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Purdue AGEC 21700 - Choice in a World of Scarcity
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Lecture 3 Outline of Last Lecture I. Economic Decisions II. The Fields of EconomicsA. MicroeconomicsB. MacroeconomicsIII. Economic TheoriesA. Basic ModelsB. Example of the Circular Flow DiagramIV. Economic MarketsA. Market EconomyB. Traditional EconomyC. Command EconomyOutline of Current Lecture I. The Economy of the United States II. Economic RulesA. Examples of RegulationsIII. The Rise of GlobalizationIV. Choices in a World of ScarcityA. Example ProblemV. What the Budget Line tells youVI. Mathematical Budget EquationCurrent LectureIn the United States, the economy is generally classified as a market economy. There are certain goods that the government has control over, making it a command economy on occasion. Examples of such goods include health-care and creating new roads. These are called public goods, as they are goods that the government provides for consumers. The economy has certain rules, called institutions. In a market economy, the goal is to keep things fair. This is done through regulations. Examples include protecting against monopoly powers, preserving competition, protecting worker’s rights, patents, property rights, and legal contracts. These regulations keep the market economy functioning. The Rise of Globalization refers to an increase in interaction between global economies. The direct impact of this is an expansion of international trades. The indirect impact is an expansion of cultures and ideas.The focus now shifts to choices in a world of scarcity. Consumers have certain preferences and budgets.Society has technology and raw materials at their disposal. A budget constraint gives restrictions on what you AGEC 217 1nd Editioncan and cannot consume. Economics never tells you what you should do, though. Below is an example of a budget problem. The model assumes that all the money is spent. Suppose you have $10 to spend. Getting a burger for lunch costs $2 per burger. Purchasing a bus ticket costs 50 cents per ticket. The first step in building a budget constraint is to draw a graph with the quantity of goods on the axes. Second, figure out the corner solutions. That is, you can buy 5 burgers and no tickets or 20 tickets and no burgers. The last step is to figure out the slope of the straight line. The slope is always negative. The graph is shown below with the slope of -4.0 1 2 3 4 5 60510152025Budget ConstraintBurgersBus TicketsEverything inside the line is considered affordable, but there will be money leftover (which to economists is undesirable). Therefore we want to be somewhere on the line. The line itself is called the budgetline. It tells us 1. What we can and cannot afford.2. The slope tells us what the trade-off is. In this example it could be stated as: If you want to consume one more burger, you have to give up 4 bus tickets. Which leads back to the idea of scarcity.If you prefer to look at things in a more algebraic way, below is given an equation that can also be used.Budget=P1 x Q1 + P2 x Q2, where P= price and Q= quantity. With this equation you can make a table of values to find a missing


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Purdue AGEC 21700 - Choice in a World of Scarcity

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