College
Principles
ofPhysics
Economics
Chapter
# Chapter
Title
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
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ECONOMIC CONCEPTS
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CIRCULAR FLOW
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ECONOMIC SYSTEMS
Economic concepts
Resources used in production of goods and
services:
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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
good.
Economic concepts
Homeless people are a stark reminder that scarcity of resources is real
Economic concepts
Opportunity Cost: The unavoidable cost of making
choices
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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
wants
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
structure
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
unemployment.
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
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Markets are where buyers and sellers
negotiate transactions
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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
class)
Economic systems
1. Tradition: Customs and the way of life answering the basic
questions
2. Command and Control: Government makes a plan to
determine what, how and for whom to produce (i.e.,
Socialism)
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
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Freedom to choose
Freedom to compete
Freedom to trade
Rule of law
Enforcement of contracts
Democracy
Creation of a large middle class
Capitalism & Freedom
Cargo ships are one mode of transportation for shipping goods in the
global economy.