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Economics

Introduction to Basic Concepts

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Economic perspective:

An unique way of thinking about economic issues

Scarcity and Choice Rational Behavior Marginal Thinking: Costs and Benefits

One unit at a time

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Why Study Economics?

Economics for Citizenship Professional and Personal Application

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Principles Are Derived At Two Levels:

Macroeconomics: economy as a whole and its basic subdivisions such as government, business and households. Macro looks at totals or aggregates to examine the “big picture”.Microeconomics: looks at specific units or segments of the economy, a particularfirm or household. Micro looks at the “trees not the forest”.

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Economic Views

POSITIVE economics collects and presents facts. It avoids value judgments—”just the facts, madam”!

Positive economics concerns WHAT IS —what the economy is really like.

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Economic Views cont.

NORMATIVE economics involves value judgments about what the economy should be

like or which policies are best.

Normative economics embodies subjective feelings about WHAT OUGHT TO BE —examining the desirability of certain conditions or aspects of

the economy.

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Scarcity

Unlimited wants v. Limited resources Considered the ‘basic economic problem’.

Examples

Time: study v. soccer game

Money: vacation v. addition to home

Shortage v. Scarcity

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Trade-Offs & Opportunity Cost

Choices lead to costs Trade-offs: choosing between alternative

uses of a resource. Opportunity cost: loss of the next best

alternative use for a resource.

Production Possibility Curve: a graphical illustration of opportunity cost.

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PPC’s

Economic model of Trade-offs and Opportunity Costs;

4 basic assumptions:Efficiency: full employment and

productive efficiencyFixed resourcesFixed TechnologyTwo ‘products’

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PPC’s cont.

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PPC for Pizza and Industrial Robots

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The PPC

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Optimal Output MB = MC

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Present choices & Future outcomes

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Strategies to expand the production possibilities frontier:

– Discover new land resources– Increase population and/or loosen

immigration policy– Education & training– Increase productivity/technology

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PPC’

Practice problems 3 and 4 in your packet.

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Absolute and Comparative Advantage

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Determining Comparative Advantage

Two methods:

Output: same amount of resources,

different output

Input: differing amount of resource,

same output

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How do we calculate the advantage?

Input Method: Item Produced

‘ O U I’ Opportunity Cost

Output Method: Opportunity Cost

‘O O O’ Item Produced

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Comparative Advantage Applications

Directions: Answer the following questions for each problem.

Does the Output vary or does the Input vary in this problem?

Who has the absolute advantage for each product? Who has the Comparative advantage for the first

product? Who has the comparative advantage for the second

product? Within what range will the terms of trade be?

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Comparative Advantage Problems

A. Joy gives two haircuts or one perm in an hour. Susie gives three haircuts and two perms in an hour.

B. Ana takes 30 min. to wash dishes or one hour to sweep the house. Joe takes 15 min. for dishes or 45 min. to sweep.

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Comparative Advantage Problems

C. George fixes sixteen flats or eight breaks per day. Amy fixes fourteen flats or eight breaks per day.

D. Texans require 10 hours of labor per unit of beef produced and 30 hours of labor per unit of cotton produced. Virginians require 15 hour of labor per unit of beef and 40 hours of labor per unit of cotton.

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Circular Flow Model

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