Essentials of economics schiller edition pdf download

Most people in the world have incomes far below American standards. Even in China, where incomes have been rising rapidly, daily living standards are below those that U. To attain current U. Will consumers around the world get the kind of persistent economic growth the United States has enjoyed?

Will living standards here and abroad rise, stagnate, or fall in future years? How does it work? Who determines the price of a textbook in a market economy? Who decides how many textbooks will be produced? Will everyone who needs a textbook get one?

And why are gasoline prices so high? How about jobs? Who decides how many jobs are available or what wages they pay in a market economy? What keeps an economy growing? Or stops it in its tracks? Question: When your children are at the age you are now, do you think their standard of living will be better, about the same, or worse than yours is now? NOTE: Will you be better off than your parents? For living standards to keep rising, the economy must continue to grow. Will that happen? To understand how an economy works, we have to ask and answer a lot of questions.

Among the most important are these:. We won't answer all of these questions in this first chapter. But we will get a sense of what the study of economics is all about and why the answers to these questions are so important. The land area of the United States stretches over 3. We have a population of million people, about half of whom work. With so many resources, the United States produces an enormous volume of output.

But it is never enough: Consumers always want more. We want not only faster cars, more clothes, and larger TVs but also more roads, better schools, and more police protection.

Why can't we have everything we want? The answer is fairly simple: Our wants exceed our resources. As abundant as our resources might appear, they are not capable of producing everything we want. The same kind of problem makes doing homework so painful. You have only 24 hours in a day. You can spend it watching movies, shopping, hanging out with friends, sleeping, tweeting, using Facebook, or doing your homework. With only 24 hours in a day, you can't do everything you want to, however: Your time is scarce.

So you must choose which activities to pursue—and which to forgo. Economics offers a framework for explaining how we make such choices. The goal of economic theory is to figure out how we can use our scarce resources in the best possible way. Consider again your decision to read this chapter right now. Hopefully, you'll get some benefit from finishing it.

You'll also incur a cost, however. The time you spend reading could be spent doing something else. You're probably missing a good show on TV right now. Giving up that show is the opportunity cost of reading this chapter. You have sacrificed the opportunity to watch TV in order to finish this homework.

The rational thing to do is to weigh the benefits of doing your homework against the implied opportunity cost and then make a choice. The larger society faces a similar dilemma. For the larger economy, time is also limited.

So, too, are the resources needed to produce desired goods and services. To get more houses, more cars, or more movies, we need not only time but also resources to produce these things. These resources—land, labor, capital, and entrepreneurship—are the basic ingredients of production. They are called factors of production.

The more factors of production we have, the more we can produce in a given period of time. As we've already noted, our available resources always fall short of our output desires. The central problem here again is scarcity, a situation where our desires for goods and services exceed our capacity to produce them.

The central problem of scarcity forces every society to make difficult choices. Specifically, every nation must resolve three critical questions about the use of its scarce resources:. We first examine the nature of each question and then look at how different countries answer these three basic questions. The WHAT question is quite simple. We've already noted that there isn't enough time in the day to do everything you want to. You must decide what to do with your time. The economy confronts a similar question: There aren't enough resources in the economy to produce all the goods and services society desires.

Because wants exceed resources, we have to decide WHAT goods and services we want most, sacrificing less desired products. It represents a menu of output choices. Point C indicates that we could produce a combination of OD units of consumer goods and the quantity OE of military output. To get more military output e. We must decide what to produce i. Our goal is to select the best possible mix of output. To make that selection, we first need to know how much of each good we could produce.

That will depend in part on how many resources we have available. The first thing we need to do, then, is count our factors of production. The more we have of these factors, the more output we can produce. Technology is also critical.

The more advanced our technological and managerial abilities, the more output we will be able to produce with available factors of production. If we inventoried all our resources and technology, we could figure out what the physical limits to production are. To simplify the computation, suppose we wanted to produce only consumer goods. How much could we produce? Surely not an infinite amount. With limited stocks of land, labor, capital, and technology, output would have a finite limit.

The limit is represented by point A in Figure 1. That is to say, the vertical distance from the origin point O to point A represents the maximum quantity of consumer goods that could be produced this year. To produce the quantity A of consumer goods, we would have to use all available factors of production.

At point A no resources would be available for producing military goods. The choice of maximum consumer output implies zero military output. We could make other choices about WHAT to produce. Point B illustrates another extreme. The horizontal distance from the origin point O to point B represents our maximum capacity to produce military goods.

To get that much military output, we would have to devote all available resources to that single task. At point B, we wouldn't be producing any consumer goods. We would be well protected but ill nourished and poorly clothed wearing last year's clothes. We could instead produce a combination of consumer and military goods. Point C represents one such combination. To get to point C, we have to forsake maximum consumer goods output point A and use some of our scarce resources to produce military goods.

Point C is just one of many combinations we could produce. We could produce any combination of output represented by points along the curve in Figure 1.

It is, in effect, an economic menu from which one specific combination of goods and services must be selected. The production possibilities curve puts the basic issue of WHAT to produce in graphic terms.

The same choices can be depicted in numerical terms as well. Table 1. The output mix A allocates all resources to home construction, leaving nothing to produce missiles. If missiles are desired, the level of home construction must be cut back. To produce 50 missiles mix B , home construction activity must be cut back to Notice that every time we increase missile production moving from A to F , house construction must be reduced. The question of WHAT to produce boils down to choosing one specific mix of output—a specific combination of missiles and houses.

TABLE 1. Here the choices are defined in terms of missiles or houses. More missiles can be produced only if some resources are diverted from home construction. Only one of these output combinations can be produced in a given time period. Selecting that mix is a basic economic issue. During World War II, we converted auto plants to produce military vehicles. Clothing manufacturers cut way back on consumer clothing in order to produce more uniforms for the army, navy, and air force.

The government also drafted 12 million men to bear arms. By shifting resources from the production of consumer goods to the production of military goods, we were able to move down along the production possibilities curve in Figure 1.

By fully 40 percent of all our output consisted of military goods. Consumer goods were so scarce that everything from butter to golf balls had to be rationed. The figure also illustrates how quickly we reallocated factors of production to consumer goods after the war ended. By less than 4 percent of U. We had moved close to point A in Figure 1. OutputThe share of total output devoted to national defense has risen sharply in war years and fallen in times of peace.

The defense buildup of the s increased the military share to more than 6 percent of total output. The end of the Cold War reversed that buildup, releasing resources for other uses the peace dividend.

Source: Congressional Research Service. In military output absorbed nearly 15 percent of America's total production. We're not spending anywhere near that kind of military money, however.

After the Korean War, the share of U. In the process, the U. As those personnel found civilian jobs, they increased consumer output. That increase in nonmilitary output is called the peace dividend. The wars in Iraq and Afghanistan absorbed even more resources.

The economic cost of those efforts is measured in lost consumer output. The money spent by the government on war might otherwise have been spent on schools, highways, or other nondefense projects. The National Guard personnel called up for the war would otherwise have stayed home and produced consumer goods including disaster relief.

These costs of war are illustrated in Figure 1. Notice how consumer goods output declines from C1 to C2 when military output increases from M1 to M2. The military buildup associated with the move from point R to point S reduces consumption output from C1 to C2. Page In some countries the opportunity cost of military output seems far too high. North Korea, for example, has the fourth largest army in the world. Yet North Korea is a relatively small country.

Consequently it must allocate a huge share of its resources to feed, clothe, and arm its military. As Figure 1. That compares with a military share of only 3.

North Korea has the highest cost, using nearly 15 percent of its resources for military purposes. Although China's army is twice as large, its military share of output is much smaller 2. Source: U. North Korea's rocket program is costly. With that much money North Korea could have purchased 4. North Korea's ambitious nuclear program costs nearly triple that amount.

The burden of North Korea's military program is evident in the country's widespread poverty and periodic starvation. Resources used for the military aren't available for producing food. North Korea's military has a high price tag. That is substantially less than the American standard of living was in and a tiny fraction of today's U.

A militaristic society would prefer a mix of output closer to point B in Figure 1. By contrast, Iceland has no military and so produces at point A. In general, one specific mix of output is optimal for a country—that is, a mix that represents the best possible allocation of resources across competing uses.

Locating and producing that optimal mix of output is the essence of the WHAT challenge. The same desire for an optimal mix of output drives your decisions on the use of scarce time. There is only one best way to use your time on any given day. Other uses won't necessarily kill you, but they won't do you as much good.

If you had no concern for future jobs or income, there would be little point in doing homework now. Then you'll have more human capital knowledge and skills later to pursue job opportunities.

The larger society confronts the same choice between present and future consumption. We could use all our resources to produce consumer goods this year. If we did, however, there wouldn't be any factors of production available to build machinery, factories, or telecommunications networks. Yet these are the kinds of investment that enhance our capacity to produce.

If we want the economy to keep growing—and our living standards to rise —we must allocate some of our scarce resources to investment rather than current consumption. The resultant economic growth will expand our production possibilities outward, allowing us to produce more goods in future years.

The phenomenon of economic growth is illustrated in Figure 1. Such shifts occur when we acquire more resources e. Our decision about WHAT to produce must take future growth into account. Investment in machinery and buildings has increased our capital stock even faster.

These additional factors of production, together with advancing technology, have expanded shifted outward our production possibilities. HOW to Produce. The second basic economic question concerns HOW we produce output. Should this class be taught in an auditorium or in small discussion sections? Should it meet twice a week or only once? Should the instructor make more use of computer aids? Should, heaven forbid, this textbook be replaced with online text files? Of these many possibilities, one way is presumably best, given the resources and technology available.

That best way is HOW we want the course taught. Educational researchers and a good many instructors spend a lot of time trying to figure out the best way of teaching a course. Pig farmers do the same thing. They know they can fatten pigs up with a lot of different grains and other food. They can also vary breeding patterns, light exposure, and heat. They can use more labor in the feeder process or more machinery.

Faced with so many choices, pig farmers try to find the best way of raising pigs. Should pig farmers be free to breed pigs and to dispose of waste in any way they desire? Or should the government regulate how pigs are produced? Department of Agriculture. The HOW question isn't just an issue of getting more output from available inputs. It also encompasses our use of the environment. Should the waste from pig farms be allowed to contaminate the air, groundwater, or local waterways?

Or do we want to keep the water clean for other uses? Humanitarian concerns may also come into play. Should live pigs be processed without any concern for their welfare? Or should the processing be designed to minimize trauma? The HOW question encompasses all such issues. Although people may hold different views on these questions, everyone shares a common goal: to find an optimal method of producing goods and services.

The best possible answer to the HOW question will entail both efficiency in the use of factors of production and adequate safeguards for the environment and other social concerns. Our goal is to find that answer. Then we have to slice it up. Should everyone get an equal slice of the pie? Or can some people have big pieces of the pie while others get only crumbs?

A pie can be divided up in many ways. Personally, I like a distribution that gives me a big slice even if that leaves less for others. Maybe you feel the same way. Whatever your feelings, however, there is likely to be a lot of disagreement about what distribution is best. Maybe we should just give everyone an equal slice. But should everyone get an equal slice even if some people helped bake the pie while others contributed nothing?

The Little Red Hen of the children's fable felt perfectly justified eating all the bread she made herself after her friends and neighbors refused to help sow the seeds, harvest the grain, or bake it. Slices of the pie are distributed, however, based on need hunger, desire rather than on productive contributions. In a communal utopia there is no direct link between work and consumption. People who work hard to bake the pie may feel cheated if nonworkers get just as large a slice.

Worse still, people may decide to exert less effort if they see no tangible reward to working. If that happens, the size of the pie may shrink, and everyone will be worse off.

This is the kind of problem income transfer programs create. As benefits rise, however, the incentive to work diminishes. If people choose welfare checks over paychecks, total output will decline. The same problem emerges in the tax system. If Paul is heavily taxed to provide welfare benefits to Peter, Paul may decide that hard work and entrepreneurship don't pay. To the extent that taxes discourage work, production, or investment, they shrink the size of the pie that feeds all of us.

The optimal distribution of income must satisfy our sense of fairness as well as our desire for more output. By now, two things should be apparent. Second, those choices are difficult. More of one good implies less of another. A more efficient production process may pollute the environment. Helping the poor may dull work incentives. In every case, society has to weigh the alternatives and try to find the best possible answer to each question. Many of these basic economic decisions are made through the political process.

Who made that decision? Not me. Not you. Not the mass of consumers who were streaming through real and virtual malls. No, the decisions on military buildups and builddowns are made in the political arena: the U. Congress makes those decisions. Congress also makes decisions about how many interstate highways to build, how many Head Start classes to offer, and how much space exploration to pursue.

Should all decisions about WHAT to produce be made in the political arena? Should Congress also decide how much ice cream will be produced and how many DVRs? What about essentials like food and shelter?

Should decisions about the production of those goods be made in Washington, DC, or should the mix of output be selected some other way? If you desire ice cream and have sufficient income, you simply buy ice cream. Your purchases signal to producers that ice cream is desired. By expressing the ability and willingness to pay for ice cream, you are telling ice cream producers that their efforts are going to be rewarded.

If enough consumers feel the same way you do—and are able and willing to pay the price of ice cream—ice cream producers will churn out more ice cream. The same kind of interaction helps determine which crops we grow. There is only so much good farmland available. Should we grow corn or beans? If consumers prefer corn, they will buy more corn and shun the beans. Farmers will quickly get the market's message and devote more of their land to corn, cutting back on bean production.

In the process, the mix of output will change—moving us closer to the choice consumers have made. The central actor in this reshuffling of resources and outputs is the market mechanism.

Market sales and prices send a signal to producers about what mix of output consumers want. If you want something and have sufficient income, you buy it.

If enough people do the same thing, total sales of that product will rise, and perhaps its price will as well. Producers, seeing sales and prices rise, will want to increase production. To do so, they will acquire more resources and use them to change the mix of output. He argued that nations would prosper with less government interference and more reliance on the invisible hand of the marketplace.

As he saw it, markets were efficient mechanisms for deciding what goods to produce, how to produce them, and even what wages to pay. Smith's writings The Wealth of Nations, urged government to pursue a policy of laissez faire—leaving the market alone to make basic economic decisions.

Central Planning. Karl Marx saw things differently. In his view, a freewheeling marketplace would cater to the whims of the rich and neglect the needs of the poor. Workers would be exploited by industrial barons and great landowners.

Marx's writings Das Kapital, encouraged communist revolutions and the development of central planning systems. The people's government, not the market, assumed responsibility for deciding what goods were produced, at what prices they were sold, and even who got them.

Central planning is still the principal mechanism of choice in some countries. In North Korea and Cuba, for example, the central planners decide how many cars and how much bread to produce. They then assign workers and other resources to those industries to implement their decisions. They also decide who will get the bread and the cars that are produced.

Individuals cannot own factors of production or even employ other workers for wages. Few countries still depend so fully on central planners government to make basic economic decisions. China, Russia, and other formerly communist nations have turned over many decisions to the market mechanism. Likewise, no nation relies exclusively on markets to fashion economic outcomes. In the United States, for example, we let the market decide how much ice cream will be produced and how many cars. We use the political process, however, to decide how many highways to construct, how many schools to build, and how much military output to produce.

Because most nations use a combination of government directives and market mechanisms to determine economic outcomes, they are called mixed economies. There is huge variation in that mix, however. It is apparent, however, that they don't always succeed. We have too much poverty and too much pollution. There are often too few jobs and pitifully small paychecks.

A third of the world's population still lives in abject poverty. Economists try to explain how these various outcomes emerge. Why are some nations so much more prosperous than others? What forces cause economic downturns in both rich and poor nations? What causes prices to go up and down so often? How can economies grow without destroying the environment? In studying these questions, economists recognize that neither markets nor governments always have the right answers. A completely free market economy might produce too many luxury cars and too few hospitals.

Unregulated producers might destroy the environment. A freewheeling market economy might neglect the needs of the poor. When the market mechanism gives us these kinds of suboptimal answers, we say the market has failed. An unregulated market might generate too much pollution. Such a market failure requires government intervention.

This may or may not be a good response. Government intervention doesn't always work out so well. Indeed, economists warn that government intervention can fail as well. Government failure occurs when intervention fails to improve—or actually worsens—economic outcomes.

The possibility of government failure is sufficient warning that there is no guarantee that the visible hand of government will be any better than the invisible hand of the marketplace. Economists try to figure out when markets work well and when they are likely to fail. We also try to predict whether specific government interventions will improve economic outcomes—or make them worse. Macroeconomics focuses on the behavior of an entire economy—the big picture.

The essential concern of macroeconomics is to understand and improve the performance of the economy as a whole. Microeconomics is concerned with the details of this big picture.

In microeconomics we focus on the individuals, firms, and government agencies that actually make up the larger economy. Our interest here is in the behavior of individual economic actors. What are their goals? How can they best achieve these goals with their limited resources? How will they respond to various incentives and opportunities? A primary concern of macroeconomics, for example, is to determine the impact of aggregate consumer spending on total output, employment, and prices.

Very little attention is devoted to the actual content of consumer spending or its determinants. Microeconomics, on the other hand, focuses on the specific expenditure decisions of individual consumers and the forces tastes, prices, incomes that influence those decisions. In macroeconomics we want to know what determines the aggregate rate of business investment and how those expenditures influence the nation's total output, employment, and prices.

In microeconomics we focus on the decisions of individual businesses regarding the rate of production, the choice of factors of production, and the pricing of specific goods.

In reality, macroeconomic outcomes depend on micro behavior, and micro behavior is affected by macro outcomes. Hence we cannot fully understand how an economy works until we understand how all the participants behave and why they behave as they do.

But just as you can drive a car without knowing how its engine is constructed, you can observe how an economy runs without completely disassembling it.

In macroeconomics we observe that the car goes faster when the accelerator is depressed and that it slows when the brake is applied. That is all we need to know in most situations. There are times, however, when the car breaks down. When it does, we have to know something more about how the pedals work. This leads us into micro studies. How does each part work? Which ones can or should be fixed? The distinction between macroeconomics and microeconomics is one of many simplifications we make in studying economic behavior.

The economy is much too vast and complex to describe and explain in one course or one lifetime. Accordingly, we focus on basic relationships, ignoring unnecessary detail. What this means is that we formulate theories, or models, of economic behavior and then use those theories to evaluate and design economic policy. The economic models that economists use to explain market behavior are like maps.

To get from New York to Los Angeles, you don't need to know all the details of topography that lie between those two cities. Knowing where the interstate highways are is probably enough. An interstate route map therefore provides enough information to get you to your destination.

The same kind of simplification is used in economic models of consumer behavior. Such models assert that when the price of a good increases, consumers will buy less of it. In reality, however, people may buy more of a good at increased prices, especially if those high prices create a certain snob appeal or if prices are expected to increase still further.

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