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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.