USA: +1(669)289-8683 
Sign in
need answer QAs after you read the pdf.
Chapter 1 Homework Problems
1. “There is no such thing as a free lunch.” How does this statement relate to the definition of economics as given in Chapter 1?
2. State whether each of the following statements is true or false.
a. Market transactions are the main way of organizing economic activity around the world.
b. Technological change only includes major new inventions or products such as the personal computer, digital camera, etc.
c. Deregulation involves reducing government control over one part of the market (such as in the airline industry) in order to increase regulation and control over other parts of the market.
d. According to official Gross Domestic Product figures, the United States economy is the second largest in the world, only trailing the economy of China.
e. The social safety net in the United States includes such programs as Medicare, Medicaid, Social Security, and Food Stamps.
f. Economists are unanimous in their opinion that the government’s response to the recession of 2007-8 (the Great Recession) was too small.
g. In a centrally-planned economy, most economic activities are controlled by a central government bureaucracy.
h. With respect to the economy, laissez faire means that the government should be heavily involved in regulating the economy.
3. Government licensing of professions is common in our economy. For example, one needs a license in order to practice as a beautician, barber, lawyer, dentist, physician, teacher, etc. Assume that individuals no longer needed teaching certification from the state of Missouri to be a K-12 teacher (there is currently no requirement for a teacher certification for college teachers). What advantages and disadvantages would you expect to see if there were no certification requirement?
4. For each of the following, indicate whether it is more likely to be the result of economic competition or of government intervention. Explain your answer in each case.
a. Protection against unsafe drugs
b. Rapid innovation
c. Assistance for low-income families
d. Strong economic growth
Introduction
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
•
•
•
Changing Nature of Economy
1-2
Tools of Economics
• View the world from the perspective of an
economist
• To accomplish this, need to understand
the key tools of analysis
• Some of these tools include:
– supply and demand
– elasticity
– production function
– the multiplier
1-3
Role of Market Economy
• In a market, buyers and sellers come
together to voluntarily exchange goods
and services for money.
• Market transactions are activities that
produce and exchange goods and
services for which other people are willing
to pay.
• In this course we will study how markets
work and prices are set.
1-4
Changing Nature of Economy
• Individuals, businesses, and even
countries are subject to limits and
constraints.
• But these limits and constraints are
constantly changing.
– Goods once expensive are now
commonplace.
– Countries once poor are rapidly growing.
1-5
• Need to understand forces driving change
• Three main forces at work:
– Technological change
– Globalization
– Financial markets
1-6
Key Forces Impacting Economy
• Technological change is an improvement in
knowledge that increases the range of
products and services the economy can
deliver.
– Examples: electricity, cars and the internet.
• Technology creates new ways of producing
goods and services.
• Technology is the critical factor in raising living
standards.
– Technology is also a possible solution to the
energy crisis and global climate change.
1-7
Key Forces Impacting Economy
• Globalization is the exchange of goods,
services, ideas, and people among
countries.
– The world economy is becoming more global.
– Does this trend benefit the US economy?
– Many aspects to Globalization, including:
• Trade in Goods and Food Stuffs
• Trade in Services
• Flow of Information
• Movement in Money
1-8
Key Forces Impacting Economy
• Financial markets encompass all those
parts of the economy that have to do with
borrowing, investing, or transferring
money.
– Includes stock market, mortgages, banks,
brokerage firms and credit cards.
• Financial markets are constantly evolving.
– Fuel economic growth by enabling
companies, individuals, and government
markets to raise money.
1-9
Key Forces Impacting Economy
• Interest rates are defined as the cost of money
and are determined in the financial markets.
– The central bank plays a key role in determining
interest rates.
• Subprime loans given to people who did not
have enough income to qualify for ordinary
mortgages are currently a major problem in the
financial markets.
1-10
• Who should guide the economy:
government, or businesses and
individuals?
– At one extreme is a centrally-planned
economy, in which all economic activities are
controlled from the top.
– At the other extreme is a laissez-faire
economy, where no government regulations
or laws exist at all.
• Role of competition in guiding the
economy
1-11
Policy Debate
• Competition is the most consistent force
for growth and progress.
• The US economy is the most competitive
in the world.
• There are some concerns over excessive
competition.
– Impact on job security, poverty, etc.
1-12
• Government plays a large role in the US
economy.
– Makes laws, regulates businesses.
• Macroeconomic policy: making sure that
the economy doesn’t fall into deep slumps
where a lot of people lose their jobs, or
overheat to the point where prices soar out
of control.
– Key role played in the economy by Federal
Reserve.
1-13
Government Intervention
• Role played by the government and by
private businesses differs across
countries.
• There is a global trend toward
deregulation.
– Deregulation is the process of reducing
government control over industries.
1-14
• Economics is the study of how
individuals, businesses, and governments
make decisions and make trade-offs in the
face of scarce resources.
• Role of Scarcity and Choice
– Limited resources
– Need to make trade-offs
– Opportunity costs
1-15
Economics Defined
• Two main area of focus:
– Macroeconomics
• Studies the overall aggregate economy, focusing
on issues such as growth, inflation, trade, and
interest rates.
– Microeconomics
• Studies the behavior of individual units in the
economy, such as households and businesses.
1-16
• Improving individual prosperity is key goal
for economy.
• Measure prosperity by using various
indicators
– One key measure is GDP.
• GDP is the dollar value of all the goods and
services produced by the economy.
– Other indicators of prosperity include wages,
income and consumption.
• Use GDP to compare the level of
prosperity among countries.
1-17
1-18
• Provides a measure of security for poor,
sick and vulnerable.
– Consists of a wide array of government
programs, including Social Security,
Medicare, etc.
– Objective is to improve the lives of low-
income households.
• Debate among economists as to whether
enough is being done.
• Safety net programs in Europe more
comprehensive than in US.
1-19
• Considerable policy disagreement among
economists.
– The role that government plays in economy is
one of the main debates.
• Some key questions include:
– How to fund Social Security and Medicare?
– How to solve the health care problem?
– How to improve the educational system?
– What is an appropriate tax policy?
1-20
• Reasons for the policy disagreement are
due to:
– Political Agenda
– Lack of Data
– Winners and Losers
• The objective of this textbook is to present
both sides of the discussion.
1-21
- Chapter 1
- �Changing Nature of Economy�
- Key Forces Impacting Economy
Text Objectives
Tools of Economics
Role of Market Economy
Key Forces Impacting Economy
Key Forces Impacting Economy
Key Forces Impacting Economy
Key Forces Impacting Economy
Policy Debate
Policy Debate
Government Intervention
Government Intervention
Economics Defined
Economics Defined
Measures of Prosperity
World’s Largest Economies
Safety Net
Economics Not an Exact Science
Why The Disagreement?
