
A
B
C
F
G
D
GUNS
ROSES
600
500
400
300
580
500
350
700

UNIT 1 - Fundamental Concepts
Economic Growth Is Caused by:
Increases in Resources
Advances in Technology

UNIT 1 - Fundamental Concepts
Your Own Personal PPC
If two possible outcomes in your own personal life are job earnings and educational credits, then your PPC looks as follows:
E
A
B
C
F
G
D
Job earnings
College credits
30000
23000
16000
12000
18
10
30
23

UNIT 1 - Fundamental Concepts
Economic Growth and Economic Systems
Countries with the highest overall economic standard of living have the freest markets (more elements of capitalism).
Examples: Hong Kong, the United States, Japan, Taiwan, Great Britain, Canada, Sweden, South Korea, and Singapore.

UNIT 1 - Fundamental Concepts
2010 Purchasing Power Parity (unless otherwise noted) Gross Domestic Product estimated in billions of dollars, and Per Capita (person) GDP
Country/Area GDP Per Cap. GDP
World $ 74,540 $ 11,200
United States $ 14,660 $ 47,200
China $ 10,090 $ 7,600
Hong Kong $ 326 $ 45,900
Korea - North $ 40 $1,800
Korea - South $ 1,459 $ 30,000
Luxembourg $ 41 $ 82,600
Qatar $ 151 $ 179,000
For GDP information of other countries around the world, see our CD, Unit 3, Section 2

UNIT 1 - Fundamental Concepts
Economies around the World
Most industrialized countries are mixed economies, but they also have many capitalist elements. Characteristics include
Substantial activity in the private sector (businesses and households). Prices are determined by demand and supply.
A significant role by federal and local governments.

UNIT 1 - Fundamental Concepts
The Role of Government
The role of most governments around the world includes:
Spending on defense, roads, legal system, public services and education
Redistributing incomes
through taxes and subsidies
Passing laws and imposing
regulations
Implementing price controls
Conducting monetary policy
to affect inflation,
interest rates, and employment

UNIT 1 - Fundamental Concepts
Important Concepts and Definitions
We will discuss the following concepts:
The simple circular flow
The circular flow with government and foreign markets
Nominal and real prices and incomes
Positive and normative economic statement
The fallacy of composition
The fallacy of cause and effect

Households
Businesses
Supply of Products
Purchases of (Demand for) Products
Purchases of (Demand for) Labor and Resources
Supply of Labor and Resources
Resource
(Inputs)
Market
Products
Market
The Simple Circular Flow

UNIT 1 - Fundamental Concepts
The circular flow with government and foreign markets (see next slide). This is a more complex (more realistic) model.

Households
Businesses
Supply of Products
Purchases
of Products
Purchases of (Demand for) Labor and Resources
Supply of Labor and Resources
Resource
(Inputs)
Market
Products
Market
Government
Taxes
Taxes
Services
Services
Products
Foreign
Markets

UNIT 1 - Fundamental Concepts
Nominal and Real Prices
Nominal prices are expressed in current dollars.
Real prices are adjusted for inflation.
Enough money to purchase
3 gallons of gasoline a
few years ago. Not
enough to purchase 2 gallons
today.

UNIT 1 - Fundamental Concepts
Which is the Normative and Which is the Positive Economic Statement?
Statement I: The minimum wage should increase to $8.50.
Statement II: If the minimum wage
increases, then firms’ cost of production rises.

UNIT 1 - Fundamental Concepts
The Fallacy of Composition
Fallacy: what is good for one person (or one group) is good for all persons (or all groups).

UNIT 1 - Fundamental Concepts
The Fallacy of Cause and Effect
Because A happens before B, A must be automatically the cause of B.

UNIT 1 - Fundamental Concepts
Cause and Effect Fallacy Example
A: The car industry in country X has not done well.
B: The economy of country X has not done well.
Did A cause B?