Chapter 1: Introduction
What is Economics?
→ Economics is concerned with Optimum Allocation of Limited Resources among Unlimited
Wants.
Economic Resources:
● Labor: skilled & unskilled labor, anyone who is 16+, not retired, comes from population
○ US population: 332 million
○ Population growth: 0.7% and decreasing (richer a country, smaller a population
growth)
○ Full employment: 5% unemployment (natural)
○ Now in US: 3.5% unemployment
○ To increase labor: Immigration + productivity of labor (technology)
● Land: the land + all the resources on and under the land (limited)
○ To increase land resource: trade + increase labor productivity
● Capital: physical tools of production
○ Two types: machinery + financial (not considered in economics)
○ To increase capital:
■ Spend less
■ Save more: US is a spender nation, saving rate is at most 5%
■ Invest
● trade deficit (USD going to other countries)
○ China uses US $ to invest in US, good for US economy, but
ownership is for China
● Entrepreneur
Labor Productivity: Output per unit of labor input.
→ Technology increases labor productivity
Productivity of Land Resources: Output per unit of land input.
Resource Prices
● How do we know a resource is limited?
○ Limited or scarce resources are resources that we pay a price for them
● Factor Prices:
○ Price of labor: wages
○ Price of land: rent
○ Price of capital: interest
○ Price of entrepreneur: profit
● How to allocate economic resources?
, ○ Economic systems: what to produce, how to produce, and for whom to produce
■ Free market system
● Free from government
● The market or demand and supply decides the resource allocation
■ Command economy
● Marxism
● Decided by central planning or the government
■ Mixed economy
● Decided by welfare
● Over 30% of the US GDP spent by the government on national
defense
Normative vs. Positive Economics
● Normative economics: based on value judgment and personal norms
○ The way things should be
○ Disagreements
● Positive economics: based on facts and data
○ The way things are
○ No disagreements
● Saving more = not spending → recession
Economic objectives
1. Full employment
2. stable prices
a. Inflation vs. deflation
i. Inflation: prices increase, and purchasing power decreases
ii. Deflation: prices decrease, more bankruptcies → more unemployment
3. economic growth
a. GDP
b. US: $64,000 GDP per capita
● Conflicting objectives: full employment + stable price
● Complementary objectives: full employment + growth
Government policy
1) Fiscal policy
2) The Federal Reserve bank
Main Macro Variables:
1. Unemployment
2. Inflation
3. GDP
What is Economics?
→ Economics is concerned with Optimum Allocation of Limited Resources among Unlimited
Wants.
Economic Resources:
● Labor: skilled & unskilled labor, anyone who is 16+, not retired, comes from population
○ US population: 332 million
○ Population growth: 0.7% and decreasing (richer a country, smaller a population
growth)
○ Full employment: 5% unemployment (natural)
○ Now in US: 3.5% unemployment
○ To increase labor: Immigration + productivity of labor (technology)
● Land: the land + all the resources on and under the land (limited)
○ To increase land resource: trade + increase labor productivity
● Capital: physical tools of production
○ Two types: machinery + financial (not considered in economics)
○ To increase capital:
■ Spend less
■ Save more: US is a spender nation, saving rate is at most 5%
■ Invest
● trade deficit (USD going to other countries)
○ China uses US $ to invest in US, good for US economy, but
ownership is for China
● Entrepreneur
Labor Productivity: Output per unit of labor input.
→ Technology increases labor productivity
Productivity of Land Resources: Output per unit of land input.
Resource Prices
● How do we know a resource is limited?
○ Limited or scarce resources are resources that we pay a price for them
● Factor Prices:
○ Price of labor: wages
○ Price of land: rent
○ Price of capital: interest
○ Price of entrepreneur: profit
● How to allocate economic resources?
, ○ Economic systems: what to produce, how to produce, and for whom to produce
■ Free market system
● Free from government
● The market or demand and supply decides the resource allocation
■ Command economy
● Marxism
● Decided by central planning or the government
■ Mixed economy
● Decided by welfare
● Over 30% of the US GDP spent by the government on national
defense
Normative vs. Positive Economics
● Normative economics: based on value judgment and personal norms
○ The way things should be
○ Disagreements
● Positive economics: based on facts and data
○ The way things are
○ No disagreements
● Saving more = not spending → recession
Economic objectives
1. Full employment
2. stable prices
a. Inflation vs. deflation
i. Inflation: prices increase, and purchasing power decreases
ii. Deflation: prices decrease, more bankruptcies → more unemployment
3. economic growth
a. GDP
b. US: $64,000 GDP per capita
● Conflicting objectives: full employment + stable price
● Complementary objectives: full employment + growth
Government policy
1) Fiscal policy
2) The Federal Reserve bank
Main Macro Variables:
1. Unemployment
2. Inflation
3. GDP
