CHAPTER

TWO
Economics: The Creation
and Distribution of Wealth
Economics: Use of scarce resources to
produce goods/services, distribute them
among competing groups/individuals
Land

Labor

Capital

Entrepreneurship

Knowledge
Economics: Create Wealth
Micro v. Macro




Resource Development


Economic Theory
Thomas Malthus (Early 1800s)
Dismal Science
Too many people

Adam Smith (1776)
Freedom is vital
Invisible Hand
Four Whats of
an Economic System
$What (how it) is produced
$What amount is produced
$What method of output
distribution
$What rate of economic
growth
Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8
Three Economic Systems

Communism
Socialism
Capitalism
(Highly Controlled)
(Little Control)
Mixed
Capitalism

Private Property
Profit/Ownership
Freedom of Competition
Freedom of Choice
Communism
Public Ownership
Productive Capacity
Capital
Central Planning/Controlled
Economy
Managers = Mandatory Party
Membership


Socialism
Private & Public
Ownership
Some Choices are Limited
Creates Social Equality &
Equality of Results
Reduces Individual
Incentive
Mixed Economies
Free-Market Economy = Capitalism
Command Economy
Socialism
Communism
Trend Results in Blend
Capitalism > Socialism
Socialism > Capitalism


Supply Curve
Quantity(S)
High
High
Low
Price(P)
S
Demand Curve
Price(P)
Quantity(D)
High
High Low
D
Quantity
High
High Low
Price
EQUILIBRIUM POINT
Market Equilibrium
S D
Surplus
Shortage
Degrees of Competition

Sellers
One Many
Monopoly
Oligopoly
Monopolistic
Competition
Pure Competition
Monopoly = One Seller
Diamonds

Utilities
Oligopoly = Few Sellers
Tobacco

Automobiles
Monopolistic Competition =
Many Sellers With Perceived Differences
Fast Food

Colleges
Pure Competition

Buyer
Sellers
Limitations of Free-Market
Inequality of Wealth-
Causes National & World
Tension
Potential Environmental
Damage
Limitations Push Country
towards Socialism =
Government Regulation
Governments Role in Economics
Enforces Rules/Regulations
Provides Public Goods
Transfers Payments
Fosters Competition
Contributes to Economic
Stability
Industrialized
Nations Tax Rate
0% 10% 20% 30% 40% 50% 60% 70%
Denmark
Finland
France
Spain/Sweden
Germany
Canada
Italy
Austria/Japan
U.S.
Source: Parade Magazine, Apr. 12, 1998.
Where Does the
Government Get Its Money
Excise Taxes
4%
Corporate
Taxes
11%
Other
4%
Social
Security
& Payroll
Taxes
34%
Individual
Income
Taxes
48%
Source: Federal Budget for Fiscal 2001
Egg McMuffin and large coffee for
President Bush & 2,000 Secret Service
Agents every morning for 575 years.
Average annual grocery bill for
250,000 families of 4.
One years food for 5 million cats & dogs.
Tuition, room and board for freshman
classes at Brown, Cornell, Harvard,
Pennsylvania & Yale with $50M leftover
for books.
What $1 Billion
Can Buy
Key Economic Indicators
Gross Domestic Product (GDP)

Unemployment Rate

Price Indexes
Consumer Price Index(CPI)
Producer Price Index(PPI)


What Makes Up the
Consumer Price Index
Transportation
18%
Other
5%
Medical Care
6%
Food &
Beverage
16%
Housing & Util.
39%
Recreation
6%
Medical Care/
Insurance
7%
Apparel
5%
SOURCE: U.S. Bureau of Labor Statistics
Economic Scenarios
Inflation vs. Deflation = #Dollars
Chasing Amount of Goods/Services
Recession & Depression = Degrees
of Severity
Federal Reserve Attempts to Control
U.S. Government
Economic Tools
Monetary Policy- management of
money supply

Fiscal Policy- management of
taxes and government
expenditures

National Debt
How Much is the
Federal Debt?
The debt has reached $5.6 trillion
If $1,000 bills were stacked:
$1 Million = 4.29 Inches
$1 Billion = 357.5 Feet
$1 Trillion = 67 Miles
The debt is equal to 375.2 miles in
$1,000 bills
Labor Productivity
1900 - 1/3 of workforce produced U.S.
food needs
2000 1/50 of workforce produces U.S.
food needs
Service vs. Manufacturing Economy?
Quality vs. Quantity?
1999 Revenue by Industry
$0 $50 $100 $150 $200 $250 $300
Movies
Music
Books
Tobacco
Airlines
Fast Food
B2B Ecommerce
Server Vendors
Oil
Source: Wired, November 2000.
In Billions of
Dollars
Key Terms
Capitalism 37
Communism 45
Communism 44
Consumer price index 50
Demand 39
Deflation 53
Depression 53
Disinflation 53
Economics 34
Federal deficit 54
Free-market economics 45
Gross domestic product 49
Inflation 53


Invisible hand 36
Mixed economics 46
Monetary policy 53
Monopolistic competition 41
Monopoly 42
National debt 54
Oligopoly 41
Perfect competition 41
Recession 53
Socialism 43
Supply 39
Unemployment rate 49