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Applied Economics
Senior High School
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 1 of 33
C H A P T E R 1: The Scope and Method of Economics
Chapter 1
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 2 of 33
The Study of Economics
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 3 of 33
The Study of Economics
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 4 of 33
Why Study Economics?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 5 of 33
Opportunity Cost
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 6 of 33
Marginalism
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 7 of 33
Marginalism
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 8 of 33
Efficient Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 9 of 33
More Reasons to Study Economics
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 10 of 33
More Reasons to Study Economics
C H A P T E R 1: The Scope and Method of Economics
• An understanding of
economics is essential to an
understanding of global affairs.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 11 of 33
The Scope of Economics
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 12 of 33
The Scope of Economics
C H A P T E R 1: The Scope and Method of Economics
• Macroeconomics is the
branch of economics that
examines the behavior of
economic aggregates—
income, output, employment,
and so on—on a national
scale.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 13 of 33
The Scope of Economics
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 14 of 33
Economic Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 15 of 33
Economic Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 16 of 33
Basic Economic Problems
C H A P T E R 1: The Scope and Method of Economics
• How is it produced?
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 17 of 40
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 18 of 33
Macroeconomic Concerns
C H A P T E R 1: The Scope and Method of Economics
• Output growth
• Unemployment
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Inflation
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Output Growth
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Output Growth
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Government in the Macroeconomy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Government in the Macroeconomy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Components of the Macroeconomy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Components of the Macroeconomy
C H A P T E R 1: The Scope and Method of Economics
• Everyone’s
expenditures go
somewhere. Every
transaction must
have two sides.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Three Market Arenas
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Three Market Arenas
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 31 of 40
C H A P T E R 1: The Scope and Method of Economics
Mixed Systems,
Markets, and Governments
• Redistribute income
• At point H, resources
are either unemployed,
or are used inefficiently.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 33 of 40
C H A P T E R 1: The Scope and Method of Economics
• Point F is desirable
because it yields more
of both goods, but it is
not attainable given
the amount of
resources available in
the economy.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 34 of 40
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 35 of 40
C H A P T E R 1: The Scope and Method of Economics
Aggregate Supply and
Aggregate Demand
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 37 of 40
Scarcity, Choice, and Opportunity Cost
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 38 of 40
C H A P T E R 1: The Scope and Method of Economics
Scarcity and Choice
in an Economy of Two or More
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 39 of 40
C H A P T E R 1: The Scope and Method of Economics
Scarcity and Choice
in an Economy of Two or More
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 40 of 40
C H A P T E R 1: The Scope and Method of Economics
Specialization, Exchange
and Comparative Advantage
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 41 of 40
Capital Goods and Consumer Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 42 of 40
Capital Goods and Consumer Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 43 of 40
C H A P T E R 1: The Scope and Method of Economics
Firms and Households:
The Basic Decision-Making Units
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 45 of 48
Financial Instruments
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Financial Instruments
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Methodology of Macroeconomics
C H A P T E R 1: The Scope and Method of Economics
• Connections to microeconomics:
• Macroeconomic behavior is the sum of all the
microeconomic decisions made by individual
households and firms. We cannot understand the
former without some knowledge of the factors that
influence the latter.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Economic Systems
C H A P T E R 1: The Scope and Method of Economics
• Command economies
• Laissez-faire economies
• Mixed systems
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 49 of 40
Economic Systems
C H A P T E R 1: The Scope and Method of Economics
• In a laissez-faire economy,
individuals and firms pursue their
own self-interests without any central
direction or regulation.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 50 of 40
Economic Systems
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 51 of 40
Economic Systems
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 52 of 40
Economic Systems
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 53 of 40
Economic Systems
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 54 of 40
C H A P T E R 1: The Scope and Method of Economics
Economic Growth in Developing
and Transitional Economies
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 55 of 37
C H A P T E R 1: The Scope and Method of Economics
Life in the Developing Nations:
Population and Poverty
• hyperinflations
• primitive shelter
• illiteracy
• infant mortality
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 56 of 37
C H A P T E R 1: The Scope and Method of Economics
Life in the Developing Nations:
Population and Poverty
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 57 of 37
C H A P T E R 1: The Scope and Method of Economics
Life in the Developing Nations:
Population and Poverty
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 59 of 44
Changes in the Distribution of Income
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 60 of 44
C H A P T E R 1: The Scope and Method of Economics
The Lorenz Curve
and the Gini Coefficient
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 61 of 44
The Lorenz Curve
C H A P T E R 1: The Scope and Method of Economics
• If income is equally
distributed, there is no
shaded area.
• More unequal
distributions of income
produce Lorenz Curves
that are farther from
the 45-degree line.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 62 of 44
The Gini Coefficient
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 63 of 44
Poverty
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 64 of 44
The Distribution of Wealth
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 65 of 44
The Redistribution Debate
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 66 of 44
The Redistribution Debate
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 67 of 44
The Redistribution Debate
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 68 of 44
The Works of Karl Marx
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 69 of 44
Redistribution Programs and Policies
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 70 of 44
Redistribution Programs and Policies
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 71 of 44
Redistribution Programs and Policies
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 72 of 44
Expenditure Programs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 73 of 44
Expenditure Programs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 74 of 44
Expenditure Programs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 75 of 44
Expenditure Programs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 76 of 44
C H A P T E R 1: The Scope and Method of Economics
Economic Development:
Sources and Strategies
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 77 of 37
C H A P T E R 1: The Scope and Method of Economics
The Sources of
Economic Development
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 78 of 37
C H A P T E R 1: The Scope and Method of Economics
The Sources of
Economic Development
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 79 of 37
C H A P T E R 1: The Scope and Method of Economics
The Sources
of Economic Development
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 80 of 37
Strategies for Economic Development
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 81 of 37
Agriculture or Industry?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 82 of 37
Agriculture or Industry?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 83 of 37
Exports or Import Substitution?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 84 of 37
Exports or Import Substitution?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 85 of 37
Exports or Import Substitution?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 86 of 37
The Tools of Applied Economics
C H A P T E R 1: The Scope and Method of Economics
• Mathematics
• Statistics
• Econometrics
• Economic Theory
• Computer softwares
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 87 of 37
C H A P T E R 1: The Scope and Method of Economics
Chapter 2
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 88 of 33
Demand in Product/Output Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 89 of 48
Demand in Product/Output Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 90 of 48
Demand in Product/Output Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 91 of 48
Demand in Product/Output Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 92 of 48
C H A P T E R 1: The Scope and Method of Economics
Price and Quantity Demanded:
The Law of Demand
ANNA'S DEMAND
SCHEDULE FOR
• The demand curve is
TELEPHONE CALLS a graph illustrating
QUANTITY
PRICE DEMANDED how much of a given
(PER (CALLS PER
CALL) MONTH) product a household
$ 0 30
0.50 25 would be willing to buy
3.50 7
7.00 3 at different prices.
10.00 1
15.00 0
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 93 of 48
C H A P T E R 1: The Scope and Method of Economics
Price and Quantity Demanded:
The Law of Demand
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 95 of 48
C H A P T E R 1: The Scope and Method of Economics
Other Determinants
of Household Demand
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 96 of 48
C H A P T E R 1: The Scope and Method of Economics
Other Determinants
of Household Demand
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 97 of 48
C H A P T E R 1: The Scope and Method of Economics
Other Determinants
of Household Demand
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 98 of 48
Supply in Product/Output Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 99 of 48
Supply in Product/Output Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 100 of 48
C H A P T E R 1: The Scope and Method of Economics
Price and Quantity Supplied:
The Law of Supply
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 102 of 48
Other Determinants of Supply
C H A P T E R 1: The Scope and Method of Economics
• Market equilibrium is
the condition that exists
when quantity supplied
and quantity demanded
are equal.
• At equilibrium, there is no
tendency for the market
price to change.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 104 of 48
Market Equilibrium
C H A P T E R 1: The Scope and Method of Economics
• Only in equilibrium is
quantity supplied
equal to quantity
demanded.
• At any price level
other than P0, such as
P1, quantity supplied
does not equal
quantity demanded.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 105 of 48
Excess Demand
C H A P T E R 1: The Scope and Method of Economics
• Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds
quantity supplied at the
current price.
• When quantity demanded
exceeds quantity supplied,
price tends to rise until
equilibrium is restored.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 106 of 48
C H A P T E R 1: The Scope and Method of Economics
At a world price of $18, domestic production is 7.7 If the government levies a 33 1/3 percent tax on imports, the price of a
million barrels per day and the total quantity of oil barrel of oil rises to $24.
demanded in the United States is 13.6 million barrels The quantity demanded falls to 12.2 million barrels per day.
per day. At the same time, the quantity supplied by domestic producers
The difference is total imports (5.9 million barrels per increases to 9.0 million barrels per day and the quantity imported falls
day). to 3.2 million barrels per day.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Changes in Equilibrium
C H A P T E R 1: The Scope and Method of Economics
Market Equilibrium
Changes In Equilibrium
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
C H A P T E R 1: The Scope and Method of Economics
The Price System:
Rationing and Allocating Resources
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 111 of 42
C H A P T E R 1: The Scope and Method of Economics
The Price System:
Rationing and Allocating Resources
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 112 of 42
Price Rationing
C H A P T E R 1: The Scope and Method of Economics
• A decrease in supply
creates a shortage at
the original price.
• The lower supply is
rationed to those who
are willing and able to
pay the higher price.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 113 of 42
Price Rationing
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 114 of 42
Constraints on the Market
C H A P T E R 1: The Scope and Method of Economics
• A price ceiling is a
maximum price that sellers
may charge for a good,
usually set by government.
• In 1974, the government set
a price ceiling to distribute
the available supply of
gasoline.
• At an imposed price of 57
cents per gallon, the result
was excess demand.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 115 of 42
Price Floors
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 116 of 42
C H A P T E R 1: The Scope and Method of Economics
Supply and Demand
and Market Efficiency
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 117 of 42
Consumer Surplus
C H A P T E R 1: The Scope and Method of Economics
• Consumer surplus is
the difference between
the maximum amount a
person is willing to pay
for a good and its current
market price.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 118 of 42
Consumer Surplus
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 119 of 42
Consumer Surplus
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 120 of 42
Producer Surplus
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 121 of 42
C H A P T E R 1: The Scope and Method of Economics
Potential Causes of Deadweight Loss From Under-
and Overproduction
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 122 of 42
Elasticity
C H A P T E R 1: The Scope and Method of Economics
• Elasticity is a general
concept that can be used
to quantify the response in
one variable when
another variable changes.
% A
elasticity of A with respect to B
% B
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 123 of 42
Price Elasticity of Demand
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 125 of 42
Calculating Elasticities
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 126 of 42
Elasticity and Total Revenue
C H A P T E R 1: The Scope and Method of Economics
TR P Q
Effect of an
Change in quantity increase in Effect of a
Type of versus change in price on total decrease in price
demand Value of Ed price revenue on total revenue
Elastic Greater than Larger percentage change Total revenue Total revenue
1.0 in quantity decreases increases
Inelastic Less than 1.0 Smaller percentage Total revenue Total revenue
change in quantity increases decreases
Unitary Equal to 1.0 Same percentage change Total revenue Total revenue does not
elastic in quantity and price does not change change
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 128 of 42
Other Important Elasticities
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 129 of 42
Other Important Elasticities
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 130 of 42
Other Important Elasticities
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 131 of 42
Other Important Elasticities
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 132 of 42
Assumptions
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 133 of 38
Assumptions
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 134 of 38
Household Choice in Output Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 135 of 38
The Budget Constraint
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 136 of 38
The Budget Constraint
C H A P T E R 1: The Scope and Method of Economics
• A budget constraint
separates those
combinations of goods
and services that are
available, given limited
income, from those that
are not.
• The available
combinations make up
the opportunity set.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 137 of 38
The Budget Constraint
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 138 of 38
The Budget Constraint
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 139 of 38
The Basis of Choice: Utility
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 140 of 38
Diminishing Marginal Utility
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 141 of 38
Diminishing Marginal Utility
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 145 of 38
The Diamond/Water Paradox
C H A P T E R 1: The Scope and Method of Economics
• Water is plentiful.
• If the price of water was
zero, you might argue that
water has no value. But it
does. Consumers enjoy a
huge consumer surplus
from water consumption.
• Household willingness to
pay far exceeds the zero
price.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 146 of 38
The Diamond/Water Paradox
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 147 of 38
Household Choice in Input Markets
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 149 of 38
The Labor Supply Curve
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 150 of 38
C H A P T E R 1: The Scope and Method of Economics
Income and Substitution
Effects of a Wage Change
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 151 of 38
C H A P T E R 1: The Scope and Method of Economics
Income and Substitution
Effects of a Wage Change
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 152 of 38
Short-Run Versus Long-Run Decisions
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 153 of 37
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 154 of 37
The Bases of Decisions
C H A P T E R 1: The Scope and Method of Economics
1. 2. 3.
The market The techniques The prices
price of of production of inputs
the output that are
available
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 155 of 37
C H A P T E R 1: The Scope and Method of Economics
Determining the
Optimal Method of Production
Total revenue
- Total cost with optimal method
=Total profit
• A capital-intensive technology
relies heavily on capital instead of
human labor.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 157 of 37
Marginal Product
C H A P T E R 1: The Scope and Method of Economics
• Marginal product is
the additional output
that can be produced
by adding one more
unit of a specific
input, ceteris paribus.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 158 of 37
C H A P T E R 1: The Scope and Method of Economics
The Law of
Diminishing Marginal Returns
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 159 of 37
Average Product
C H A P T E R 1: The Scope and Method of Economics
• Average product is
the average amount
produced by each unit
of a variable factor of
production.
total product
average product of labor =
total units of labor
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 160 of 37
Production Function for Sandwiches
C H A P T E R 1: The Scope and Method of Economics
Production Function 45
40
35
(2) (3) (4)
Total product
30
(1) TOTAL PRODUCT MARGINAL AVERAGE
LABOR UNITS (SANDWICHES PRODUCT OF PRODUCT 25
(EMPLOYEES) PER HOUR) LABOR OF LABOR 20
15
0 0 - -
10
5
1 10 10 10.0
0
2 25 15 12.5 0 1 2 3 4 5 6 7
Number of employees
3 35 10 11.7 15
Marginal Product
4 40 5 10.0
10
5 42 2 8.4
6 42 0 7.0 5
0
0 1 2 3 4 5 6 7
Number of employees
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 161 of 37
C H A P T E R 1: The Scope and Method of Economics
Saving and Borrowing:
Present Versus Future Consumption
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 162 of 38
C H A P T E R 1: The Scope and Method of Economics
Saving and Borrowing:
Present Versus Future Consumption
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 163 of 38
C H A P T E R 1: The Scope and Method of Economics
Saving and Borrowing:
Present Versus Future Consumption
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 164 of 38
C H A P T E R 1: The Scope and Method of Economics
Long-Run Costs: Economies and
Diseconomies of Scale
• Increasing returns to
scale, or economies of
scale, refers to an
increase in a firm’s scale
of production, which
leads to lower average
costs per unit produced.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 165 of 38
A Firm Exhibiting Economies of Scale
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 166 of 38
The Long-Run Average Cost Curve
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 167 of 38
Constant Returns to Scale
C H A P T E R 1: The Scope and Method of Economics
• Constant returns to
scale refers to an
increase in a firm’s scale
of production, which has
no effect on average
costs per unit produced.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 168 of 38
Decreasing Returns to Scale
C H A P T E R 1: The Scope and Method of Economics
• Decreasing returns to
scale, or diseconomies
of scale, refers to an
increase in a firm’s scale
of production, which
leads to higher average
costs per unit produced.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 169 of 38
C H A P T E R 1: The Scope and Method of Economics
A Firm Exhibiting Economies
and Diseconomies of Scale
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 170 of 38
Optimal Scale of Plant
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 171 of 38
Income Distribution and Poverty
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 172 of 44
The Sources of Household Income
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 173 of 44
Wages and Salaries
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 174 of 44
Wages and Salaries
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 175 of 44
Wages and Salaries
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 176 of 44
Effect of Minimum Wage Legislation
C H A P T E R 1: The Scope and Method of Economics
• If the equilibrium
wage in the market
for unskilled labor is
below the legislated
minimum wage, the
result is likely to be
unemployment.
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Effect of Minimum Wage Legislation
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 178 of 44
Decisions Facing Firms
C H A P T E R 1: The Scope and Method of Economics
are based
DECISIONS on INFORMATION
1. 1.
How much The market
output to 2. price of 2.
supply Which the output
The techniques
production of production
3. technology that are
to use 3. available
How much
of each The prices
input to of inputs
demand
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 179 of 25
Costs in the Short Run
C H A P T E R 1: The Scope and Method of Economics
TC TFC TVC
Total Cost = Total Fixed + Total Variable
Cost Cost
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Marginal Cost (MC)
C H A P T E R 1: The Scope and Method of Economics
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C H A P T E R 1: The Scope and Method of Economics
Total Revenue (TR) and
Marginal Revenue (MR)
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C H A P T E R 1: The Scope and Method of Economics
Comparing Costs and
Revenues to Maximize Profit
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 186 of 38
Minimizing Losses
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 187 of 38
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 188 of 43
C H A P T E R 1: The Scope and Method of Economics
Chapter 3
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Production
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 190 of 37
What Is A Firm?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 191 of 37
Perfect Competition
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 193 of 37
C H A P T E R 1: The Scope and Method of Economics
The Behavior of
Profit-Maximizing Firms
1.
How much
output to 2.
supply Which
production 3.
technology How much
to use of each
input to
demand
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 194 of 37
Profits and Economic Costs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 195 of 37
Profits and Economic Costs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 196 of 37
Profits and Economic Costs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 197 of 37
Profits and Economic Costs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 198 of 37
Profits and Economic Costs
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 199 of 37
C H A P T E R 1: The Scope and Method of Economics
Calculating Total
Revenue, Total Cost, and Profit
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 200 of 37
Short-Run Versus Long-Run Decisions
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 201 of 37
C H A P T E R 1: The Scope and Method of Economics
Imperfect Competition and
Market Power: Core Concepts
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 202 of 43
Defining Industry Boundaries
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 203 of 43
Barriers to Entry
C H A P T E R 1: The Scope and Method of Economics
• A barrier to entry is
something that prevents
new firms from entering
and competing in
imperfectly competitive
industries.
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Barriers to Entry
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 205 of 43
Barriers to Entry
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 206 of 43
Price: The Fourth Decision Variable
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 207 of 43
The Social Costs of Monopoly
C H A P T E R 1: The Scope and Method of Economics
• Monopoly leads to
an inefficient mix of
output.
• Price is above
marginal cost, which
means that the firm
is underproducing
from society’s point
of view.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 208 of 43
The Social Costs of Monopoly
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 209 of 43
Rent-Seeking Behavior
C H A P T E R 1: The Scope and Method of Economics
• Rent-seeking behavior
refers to actions taken
to preserve positive
profits.
• A rational owner would
be willing to pay any
amount less than the
entire green rectangle
to prevent those
positive profits from
being eliminated as a
result of entry.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 210 of 43
Government Failure
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 211 of 43
C H A P T E R 1: The Scope and Method of Economics
Remedies for Monopoly:
Antitrust Policy
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 212 of 43
C H A P T E R 1: The Scope and Method of Economics
Characteristics of
Different Market Organizations
Products Price a
Number differentiated decision Free Distinguished
of firms or homogeneous variable entry by Examples
Perfect Price competition Wheat farmer
Many Homogeneous No Yes
competition only Textile firm
Automobiles
Oligopoly Few Either Yes Limited Strategic behavior
Aluminum
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 213 of 47
Monopolistic Competition
C H A P T E R 1: The Scope and Method of Economics
• A monopolistically competitive
industry has the following
characteristics:
• A large number of firms
• No barriers to entry
• Product differentiation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 214 of 47
Monopolistic Competition
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 215 of 47
Monopolistic Competition
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 216 of 47
C H A P T E R 1: The Scope and Method of Economics
Product Differentiation,
Advertising, and Social Welfare
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 217 of 47
C H A P T E R 1: The Scope and Method of Economics
Product Differentiation,
Advertising, and Social Welfare
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 218 of 47
Oligopoly
C H A P T E R 1: The Scope and Method of Economics
• An oligopoly is a form of
industry (market) structure
characterized by a few
dominant firms. Products may
be homogeneous or
differentiated.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 219 of 47
Oligopoly
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 220 of 47
The Collusion Model
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 221 of 47
The Collusion Model
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 222 of 47
The Price-Leadership Model
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 223 of 47
The Price-Leadership Model
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 224 of 47
Predatory Pricing
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 225 of 47
Oligopoly
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 226 of 47
Oligopoly
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 227 of 47
Oligopoly and Economic Performance
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 229 of 44
C H A P T E R 1: The Scope and Method of Economics
Externalities and
Environmental Economics
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Internalizing Externalities
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 231 of 44
Direct Regulation of Externalities
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 232 of 44
Direct Regulation of Externalities
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 233 of 44
Public (Social) Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 234 of 44
The Characteristics of Public Goods
C H A P T E R 1: The Scope and Method of Economics
• A good is nonrival in
consumption when A’s
consumption of it does not
interfere with B’s consumption
of it. The benefits of the good
are collective—they accrue to
everyone.
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The Characteristics of Public Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 236 of 44
The Characteristics of Public Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 237 of 44
The Characteristics of Public Goods
C H A P T E R 1: The Scope and Method of Economics
• The drop-in-the-bucket
problem is another problem
intrinsic to public goods: The
good or service is usually so
costly that its provision
generally does not depend on
whether or not any single
person pays.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 238 of 44
The Characteristics of Public Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 239 of 44
Public Provision of Public Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 240 of 44
Public Choice Theory
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 241 of 43
Government Inefficiency:
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 242 of 44
Rent Seeking Revisited
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 243 of 44
Government and the Market
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 244 of 44
The Role of Government
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 245 of 47
Gross Domestic Product
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 246 of 38
Final Goods and Services
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 247 of 38
Value Added
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 248 of 38
Value Added
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 249 of 38
The Expenditure Approach
C H A P T E R 1: The Scope and Method of Economics
Expenditure categories:
• Personal consumption
expenditures (C)—household
spending on consumer goods.
• Gross private domestic
investment (I)—spending by firms
and households on new capital:
plant, equipment, inventory, and new
residential structures.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 250 of 38
The Expenditure Approach
C H A P T E R 1: The Scope and Method of Economics
Expenditure categories:
• Government consumption and
gross investment (G)
• Net exports (EX – IM)—net
spending by the rest of the world, or
exports (EX) minus imports (IM)
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 251 of 38
The Expenditure Approach
C H A P T E R 1: The Scope and Method of Economics
GDP C I G ( EX - IM )
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 252 of 38
C H A P T E R 1: The Scope and Method of Economics
Components of GDP, 1999:
The Expenditure Approach
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 254 of 38
Gross Private Domestic Investment
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 255 of 38
Gross Private Domestic Investment
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 257 of 38
C H A P T E R 1: The Scope and Method of Economics
Gross Investment
versus Net Investment
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 258 of 38
C H A P T E R 1: The Scope and Method of Economics
Government Consumption
and Gross Investment
• Government
consumption and gross
investment (G) counts
expenditures by BSPeral,
state, and local
governments for final
goods and services.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 259 of 38
Net Exports
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 260 of 38
The Income Approach
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 261 of 38
Disposable Personal Income and Personal Saving
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 262 of 38
Nominal Versus Real GDP
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 263 of 38
GDP and Social Welfare
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 264 of 38
GDP and Social Welfare
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 265 of 38
The Underground Economy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 266 of 38
Gross National Income per Capita
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 267 of 38
Gross National Income per Capita
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 269 of 40
C H A P T E R 1: The Scope and Method of Economics
Long-Run Output
and Productivity Growth
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 270 of 40
C H A P T E R 1: The Scope and Method of Economics
Long-Run Output
and Productivity Growth
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 273 of 40
C H A P T E R 1: The Scope and Method of Economics
Defining and
Measuring Unemployment
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 274 of 40
C H A P T E R 1: The Scope and Method of Economics
Defining and
Measuring Unemployment
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 275 of 40
C H A P T E R 1: The Scope and Method of Economics
Defining and
Measuring Unemployment
unemployed
unemployment rate =
employed + unemployed
labor force
labor force participation rate =
population
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 276 of 40
C H A P T E R 1: The Scope and Method of Economics
Defining and
Measuring Unemployment
7.92
unemployment rateJuly 2003 = 5.6%
133.47 + 7.92
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 277 of 40
Philippine Employment Statistics
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 278 of 40
ED UCATIONAL SITUATION
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 279 of 40
The Benefits of Recessions
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 280 of 40
Price Indexes
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 281 of 40
Price Indexes
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 282 of 40
Price Indexes
C H A P T E R 1: The Scope and Method of Economics
Education and
Recreation Other Goods
Communication
5.9% and Services
Medical Care 5.8%
4.3%
6.0%
Food and
Transportation Beverages
17.3% 15.6%
Apparel
4.2%
Housing
40.9%
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Government in the Economy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Net Taxes (T), and Disposable Income (Yd)
C H A P T E R 1: The Scope and Method of Economics
Yd Y - T
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Budget Deficit
C H A P T E R 1: The Scope and Method of Economics
Budget deficit G - T
• If G exceeds T, the government must
borrow from the public to finance the
deficit. It does so by selling Treasury
bonds and bills. In this case, a part of
household saving (S) goes to the
government.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
C H A P T E R 1: The Scope and Method of Economics
Adding Taxes to the
Consumption Function
C a bYd
Yd Y - T
C a b( Y - T )
• The aggregate consumption function is now a
function of disposable, or after-tax, income.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Government Spending Multiplier
C H A P T E R 1: The Scope and Method of Economics
1
Government spending multiplier
MPS
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Tax Multiplier
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
C H A P T E R 1: The Scope and Method of Economics
The Economy’s Influence
on the Government Budget
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Monetary Policy and Interest
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 292 of 29
The Demand for Money
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 293 of 29
The Transaction Motive
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 294 of 29
The Speculation Motive
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 295 of 29
The Speculation Motive
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 297 of 29
The Total Demand for Money
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 298 of 29
C H A P T E R 1: The Scope and Method of Economics
The Determinants of
Money Demand: Review
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 299 of 29
The Equilibrium Interest Rate
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 300 of 29
The Equilibrium Interest Rate
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 301 of 29
The Equilibrium Interest Rate
C H A P T E R 1: The Scope and Method of Economics
• At r2, households
don’t have enough
money to facilitate
ordinary transactions.
They will shift assets
out of bonds and into
their checking
accounts.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 302 of 29
C H A P T E R 1: The Scope and Method of Economics
Changing the Money
Supply to Affect the Interest Rate
• An increase in the
supply of money
lowers the rate of
interest.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 303 of 29
C H A P T E R 1: The Scope and Method of Economics
Increases in Y and Shifts
in the Money Demand Curve
• An increase in
aggregate output
(income) shifts the
money demand curve,
which raises the
equilibrium interest rate.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 304 of 29
An Overview of Money
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 305 of 42
How Banks Create Money
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 306 of 42
The Modern Banking System
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 307 of 42
The Creation of Money
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 308 of 42
C H A P T E R 1: The Scope and Method of Economics
How the BSP
Controls the Money Supply
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 309 of 42
The Aggregate Demand Curve
C H A P T E R 1: The Scope and Method of Economics
• Aggregate demand
is the total demand for
goods and services in
the economy.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 310 of 47
C H A P T E R 1: The Scope and Method of Economics
Aggregate Expenditure
and Aggregate Demand
Y=C+I+G
equilibrium condition
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 311 of 47
The Aggregate Supply Curve
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 312 of 47
The Aggregate Supply Curve
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 313 of 47
Aggregate Supply in the Short Run
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 314 of 47
The Equilibrium Price Level
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 315 of 47
C H A P T E R 1: The Scope and Method of Economics
The Long-Run
Aggregate Supply Curve
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 316 of 47
Causes of Inflation
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 317 of 47
Causes of Inflation
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 318 of 47
Cost-Push, or Supply-Side Inflation
C H A P T E R 1: The Scope and Method of Economics
• Stagflation occurs
when output is falling at
the same time that
prices are rising.
• One possible cause of
stagflation is an
increase in costs.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 319 of 47
Cost-Push, or Supply-Side Inflation
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 320 of 47
Expectations and Inflation
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 321 of 47
Stabilization Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 322 of 40
Monetary Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 323 of 40
Fiscal Policy: Deficit Targeting
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 324 of 40
C H A P T E R 1: The Scope and Method of Economics
The Effects of
Spending Cuts on the Deficit
• The deficit tends to rise when GDP falls, and tends to fall
when GDP rises.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 325 of 40
C H A P T E R 1: The Scope and Method of Economics
Economic Stability
and Deficit Reduction
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 326 of 40
C H A P T E R 1: The Scope and Method of Economics
Economic Stability
and Deficit Reduction
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 327 of 40
C H A P T E R 1: The Scope and Method of Economics
Economic Stability
and Deficit Reduction
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 328 of 40
C H A P T E R 1: The Scope and Method of Economics
The Stock Market
and the Economy
• The stock market boom of the last half of the 1990s had a
large impact on the economy.
• How much of the economic growth was due to the stock market
boom?
• Did the economy in fact enter a new age?
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 329 of 41
Stocks and Bonds
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 330 of 41
Bonds
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 331 of 41
Bonds
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 332 of 41
Stocks
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 333 of 41
Stocks
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 334 of 41
Stocks
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 335 of 41
Stocks
C H A P T E R 1: The Scope and Method of Economics
• Most stocks bought and sold on the stock market daily are
not newly issued but issued long ago, when the firm “goes
public.”
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 336 of 41
Stock Market Effects on the Economy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 337 of 41
Long-Run Growth
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 338 of 40
Long-Run Growth
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 339 of 40
C H A P T E R 1: The Scope and Method of Economics
The Growth Process:
From Agriculture to Industry
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 340 of 40
The Sources of Economic Growth
C H A P T E R 1: The Scope and Method of Economics
• An aggregate production
function is the mathematical
representation of the relationship
between inputs and national output,
or gross domestic product.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 341 of 40
The Sources of Economic Growth
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 343 of 40
An Increase in Labor Supply
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 344 of 40
Increases in Physical Capital
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 345 of 40
Increases in Physical Capital
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 346 of 40
Increases in Physical Capital
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 347 of 40
Increases in Human Capital
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 348 of 40
Increases in Productivity
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 349 of 40
Increases in Productivity
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 351 of 40
Economic Growth and Public Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 352 of 40
Economic Growth and Public Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 353 of 40
Economic Growth and Public Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 354 of 40
Economic Growth and Public Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 355 of 40
Economic Growth and Public Policy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 356 of 40
Exchange Rates
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 357 of 53
Exchange Rates
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 358 of 53
The Balance of Payments
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 359 of 53
The Balance of Payments
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 360 of 53
The Current Account
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 361 of 53
The Current Account
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 362 of 53
The Capital Account
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 363 of 53
The Capital Account
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 364 of 53
The Capital Account
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 365 of 53
C H A P T E R 1: The Scope and Method of Economics
Imports and Exports and
the Trade Feedback Effect
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 366 of 53
C H A P T E R 1: The Scope and Method of Economics
The Open Economy with
Flexible Exchange Rates
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 367 of 53
The Market for Foreign Exchange
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 368 of 53
The Market for Foreign Exchange
C H A P T E R 1: The Scope and Method of Economics
• When the price of pounds rises, the British can obtain more dollars
for each pound. This means that U.S.-made goods and services
appear less expensive to British buyers. Thus, the quantity of
pounds supplied is likely to rise with the exchange rate.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 370 of 53
The Equilibrium Exchange Rate
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 371 of 53
C H A P T E R 1: The Scope and Method of Economics
The Effects of Exchange
Rates on the Economy
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 372 of 53
C H A P T E R 1: The Scope and Method of Economics
The Effects of Exchange
Rates on the Economy
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 373 of 53
C H A P T E R 1: The Scope and Method of Economics
Exchange Rates and the
Balance of Trade: The J Curve
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 374 of 53
C H A P T E R 1: The Scope and Method of Economics
Exchange Rates and the
Balance of Trade: The J Curve
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 375 of 53
Exchange Rates and Prices
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 376 of 53
C H A P T E R 1: The Scope and Method of Economics
Monetary Policy with
Flexible Exchange Rates
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 377 of 53
C H A P T E R 1: The Scope and Method of Economics
Monetary Policy with
Fixed Exchange Rates
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 378 of 53
Globalization
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 379 of 42
C H A P T E R 1: The Scope and Method of Economics
A Brief History of
Economic Globalization
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 380 of 42
The Free-Trade Debate Revisited
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 381 of 42
The Free-Trade Debate Revisited
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 382 of 42
The Free-Trade Debate Revisited
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 383 of 42
The Free-Trade Debate Revisited
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 384 of 42
The Free-Trade Debate Revisited
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 385 of 42
The Free-Trade Debate Revisited
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 386 of 42
Trade, Growth, and Poverty
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 387 of 42
C H A P T E R 1: The Scope and Method of Economics
Economic Arguments
for Free Immigration
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 388 of 42
C H A P T E R 1: The Scope and Method of Economics
The Argument
Against Free Immigration
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 389 of 42
Capital Mobility
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 390 of 42
Capital Mobility
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 391 of 42
Public Policy and Globalization
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 392 of 42
Global Externalities and Public Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 393 of 42
Global Externalities and Public Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 394 of 42
Global Externalities and Public Goods
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 395 of 42
Nongovernmental Organizations and International Economics:
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 396 of 42
Nongovernmental Organizations and International Economics:
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 397 of 42
Nongovernmental Organizations and International Economics:
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 398 of 42
Nongovernmental Organizations and International Economics:
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 399 of 42
C H A P T E R 1: The Scope and Method of Economics
Globalization,
Capitalism, and Democracy
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 400 of 42
C H A P T E R 1: The Scope and Method of Economics
Globalization,
Capitalism, and Democracy
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 401 of 42
C H A P T E R 1: The Scope and Method of Economics
Globalization,
Capitalism, and Democracy
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 402 of 42
C H A P T E R 1: The Scope and Method of Economics
Globalization,
Capitalism, and Democracy
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 403 of 42
C H A P T E R 1: The Scope and Method of Economics
Globalization,
Capitalism, and Democracy
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 405 of 42
Central Planning or the Market?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 406 of 37
Central Planning or the Market?
C H A P T E R 1: The Scope and Method of Economics
• Market-oriented reforms
recommended by international
agencies include:
• the elimination of price controls,
• privatization of state-run enterprises,
and
• reductions in import restraints.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 407 of 37
Central Planning or the Market?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 408 of 37
Central Planning or the Market?
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 409 of 37
C H A P T E R 1: The Scope and Method of Economics
Growth Versus Development:
The Policy Cycle
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 410 of 37
Issues in Economic Development
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 411 of 37
The Growth of World Population, Projected to 2020
C H A P T E R 1: The Scope and Method of Economics
A.D.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 412 of 37
Population Growth
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 413 of 37
Population Growth
C H A P T E R 1: The Scope and Method of Economics
• Any nation that wants to slow its rate of population growth will
probably find it necessary to have in place economic incentives for
fewer children as well as family planning programs.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 414 of 37
Developing-Country Debt Burdens
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 415 of 37
Political Systems and Economic Systems: Socialism,
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 416 of 37
Political Systems and Economic Systems: Socialism,
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 417 of 37
Political Systems and Economic Systems: Socialism,
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 418 of 37
Political Systems and Economic Systems: Socialism,
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 419 of 37
Political Systems and Economic Systems: Socialism,
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 420 of 37
Political Systems and Economic Systems: Socialism,
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 421 of 37
Central Planning Versus the Market
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 422 of 37
The Transition to a Market Economy
C H A P T E R 1: The Scope and Method of Economics
1. macroeconomic stabilization;
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 423 of 37
The Transition to a Market Economy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 424 of 37
The Transition to a Market Economy
C H A P T E R 1: The Scope and Method of Economics
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 425 of 37
The Transition to a Market Economy
C H A P T E R 1: The Scope and Method of Economics
Chapter 4
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 427 of 33
C H A P T E R 1: The Scope and Method of Economics
How do we prepare a
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 428 of 33
Environmental Scanning
C H A P T E R 1: The Scope and Method of Economics
2) Analyze and evaluate the viability of a business and its impact on the
community
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 430 of 37