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1、Chapter 2 Basic Economic Problem1. Scarcity2. Choice and opportunity cost3. Economic systemsBasic logic of this section (1) Economic basic problem: the resources are scarce and human beings wants are unlimited. Thus, individuals and society have to make choices among many options. Making choices mea
2、ns that they have to pay opportunity cost. These choices include what (which), how and for whom. People make different choices depending on different values, ideas, priorities and situations, thus developing different economic systems. Although resources limit production ultimately, the combination
3、of goods and services produced by an economy is not limited within given boundaries. Production possibility is introduced.Basic logic of this section (2) How to tell how much those choices bring about satisfaction to people? Three approaches can be used to gauge the satisfaction: marginal utility th
4、eory, consumer preference and indifference analysis. All major societies use market system. Market brings together buyers (demanders) and sellers (suppliers). In competitive markets, prices adjust to the equilibrium level at which quantity demanded equals quantity supplied. The law of demand shows t
5、hat there is an inverse relationship between price and quantity demanded, and the law of supply shows that a positive relationship exists between price and quantity supplied. But they do not show how much they change. Price elasticity of demand and supply answers this question.1. Scarcity: Unlimited
6、 Wants and Limited ResourcesBasic Economic Problem Basic economic problem arises from scarcity (稀缺) and is the result of different choices made by individuals and societies. Or, two fundamental facts together constitute the basic economic problem and provide a foundation for economics: societys want
7、s are virtually unlimited and the resources for producing the goods and services to satisfy societys wants are limited or scarce. All economic issues depends directly on these two facts.Scarcity Economists see resources as scarce in the sense that no economy has sufficient resources to be able to pr
8、oduce all the goods and services everyone wants. Compared with unlimited wants, resources are scarce.Wants (想要想要) The desires of consumers (including business and government) to obtain and use various goods and services that provide utility (效用) that is, pleasure or satisfaction. Wants in General Ou
9、r desires for a particular good or service can be satisfied. But goods in general can not be satisfied. Wants and Needs (必要必要)Resources Economic resources: All natural, human, and manufactured resources that go into the production of goods and services. Property and Human ResourcesEconomists classif
10、y all these resources as1. property (财产) resourcesland and raw materials, and capital;2. human (人力) resourceslabour and entrepreneurial ability.Land Natural resources used to produce goods and services. It includes all natural resources (all “gifts of nature”) that are used in the production process
11、, such as arable land, forests, mineral and oil deposits, and water resources.Arable Land (可耕地可耕地)Land (Natural Resources)Capital (资本资本) Human-made resources used to produce goods and services. Purchasing capital goods is known as investment. Capital goods differ from consumer goods in that consumer
12、 goods satisfy wants directly, while capital goods do so indirectly by aiding the production of consumer goods. The term “capital” as used by economists does not refer to money but real capitaltools, machinery, and other productive equipment.Capital (Machine)Capital good does not refer to moneyLabou
13、r The physical and mental talents and efforts of people that are used to produce goods and services.Labour (Human Resources)Labour on StrikeEntrepreneurial Ability (企业家企业家) The human resources that combine the other resources to produce a product, make non-routine decisions, innovate, and bear risks
14、. Entrepreneurs Perform Several Functions1.Taking the initiative in combining the resources of land, capital, and labour to produce a good or a service. 2.Making basic business-policy decisions.3.Commercializing new products, new production techniques, new forms of business organization.4.They have
15、no guarantee of profit in a market system, thus they are risk bearers.Entrepreneurial AbilityTaking risksFactors of Production Because these four resourcesland, labour, capital, and entrepreneurial abilityare combined to produce goods and services, they are called the factors of production (生产要素).Im
16、agine If No Scarcity Close your eyes for a minute and pretend you are in paradise, a place where you have anything you want whenever you desire it. On a particular day you decide you want a new pair of jeans, a new portable computer, a cell phone, and a new Ferrari sports car. Your friends may have
17、a completely different list of wants, but all of their desires will also be satisfied. The following day you can start all over and make any request you have, and they will all be fulfilled. And so it will continue forever. Your body will never get old or sick, you will have all the friends and love
18、 you want, etc, etc. There is no scarcity problem in the heaven“Oh, its great here, all right, but I sort of feel uncomfortable in a place with no budget at allBoring?Scarcity Leading to Economic Problems But, in this world our wants greatly outstrip (超过) our ability to satisfy them. Anytime there i
19、s a situation in which wants are greater than the resources to meet those desires, we have an economic problem.Examples of Scarcity Time is a scarce resource for everyone, not just the terminally ill. In deciding which movies to see, it is time, not the price of admission, that constrains most of us
20、. With only a few free nights available each month, seeing one movie means not being able to see another, or not being able to have dinner with friends. In a buffet restaurant, it is an all-you-can-eat affair, and you must decide how to fill your plate. Everything is free. The important scarce resou
21、rce here is the capacity of your stomach. You must decide which to eat and in what quantity, because eating a chicken leg means having less room for more scrambled eggs.Examples of ScarcityScarcity of Land6,340 square kilometers, 23 millions residents (Shanghai)16,410 square kilometers, 7,837 people
22、 per square kilometer in central six districts (Beijing)Scarcity of TreesScarcity of WaterScarcity of WaterScarcity of Skilled Labour(生态)Questions about resources 1.Money is a resource and is classified as “capital.” (T/F)2.A natural gas pipeline is an example of a capital goods. (T/F)3.Which of the
23、 following is not a factor of production?a. A computerb. A gold minec. An economics teacherd. A $100 bill2. Choice and Opportunity CostChoice Since the economy cannot produce all that everyone wants, the resources available for production are scarce, and some kind of mechanism must be put into place
24、 to choose what will be produced and, by implication, what will not be produced. This is why economics is sometimes called the science of choice.Too Many Choices“As soon as questions of choice of action arise, human science is at a loss.” (Noam Chomsky) It is not easy to make decisionsOpportunity Co
25、st Because of these choices, the decision to produce one thing means that some other things will not be produced. This point is so fundamental that economists have coined a special term to identify it: opportunity cost, which is the amount of other products that must be forgone or sacrificed to prod
26、uce a unit of a product. Thus, it is always measured in the units of the forgone good. Another definition: the value of the next-best alternative that is given up as a result of making a particular choice.Why not Money Value Why is it better to think of costs in term of opportunity cost rather than
27、simply as money payments? Economists argue that using the concept of opportunity costs captures the true measure of any decision. If we use money payments as the measure, then we seemingly have unlimited means to produce goods, since governments can always print more money. But no matter what any go
28、vernment might wish, any society has only a limited amount of resources. When we realize this, we begin to realize that there is no such thing as a “free lunch”any decision necessarily involves the use of scarce resource which could have alternatively been used to produce something else.Printing Mon
29、ey量化宽松(QE) 2, like the “nuclear football”? Never Forget Opportunity Costs The total opportunity costs of some actions can never be known with certainty, and are sometimes called “hidden costs” or “hidden losses” as what has been prevented from being produced cannot be seen or known. Thus, opportunit
30、y costs are often ignored. Many people make bad decisions because they tend to ignore the value of such forgone opportunities. To avoid overlooking opportunity costs, economists often translate questions like “Should I do this” into ones like “Should I do this or do that?” If I do this, opportunity
31、costs are “do not do that”.Opportunity Cost of Study Choice and Opportunity CostOpportunity Cost of Governments DecisionOpportunity costOne-armed Economist President Harry Truman once said that he wanted to find a one-armed economist. When he asked his economists for advice, they always answered, “O
32、n the one hand, . . . . On the other hand, . . . .” Truman was right in realizing that economists advice is not always straightforward. This tendency is rooted in the principles: tradeoffs (权衡取舍, 折中) are involved in most policy decisions.Questions about scarcity and opportunity costTrue or false?1.T
33、he rising living standards in developed countries is proof that the scarcity problem has been overcome.2.Since the government can print money there is no opportunity cost connected with government spending.3.The main opportunity cost of going to college is the foregone earnings.Question about scarci
34、ty Scarcity necessitatesa. utility.b. efficiency.c. inefficiency.d. choice.e. government regulation.Question about opportunity cost College students often skip class becausea. they view the explicit cost of class as too high.b. they view the opportunity cost of attending class as high.c. they view t
35、he dollar cost of class as too high.d. they view the opportunity cost of attending class as low.Question about opportunity cost People often speed becausea. the marginal cost of getting caught is low.b. the overall cost of getting caught is low.c. the opportunity cost of getting caught is low.d. the
36、 opportunity cost of not speeding is considered high.Relationship among scarcity, choice and opportunity costchoiceopportunity costchoiceopportunity cost forces which involvesscarcitychoiceopportunity costFor Whom Question “For whom” question is, to great extent, the question of the ownership of res
37、ources and whether it is better that certain resources be owned by society as whole or by private individuals. In short, the “for whom” question (as well as the what and how questions) cannot be adequately addressed unless we look at the societys attitude toward the private ownership of resources an
38、d the question of who has the power to make crucial decisions.3. Economic SystemsDifferent Economic Systems Faced with three questions: what (or which), how, and for whom (or who), society will develop its own economic system that is basis of different solutions. Different solutions require people t
39、o develop different economic systems, then different systems can institutionalize (制度化) different solutions. Economic System Which goods and services are to be produced? How are they to be produced? Who is to receive them? Market/Capitalist or Free Enterprise: Hong Kong USA Japan Sweden Individuals
40、expressing preferences by spending incomes on desired goods and services, and firms responding by producing goods and services. Price mechanism sends the appropriate signals. Profit motive dominant. Firms competing with each other to produce goods and services using the least amount of resources, th
41、e prices of which are set by market forces. Choose lowest cost location. Determined by individuals incomes, the levels of which are set by market forces. Individuals will only receive goods and services if they are able to afford to pay for them. Government will only provide defence, law and order t
42、o all. Mixed: UK France Germany Decided by governments (both central and local) and by individuals (consumers and firms). Production based on profit and on need. Government: defence health education. Individuals: cars umbrellas golf clubs. Mixture of Central Planning and decisions of private firms.
43、Government intervenes to direct businesses to depressed areas (Regional Policy). Otherwise lowest cost location would be chosen. Market forces modified by taxation and the payment of transfer incomes, eg to unemployed, OAPs. Certain goods and services provided as of right, eg health and education. S
44、ome subsidised eg dental health and prescriptions. Many goods only available to those who can afford to pay for them, eg holidays, VCRs. (Old age pensioners)Planned/Command: North Korea or China and Most Eastern European Countries before reforms A central planning organisation, making judgements abo
45、ut individual preferences. Production based on need. Five year plans drawn up setting out priorities for economy as a whole. A central planning organisation choosing the resource combination and production technique for each area of activity. Output targets set for each industry and factory within e
46、ach industry. A central planning organisation setting the level of wages for each individual. Also set price levels. Consumers free to spend their incomes as they wish, but there is no guarantee that all goods and services will be available at the planned price. Entrepreneurship and risk taking are
47、rewarded with big financial gains. Private property rights are strictly enforced even when they result in many poor people and few very wealthy people. Producers decide what to produce based on consumer tastes and demands. Productivity results in more personal wealth. Governments role in the economy
48、 is limited. The economy is based on almost entirely on supply and demand. Private individuals and companies own businesses and industry. Overall, the allocation of resources is efficient.Market system is not perfectMarket economy is not perfectMerit-goods not enough in market economy The government
49、 controls large industries, while private individuals control small businesses. Citizens are taxed heavily to provide all citizens a social safety net such as welfare, free university tuition and free health care. Property is controlled by both the government and private individuals. Workers tend to
50、 be somewhat less productive than those in market economies. Consumers generally have a wide variety choices.Command EconomyCommander and famine (饥荒)Command EconomyA command economy is a shortage economy (短缺). The government controls all aspects of the economy. Private property is illegal. Supply an