Contents: I Semester (d.Begg, s.Fisher, r.Dornbusch. Economics.)

I. Part I. Economics and the Economy 2

Introduction: What is Economics? 2

I-1. The Basic Economic Problems 3

I-2. Two Economic Issues 7

I-3. Types of Economic Systems 12

I-4. Positive and Normative Economics 19

I-5. Microeconomics and macroeconomics 22

Part II. Demand, Supply and the Market 27

II-1. The Role of the Market 27

II-2. The Market 30

II-3. Supply, Demand and the Market Price 34

Part III. Types of Markets 42

III-1. Perfect Competition: Many Buyers and Sellers 42

III-2. Monopolistic Competition: Many Unique Products 42

III-3. Oligopoly: A Few Sellers 43

III-4. Monopoly: One Seller 43

Part IV. Government in the Mixed Economy. 49

IV-1. What do Governments Do? 49

IV–2. The Role of Government 54

IV-3. What Should Governments Do? 56

IV-4. How Do Governments Decide? 62

Part V. Taxes 66

Case 1. Contracting for Prisons in Texas. 70

Case 2. Nationland. 73

I.Part I. Economics and the Economy

Introduction: What is Economics?

One of the things that young people discover as they grow older is that you can’t have everything. You are reminded of it every time you shop. Although you may see twenty or thirty items that you would really like to buy, you know that you will have to limit your selection to one or two. Everyone goes through life having to make choices.

Governments, too, cannot have everything. Every year the most important political debates concern questions about spending taxpayers’ money.

Neither individuals nor societies can have all the things they would like to have. There simply is not enough of everything to go around. Economists note that there is no limit to the amounts or kinds of things that people want. There is, however, a limit to the resources, things used to produce goods and services, available to satisfy those wants. Once that limit is reached, nothing else can be produced.

In other words, when a nation’s resources (all its workers, factories, farms, etc.) are fully employed, the only way it will be able to increase the production of one thing will be by reducing the production of something else. This happened during World War II. In its efforts to increase the production of tanks and other military vehicles, our nation’s factories stopped producing automobiles. Therefore, if somebody tries to sell you a 1944 Ford or Chevrolet, run, do not walk, to the nearest exit – none were produced that year.

To summarize: human wants are unlimited, but the resources necessary to satisfy those wants are limited. Thus, every society is faced with the identical problem, the problem of scarcity.

Since there is not enough of everything to go around, everyone – individuals, business firms and government – needs to make choices from among the things they want. In the process they will try to economize, to get the most from what they have. With this in mind, we can define economics as the social science that describes and analyses how society chooses from among scarce resources to satisfy its wants.

The need to choose is imposed on us all by our income, wealth and ability to borrow. Individuals and families are limited by the size of their personal income, savings and ability to borrow. Similarly, business firms are limited by their profits, savings and borrowings and governments by their ability to tax and borrow.

Income, earnings, profits and taxes enable people, institutions and governments to purchase goods, products you can see or touch, and services, work performed for pay that benefits others. The problem that each must face, however, is that once the decision has been made to choose one set of alternatives, one loses the opportunity to choose the other.

Business is faced with the problem of choices and opportunity costs. The opportunity cost of something is its cost measured in terms of what you have to give up to get it. In planning an advertising campaign, for example, a local store might have to choose between a newspaper ad or a direct-mail campaign. If it puts its efforts into newspaper advertising, the opportunity cost is the benefits of a direct-mail campaign.

Like individual and business firms, government also pays opportunity costs. If, for example, the federal government chooses to increase its spending for roads by reducing the number of warships to be built, the opportunity cost of the improved road network would be a more powerful navy.

The resources that go into the creation of goods and services are called the factors of production. The factors of production include natural resources, human resources, capital and entrepreneurship. Each factor of production has a place in the economic system, and each has a particular function. People who own or use a factor of production are entitled to a “return or reward”. This generates income which, as it is spent, becomes a kind of fuel that drives the economy.

Natural Resources or “Land”. Natural resources are the things provided by nature that go into the creation of goods and services. They include such things as mineral, wildlife and timber resources, as well as the air we breathe. Economists also use the term “land” when we speak of natural resources as a factor of production. The price paid for the use of land is called rent. Rent becomes income to the owner of the land.

Human Resources or “Labor”. Economists call the physical and mental efforts that people put into creation of goods and services labor. The price paid for the use of labor is called wages. Wages represent income to workers, who own their labor.

Capital. To the economists, physical capital (or “capital” as it is commonly called) is something created by people to produce other goods and services. A factory, tools and machines are capital resources because they can be used to produce other goods and services. The term capital is often used by business people to refer to money that they can use to buy factories, machinery and other similar productive resources. Payment for the use of someone else’s money, or capital, is called interest.

Entrepreneurship. Closely associated with labor is the concept of entrepreneurship, the managerial or organizational skills needed by most firms to produce goods and services. The entrepreneur brings together the other three factors of production. When they are successful, entrepreneurs earn profits. When they are not successful, they suffer losses. The reward to entrepreneurs for the risks, innovative ideas and efforts that they put into the business are profits, whatever remains after the owners of land, labor and capital have received their payments.