Chapter 1: Alleviating Human Misery

Goods & Services

Commodities we use to satisfy our needs and wants Goods are tangible commodities we use (things we use or consume: pizza, gasoline) Services are intangible commodities (things other people do for us: hair cut, piano lesson)

Scarcity
The imbalance between what we have and what we need Goods & services are scarce because we cannot have all we want Price is the cost of removing scarcity of goods and services

Economic Resources
Human: physical & mental efforts of workers in production of goods & services Capital: goods used in production of other goods (e.g., tools, equipment, buildings) Natural: gifts of the nature (e.g., water, minerals)

Economic Problem
Unlimited human needs and wants
vs.

Limited economic resources

Choice must be made in satisfying unlimited human needs and wants by optimal allocation of limited resources to production of goods and services

Opportunity Cost
Choice: the act of selecting between alternatives

Opportunity cost is the cost of making unavoidable choices; it is measured by:

cost of foregone opportunities, or value of best alternative sacrificed

Cost of College Education

Out-of-pocket costs: payments the we actually make: tuition fees, books, supplies, transportation, etc. Opportunity costs: foregone labor income if one decided to work instead of attending college

Production Possibilities Curve

Maximum quantities of two good and services the economy can produce, assuming:
full employment / efficiency fixed resources constant technology

PPC Schedule

Combination Food Education

A 100 0

B 90 40

C 50 80

0
100

PPC Graph
Food
Combinations A, B, C, and E are attainable Combination D is unattainable Combination F indicates unemployment/inefficiency

100 90
50

B
F C

40

E 80 100

Education

Economic Growth
Combination D becomes available with -more resources -technological advancement

Food

100 90
50

A B C D

40

E 80 100

Education

Law of Increasing Opportunity Costs

Moving from A to B: lose 10 Food, but gain 40 Education O.C. = 10/40 = 0.25

Moving from B to C: lose 40 Food, but gain 40 Education O.C. = 40/40 = 1

Moving from C to E: lose 50 Food, but gain 20 Education O.C. = 50/20 = 2.5 O.C. increases because resources are not fully substitutable.

Cost-Benefit Analysis
Marginal Social Cost (MSC): the opportunity cost of producing an additional unit of good or service Marginal Social Benefit (MSB): the benefit to society from consuming an additional unit of good or service

Decision Criterion
Optimal: MSC = MSB

Non-optimal: MSC > MSB reduce production Non-optimal: MSB > MSC increase production

Gross Domestic Product

Market value of all final goods and services produced by an economy in one year Real GDP = GDP / Price Index Real GDP Per Capita= Real GDP / Population

Growth vs. Distribution

Economic Growth: Increase in Real GDP

Income Distribution: Patterns of the distribution of Real GDP between population

Growth without Distribution will increase income disparity

Income Distribution
Income inequality is greater in LDCs than MDCs:
Poorest 20% of population: 5.3 vs. 6.1% of income Richest 20% of population: 52.1 vs. 41.8% of income Middle 60% of population: 42.6 vs. 52.1% of income

Problems of Developing Countries

Rapid population growth Insufficient human capital investment Insufficient capital investment High income inequality Inefficient government Reliance on natural resource exports