GFundamental 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 CausationEC 201Cal Poly PomonaDr. BresnockLecture 1 What is Economics? Here are several definitions.It is a social science concerned with the efficient use of limited, or scarce, resources toachieve maximum satisfaction of human material wants. (typical texts)It is the study of how people and society end up choosing, with or without the use ofmoney, to employ scarce productive resources that could have alternative uses, toproduce various commodities and distribute them for consumption, now or in the futureamong various persons 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 limited income, or budget.Producer Decision – maximizing profit given their limited resources.Government Decision – maximizing net benefits to society given limited budgets. Private Sector = Consumers + Producers+ Public Sector = All Levels of Government Mixed Market Economy , i.e. U.S.Types of Economies Transitional Economies – Eastern EuropePure Market Pure Command(Capitalism) (Communism) U.S., Canada, Japan, EU China Cuba, N. KoreaPure Market – private property rights and decentralized decision making coordinatedthrough markets. Pure Command – state ownership and control of economic resourcesand central planning.EC 201 Lecture 1Dr. BresnockResources – also known as inputs. An input is also referred to as a “factor ofproduction” if it earns income over and over again, i.e. labor and capital equipment areused repeatedly in production whereas other inputs, i.e. electricity, cloth, are used onlyonce.I. Human ResourcesA. Labor – many types. See “occupational triangle” below. Notice thatthere are more plentiful workers in the unskilled category. Consequentlythe wage for those workers will be quite low. At the top of the trianglethere are far fewer workers in the “G” (short for genius or someone withunique talents), and such persons receive rather high salaries. “M & P”represents managers and other professional persons.Note also that the Human Capital of the workers increases greatly as theworkers move higher on the occupational triangle. Human capital is ameasure of the workers education, training and skills.B. Entrepreneur – creative genius, the person or persons who puttogether all of the production inputs and produce a marketable product. II. Non-Human ResourcesA. Capital – tools, equipment, aka “investment goods”. Not stocks andbonds (which are financial capital), and not money. (Financial resourcesare used to purchase physical productive inputs; they are a medium ofexchange not a productive input.)B. Land -- “Natural Capital”. Environmental and natural resourceendowment, i.e. air and water resources, forests, fish, minerals andmaterials, energy resources, species, agricultural products, land.2 G M & P Skilled Semi-Skilled UnskilledEC 201 Lecture 1Dr. BresnockConsumer Goods and Services1. Durable Goods – i.e. TVs, cars, washing machines, refrigerators, stoves,furniture; relatively stable expenditure pattern over last 70 years.2. Non-Durable Goods – i.e. food, clothing, small appliances, cleaning products,footwear, beverages; decrease in expenditure pattern over last 70 years.3. Services – i.e. dental work, manicures, car repairs, child care, health care,laundering, home repairs; increase in expenditure pattern over last 70 years.Public Goods and Services1. Pure Public –goods and services only produced by government, i.e. nationaldefense, lighthouses,2. Quasi-Public -- goods and services produced in part by government and in partby the private sector, i.e. education, housing, medical care, Key Microeconomic Questions1. What to Produce? How are finite resources allocated to satisfy infinite societalwants/demands? Choices made by consumers, firms, and government. Thesechoices are constrained by either limited monetary budgets or physical resources.2. How to Produce? Efficiency goal. A. Productive, or Technical Efficiency – achievement of maximum outputwith full usage of all inputs at lowest production cost. Focuses onphysical efficiency.B. Allocative Efficiency – production of the combination of goods andservices that people prefer given their income. Focuses on marketanalysis. Goods and services are produced up to the point where themarginal benefit to consumers is equal to the marginal cost of producingthem.3. How to Distribute? Equity, or fairness, goal. But who determines what is fair?Distribution of goods and services depends on the distribution of income. Thosewith more income receive a larger share of goods and services in general. Micro vs. MacroeconomicsMicroeconomics analyses the behavior of specific economic units, i.e. how does anindividual consumer decide how to spend his/her income, how does a business firmdetermine what to produce.Macroeconomics analyzes the behavior of an entire economic system, i.e. aggregateeconomic analysis, study of U.S. economy as a wholeKey Macroeconomic Issues A. Stable Prices – low inflation3EC 201 Lecture 1Dr. BresnockB. Full Employment – low unemploymentC. Sustainable Economic Growth – that is consistent