Key Elements of Economics

1

• Key Elements of Economics
• (GSL)
• Incentives are important
• Benefits and costs influence individual behavior
  and choices
• Supply and demand respond differently to changes
  in price
• Responding to incentives does not imply
  selfishness

2

• International Economic Concepts
• There is no such thing as a free lunch
• Resource scarcity
• Tradeoffs in allocating resources
• Voluntary exchange and economic progress
• Trade synchronizes preferences, needs, and
  ability to buy/pay
• Trade leads to specialization and efficient
  production
• Trade leads to division of labor and economies of
  scale

3

• International Economic Concepts
• Reducing obstacles to trade promotes economic
  growth
• Physical obstacles (e.g., distance, geography,)
• Man-made barriers (e.g., taxes, government
  regulations, tariffs, price controls,)
• This does not mean that middlemen or
  intermediaries are unnecessary.

4

• International Economic Concepts
• Higher real income and standard of living depend
  on higher real output
• Do we all agree with the statement?
• Does technology have adverse effects on workers?

5

• International Economic Concepts
• Sources of income growth
• Improvement in worker skills (human capital)
• Capital formation (physical capital)
• Technological progress
• Better economic organization, and legal and
  political institutions

6

• International Economic Concepts
• Income is compensation received for productive
  services rendered
• This creates motivation to acquire skills and
  undertake investments
• Profits and losses direct businesses towards
  activities that increase wealth and away from
  activities that squander economic resources

7

• International Economic Concepts
• The invisible hand
• Through price adjustments, markets reach
  equilibrium and bring millions of buyers and
  sellers of inputs and outputs into harmony
• Price controls prevent such outcome
• Secondary effects and long-term impact are very
  important, ignoring them is the most common
  source of error in economics
• (e.g., rent control)

8

• Major Sources of Economic Progress
• (GSL)
• Private Ownership
• Freedom of Exchange
• Competition
• Efficient capital market
• Monetary stability
• Low tax rates
• Free trade

9

• Private Ownership
• Private Ownership of property involves
• The right to exclusive use
• Legal protection against invaders
• The right to transfer property
• Private ownership leads to wise stewardship,
  promotes higher productivity and development and
  conservation of resources

10

• Freedom of Exchange
• Regulations that restrict entry into some
  businesses have bad consequences
• Discretionary political authority instead of the
  rule of law stifles exchange
• Price controls repress exchange
• Personal gain provides motivation for
  trade/exchange

11

• Competition
• Promotes efficiency and innovation
• Personal self-interest is a major source of
  economic progress when directed by competition
• Efficient Capital Market
• The ultimate goal of all production is
  consumption
• Investment is another major source of economic
  growth and progress
• Financial institutions are very important in the
  capital market
• Markets direct investment projects to activities
  that increase wealth. Politics may use investment
  projects that reduce wealth

12

• Monetary stability
• The productive contribution of money depends on
  the stability of its value
• Empirical and theoretical evidence indicate that
  persistent inflation results from rapid growth in
  money supply (Table 1 on page 57)
• When there is high inflation, people will spend
  less time producing and more time trying to
  protect their wealth

13

• Low Tax Rates
• High tax rates discourage work (labor supply
  declines) and reduce the productive efficiency of
  labor as workers substitute less productive
  activities for higher-tax work opportunities.
• Higher tax rates cause capital formation to fall
  (both foreign and domestic investments are
  discouraged)
• High tax rates increase preference for
  tax-deductible goods

14

• Free Trade
• Trade allows each trading partner to produce and
  consume more than would be possible under
  autarchy
• Trade barriers (quotas, tariffs, bureaucracy)
  increase transaction costs and reduce the gains
  from trade
• Free trade between the 50 states is an important
  source of prosperity for each state
• Political power of special interests often lead
  to trade restraints being implemented in some
  countries