Review for Exam 1

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Review for Exam 1

• PRM 255

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Relationship Between the Economy and the
Environment
Sun
waste energy
energy
Economic System
waste matter
matter
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Environmental Components
Atmosphere Biosphere Geosphere Hydrosphere
Sun
Economic System
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Laws of conservation of matter and energy

• Matter energy cannot be destroyed.
• Matter energy cannot be created.
• But matter energy can be transformed from one
  form to another

waste energy
energy
Economic System
waste matter
matter
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Effects of the Economy on the Environment

• Reduced stocks of naturally occurring matter and
  energy
• Reduced space available to other life forms and
  environmental processes that produce naturally
  occurring matter and energy
• Reduced quality of environmental matter and energy

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The purpose of an economy is to produce and
distribute FINAL goods and services (Q).
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Gross Domestic Product (GDP) Measures Economic
Success
The market value of FINAL goods and services (Q)
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The Amount of Final Goods and Services Produced
Depends on the Stock of Capital
FINAL Q f ( Km, Kn, Kh, Ks )
Production Function
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Four Types of Capital

• KM Manufactured capital

• KN Natural capital

• KH Human capital

• KS Social capital

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Production Possibilities Frontier Tradeoff
Between Economic and Environmental Goods
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Technology Improvement Shifts the PFF
B
A
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Example of Economic Development Degrading
Environmental Quality
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Example of Economic Development Improving
Environmental Quality
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Industrial Metabolism

• Transformation of environmental matter and energy
  into (1) intermediate goods and services and (2)
  final goods and services

(Q)
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Industrial Metabolism Model
Each Stage Uses Space
Discover Resources
Extract Raw Materials
Separate Pure Materials
Mix Compound Materials
Other Inputs of Matter Energy
Waste Matter Energy
Form Parts
Assemble Products
Use Products
Dispose Refuse
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IM Example
Discover Resources
Extract Raw Materials
Separate Pure Materials
Mix Compound Materials
Form Parts
Assemble Products
Use Products
Dispose Refuse
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Industry Sectors NAICS
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Input-Output Table The Relationships Among
Industry Sectors
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Direct Requirements Table Columns sum to 1. It
shows the direct effect of a change in demand for
output.
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Total Requirements Table Columns sum is greater
than 1. It shows the multiplier effect of a
change in demand for output.
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Direct effects of a 1,000 increase in demand for
industry 1s product
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Total (direct plus indirect) effects of a 1,000
increase in demand for industry 1s product
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Why Use Markets to Coordinate Industrial
Metabolism and Relationship Among Industry
Sectors?

• Markets respond to changing demand and supply
  conditions (scarcity conditions)
• Markets may be more socially efficient than other
  means of coordination

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U.S Refined Copper Market Equilibriums
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U.S Refined Copper Market Conditions
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Change in Market Demand

• Price of substitutes
• Price of complements
• Income
• Production Technology (Derived Demand)
• Preferences
• Population

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Factors that Shift Market Supply

• Input price changes
• Technology
• Price of other outputs
• New firms

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Market Efficiency
Marginal Benefits
Marginal Costs
gains
losses

-

-

-
-


-

-
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Market Efficiency Requires that the Demand Curve
Accurately Reflect True Marginal Social Benefits
of Consumption
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Market Efficiency Requires that the Supply Curve
Accurately Reflect True Marginal Social Costs of
Production