Chapter1Economics:FoundationsandModelsLearningObjectivesIswaterascarceresource?Economicsisusedtoanswerquestionssuchasthefollowing:Howarethepricesofgoodsandservicesdetermined?Howdoespollutionaffecttheeconomy,andhowshouldgovernmentpolicydealwiththeseeffects?Whydofirmsengageininternationaltrade,andhowdogovernmentpoliciesaffectinternationaltrade?Whydoesgovernmentcontrolthepricesofsomegoodsandservices,andwhataretheeffectsofthosecontrols?Economicsisthestudyofthechoicespeopleandsocietiesmaketoattaintheirunlimitedwants,giventheirscarceresources.Ineconomicswestudyhowpeoplemakechoicesandinteractinmarkets.Market:Agroupofbuyersandsellersofagoodorserviceandtheinstitutionorarrangementbywhichtheycometogethertotrade.ThreekeyeconomicideasScarcityandtrade-offsTrade-offsforcesocietytomakechoicesThisisespeciallytruewithrespecttothreefundamentalquestions:Whatgoodsandserviceswillbeproduced?Howwillthegoodsandservicesbeproduced?Whowillreceivethegoodsandservicesproduced?Whatgoodsandserviceswillbeproduced?Whenchoosingbetweenalternativeoptions,economistsusetheconceptofopportunitycost.Opportunitycost:Theopportunitycostofanyactivityisthehighest-valuedalternativethatmustbegivenuptoengageinthatactivity.Howwillthegoodsandservicesbeproduced?Inmanycases,firmsfaceatrade-offbetweenusingmoreworkersandusingmoremachines.Whowillreceivethegoodsandservicesproduced?Thislargelydependsonhowincomeisdistributed.CentrallyplannedversusmarketeconomiesCentrallyplannedeconomy:Aneconomyinwhichthegovernmentdecideshoweconomicresourceswillbeallocated.Marketeconomy:Aneconomyinwhichthedecisionsofhouseholdsandfirmsinteractinginmarketsallocateeconomicresources.Centrallyplannedversusmarketeconomies,cont.Acentralfeatureofmarketeconomiesisconsumersovereignty.Consumersovereignty:Theconceptthatinamarketeconomyitisultimatelyconsumerswhodecidewhatgoodsandserviceswillbeproduced.Thisoccursbecausefirmsmustproducegoodsandservicesthatmeetthewantsoftheconsumers,orthefirmswillgooutofbusiness.Themodern‘mixed’econ