GPrinciples of EconomicsEC 201California State Polytechnic University, PomonaFall, 2002Fundamental Economic ProblemTypes of EconomiesPure Market Pure CommandConsumer Goods and ServicesPublic Goods and ServicesKey Microeconomic QuestionsMicro vs MacroeconomicsKey Macroeconomic IssuesIs Economics an Art or a Science?Deductive vs Inductive ReasoningCorrelation vs CausationPrinciples of EconomicsEC 201California State Polytechnic University, PomonaDr. BresnockFall, 2002Lecture 2 Note: This is the first set of abbreviated class notes to accompany ourclass. Please remember to check the “Class Materials”, “LectureNotes” listing for notes for each class prior to each upcoming lecture.It will be your responsibility to download and print a copy of the notesand bring them to class. Remember, the postings will be partiallecture notes. You must attend lecture to fill in additional tables,graphs, derivations of theoretical points, and applications. You willnotice spaces throughout the posted notes that are place savers formaterial that we will add during class lecture. I will not be postingcomplete notes for the lectures, just the abbreviated notes. Theintention is to economize on class lecture time so that we can devotemore class time to the more difficult concepts.What is Economics? Here are several definitions.It is a social science concerned with the efficient use of limited, orscarce, resources to achieve maximum satisfaction of human materialwants. (McConnell/Brue, p. 3)It is the study of how people and society end up choosing, with orwithout the use of money, to employ scarce productive resources thatcould have alternative uses, to produce various commodities anddistribute them for consumption, now or in the future among variouspersons and groups in society. (Samuelson)An analysis of choice making. (Bresnock)Fundamental Economic Problem Unlimited Wants vs Limited Resources Demands > Supplies ScarcitiesConsumer Decision – maximizing satisfaction given their limitedincome, or budget.Producer Decision – maximizing profit given their limited resources.EC 201 Lecture 2Fall, 2002 A. BresnockGovernment Decision – maximizing net benefits to society givenlimited budgets. Private Sector = Consumers + Producers+ Public Sector = All Levels of Government Mixed Market Economy , i.e. U.S.Types of EconomiesPure MarketPure Command(Capitalism)(Communism) U.S., Canada Cuba, ChinaPure Market – private property rights and decentralized decisionmaking coordinated through markets. Pure Command – stateownership and control of economic resources and central planning.Resources – also known as factors of production, inputs, productiveinputs.I. Human ResourcesA. Labor – many types. See “occupational triangle” below. Noticethat there are more plentiful workers in the unskilled category.Consequently the wage for those workers will be quite low. At thetop of the triangle there are far fewer workers in the “G”(short forgenius or someone with unique talents), and such persons receiverather high salaries. “M & P” represents managers and otherprofessional persons.2 GM & PSkilledSemi-SkilledUnskilledEC 201 Lecture 2Fall, 2002 A. BresnockNote also that the Human Capital of the workers increases greatly asthe workers move higher on the occupational triangle. Human capitalis a measure of the workers education, training and skills.B. Entrepreneur – creative genius, the person or persons who puttogether all of the factors of production and produce amarketable product. II. Non-Human ResourcesA. Capital – tools, equipment, aka “investment goods”. Not stocksand bonds. B. Land -- “Natural Capital”. Environmental and natural resourceendowment.Consumer Goods and Services1. Durable Goods – i.e. TVs, cars, washing machines, relativelystable expenditure pattern over last 70 years.2. Non-Durable Goods – i.e. food, clothing, decrease in expenditurepattern over last 70 years.3. Services – i.e. dental work, manicures, car repairs, increase inexpenditure pattern over last 70 years.Public Goods and Services1. Pure Public – i.e. national defense, lighthouses, only produced bygovernment2. Quasi-Public -- i.e. education, housing, medical care, produced inpart by government and in part by the private sectorKey Microeconomic Questions1. What to Produce? How are finite resources allocated to satisfyinfinite societal wants? 3EC 201 Lecture 2Fall, 2002 A. BresnockA. Traditional wants – custom, institution, arrangement, societalB. Political/command wants – democracy, socialist, monarch ruleC. Economic wants – determined by the market system2. How to Produce? Efficiency goal. A. Productive, or Technical Efficiency – achievement ofmaximum output with full usage of all inputs. Focuses onphysical efficiency.B. Allocative Efficiency – production of the combination of goodsand services that people prefer given their income. Focuses onmarket analysis.3. How to Distribute? Equity, or fairness, goal. But who determineswhat is fair. Some possible equity goals…A. Pure Egalitarian – one person, one vote.B. Need – Marxian formula – “from each according to his ability, toeach according to his need”C. Deed -- “get what you work for”Micro vs MacroeconomicsMicroeconomics analyses the behavior of specific economic units, i.e.how does an individual consumer decide