This book is authored by James Lamb who has been a student of mine in “Introduction

to Macroeconomics”, Fall 2004. The reasons for this assignment are:

Learning is a “Cumulative” procedure. The students learn a little bit every day,
without noticing that they are accumulating the knowledge. Many times, in my
professional life, I have been approached by my students who frequently claim: “I
have not learned anything in this course!” Putting the accumulated knowledge in
writing, brings to the students’ attention the enormous amount of knowledge that
they have gradually acquired.
It is a matter of the fact that in our country, the students are not learning the basic
tools for their success; especially at high school level. They learn “Everything”
except how to read, how to listen, how to write, and how to calculate! That is why
I have chosen these skills as my curricula’s core competencies. Authoring this
book improves the first three above mentioned communication skill of my
students.
To further improve the communication abilities of my students, they are taught how
to build a web-site and enrich it with their accumulated knowledge. You may visit
James‘s web-site at: www.geocities.com .econj82
This book, undoubtedly, is not a perfect book in economics. It is, hopefully, the “First
Try” in a series of books published by James in the future. It is a pleasure for me to hear
about the future published scientific works of James. This will give me the satisfaction to
claim that I was the one who taught him how to improve his communication skills at first
place.

Bijan, Moeinian, Docteur es sciences economiques.

 Why the U.S.A. is #1

Many people would say the USA is number 1 because of our economy, government and
military. The economy of the United States is a free enterprise which means anyone can
start up their own business without much control from the government. Most countries
have so many rules and regulations about thier citizens starting their own companies that
it takes a long time to get the ok to start your business if at all. The United States isn't
completely free of rules and regulations as in Hong Kong, but it is a lot easier to
accomplish your dreams in America than in most other countries around the world.
The government of the United States is also a Democracy, which means there is no
Dictatorship and the citizens have a voice in who they elect into government offices. So
this way the majority of the people can elect into office who they feel will be the most
beneficial for our economy and national security. The only downside to this is that the
majority choice is not always the right choice.
Another reason people will say that the United States is number one is because of our
military. The U.S. has the strongest and most technologically advanced military in the
world. Americas strong military and economy has helped it to be one of the best countries
in the world. Some would even say it is the best country and that is why the USA is
number one.
 The 10 Principles of Economics

1. Trade Off’s- Giving up one thing for another

2. Opportunity Cost- What we give up in order to get what we want

3. Marginal Thinking- That everything is not black or white, but in the grey area

4. Incentives- What you receive from the good

5. Trade- Giving one thing for another

6. Markets- Where goods and services are bought and sold

7. Government- Sets rules and regulations, governs markets

8. Productivity- Ability to produce goods and services

9. Inflation- The rising costs of goods and services

10. Phillips Curve- The short run trade-off between unemployment and inflation
 Confronting Scarcity

Production is made up of three factor: people, machines, and raw materials. These factors
allow a company or government to produce goods and services. Scarcity is a problem
companies and governments face, trying to allocate their resources most efficiently. In
order to produce more of one good or service, the producer must produce less of another.
So the producer must find the best equilibrium of how much to produce of each good or
service for efficiency of its resources. For this they use a production possibilities graph.
This shows the relationship and trade-off of two products. Economic growth is the ability
to produce more goods and services. If resources decrease then the economy’s potential
will diminish. This will cause an inward shift in the possibilities curve. International trade
is also important point to scarcity. What to produce? How to produce it? And for whom?
These are the questions a producer must answer in order to produce a sufficient amount
of a good or service. Countries become famous for a certain good that they produce better
than other countries through trade.
 Supply and Demand

In 1974, water prices in California were cheap. By 1977, water had become a scarce
resource due to a draught in California. Water from the lakes and other water supplies
were used to put out all the fires that were breaking out due to the heat and lack of rain.
People were rationed a certain amount of water to consume on a daily basis. Water usage
was dropped by 66% due to people prioritizing their water consumption because of the
seriousness of the situation.

OPEC had an incentive to drill due to its oil crisis. But as inflation accelerated, such as
purchasing power, the real price of oil declined. This caused a less of an incentive to drill.
In 1971, President Nixon imposed price ceilings on oil. This caused more problems for
OPEC. New oil was found in 1972. By then 42% of our oil was in reserves. President
Carter put out more price ceilings to keep from having to use our oil reserves. Eventually
President Carter removed the price ceilings and the amount of drilling rose again to
approximately 45,000 wells. With higher prices consumers bought less. This caused a
surplus and caused the prices to drop again. With a surplus, prices drop and prices rise
when there is a shortage.
 Issues and Methods of Economics

Economics study the choices made by society. Labor, materials, and machines are all
forms of resources. Resources are scarce so we must choose to allocate them most
efficiently. The production possibilities curve shows what is obtainable to produce and
what is not. This causes a trade off. How much to produce of one good and less of
another or vice versa.

Opportunity cost is what we get to give up one thing for another. Economic growth is
measured by GDP (Gross Domestic Product). This method sums up how well a economy
is doing or not. This method is comprised of several factors. These factors are consumers,
producers, government and international affairs.

Positive and normative issues are a part of economics. Economists use positive and
normative questions to figure out the supply and demand. Economists also use a market
between buyers and sellers to get answers to these questions.
 Applications of Supply and Demand

Supply and demand are the two most familiar terms in economics. Market efficiency is
reached when these two interact freely. Market efficiency brings out an equality between
quantity demanded and quantity supplied. A demand curve shows the inverse relationship
of the price of a good and the quantity demanded at given prices. The supply curve shows
the relationship of the price of a good and the quantity supplied at the given prices. The
equilibrium price is when the quantity demanded and the quantity supplied are equal. A
surplus will occur when quantity supplied exceeds the quantity demanded at the given
price. A shortage will occur when the quantity demanded exceeds the quantity supplied at
the given price. Price floors and price ceilings are ways the government use to put a
control on prices. A price floor is the minimum legal price for a good or service. A price
ceiling is the maximum legal price for a good or service.
 Economic Efficiency

Economic efficiency is considered the invisible hand. This is because it decides on what
to produce, how much to produce and for whom it is produced for. While president
Nixon was in office during the 1960’s, inflation became a major concern. During this
time, the President and his advisors had several secret meetings at Camp David to see
how they could control or stop inflation. To try to help President Nixon put a price
control on things. After awhile this ended up not helping so he put a price ceiling on
living. This caused a problem for farmers. The farmers withheld their beef supply and
caused more of a demand. This caused lower prices and more inflation. During World
War II, people became a precious resource for fighting and working.
 Consumer Choice Theory

Consumer demand lets producers know what goods and services to produce and how
much of each. Price is a signal to producers and consumers. It tells producers how much
of a good and service the consumers are willing to buy at certain prices. Producers try to
maximize their profits while consumers try to maximize their utility form goods and
services. When marginal benefit equals marginal cost than efficiency is made. Businesses
try to cut costs, add new products or increase prices to maximize their profits. Utility is
the satisfaction consumers get from a good or service. The more of a good or service is
consumed, utility rises but at smaller increments. Once utility reaches its highest point,
the marginal utility is zero. Anything beyond this point might have a negative effect on
utility. Income effect is caused when the prices go up, purchasing power decreases.
 Household Behavior

Suppliers like price increases and demanders do not. Consumers make many choices
every day. A consumers goal is to maximize their satisfaction with a limited budget. The
more people buy of any one particular commodity, the more satisfaction or utility in total
they will get from consuming that commodity, but the less and less the subsequent units
of the good will add to this accumulated total amount of utility. The optimal purchase
rule is that the marginal utility from each item is just equal to the price. Consumer surplus
is when there is a excess of total benefit over the total expenditure. On an individual
level, the demand curve and marginal utility curve are one in the same thing. The overall
market demand curve is simply the adding together of all the individual demand curves.
Utility is measured in terms of peoples willingness to part with income.
The amount of tax past on demands on the elasticities of the good or service.
 The Firm

In a competition environment, lowered costs almost invariably translate into downward

pressures on consumers prices. Substitutions are not only beneficial, they are
characteristic in a market economy. The way products are produced are affected by the
prices of production. The large firms are likely to have advantages over the smaller firms.
Economists call these advantages Economies of scale. When these economies occur, the
individual firms average cost per unit of output will decline as its production size
increases. Huge firms do not always mean lowered costs. Inefficient business
bureaucracies can cause costs to be higher than otherwise. Also, if a firm gets too large, it
may be possible for them to monopolize certain markets. So lowered costs are not always
passed on to the consumer. Cutting costs is a necessity for businesses that are wanting to
stay in business.
 Competitive Markets

Competition is a driving force in a market economy. Price and output decisions depend
on the competition structure of the market. Market structures vary from a monopoly to a
perfect competition market. Perfect competition is the ideal market situation because it
leads to efficiency in the use of resources, and in terms of output, it meets societys wants
more than any other market structure. Businesses seek the output level at which profits
are maximized. The market demand curve is downward sloping. The perfectly
competitive model leads to production efficiency because price equals minimum average
total cost. It also leads to allocative efficiency because price equals marginal revenue and
price equals marginal cost. The allocation of resources are as efficient as it can get, just
the right amount in terms of what consumers are willing to pay for. Market forces seeking
equilibrium also lead to production and allocative efficiency.
 Monopoly

The basic message was that if there are many buyers and sellers for each commodity,
then competition forces firms to arrange societys scarce resources in just the way that a
perfect planner would without any need for the impossible calculations that central
planning involves. A monopoly is a market in which there is only one seller of a
commodity. A monopoly develops in one of two ways, through deliberate government
policy or without government intervention, where one private firm tales over all
competitors through a series of mergers. A marketing board is a monopoly that could not
have existed without government intervention. Without competition, a monopolist does
not have to serve consumer interests so directly. A natural monopoly is a situation where
the average cost is falling over the entire range of output. Firms invest in new techniques
to lower costs and create extra profits. Monopolies create inefficiency. There are three
ways to eliminate inefficiency. The first way is with government regulations. The second
is to apply a competition act and the final way is competition enforced by new market
entrants, such as foreign trade.
 Imperfect Competition

From the playing field to the battle field, the movie screen, and political arena,
competition is a way of life. The most intense competition is in the world of business.
Imperfect competition is made up of monopolistic competition and oligopoly. Together
they make up most of todays business operations. The slot machine industry in Las Vegas
is a perfect example of monopolistic competition. It plays host to a large number of
buyers and sellers. Participants also enjoy an ease of entry and exit. There is no shortage
of slot machines, even with 30 million visitors a year. One strength in a free market
system is that competition encourages efficiency and innovation while keeping prices
down. Over time competitors either go out of business or join rivals through mergers or
acquisition. Once a market shrinks to just a few competitiors it becomes an oligopoly. An
oligopoly is when there are only a few firms. Each firms decision is affected by decisions
of the other firms. Competition is all around us. Every firm is competing for the same
thing: the consumers dollar.