Microeconomics

Lecture 3

Production Possibilities Frontier

Exam 1 Review

What to make?

How much to make?

Who will make it?

Who will consume it?

Four Questions

How you slice the pie

determines the size of

the pie

Who decides?Government

orIndividuals

Planned Economyvs.

Market Economy

Government Economyvs.

Individual Economy

Adam SmithMarket Economy

Individual Economy

Karl MarxPlanned Economy

Government Economy

Adam Smith

The Wealth of Nations

1776

Invisible Hand

individualself interestpromotes

wealth

Price System is a

Knowledge System

buyer and seller both win

Voluntary Exchange

One PriceTwo values

Every Exchange

Protect property rights

What can government do?

the ability of an individual to own

and control resources

Property Rights

It’s cheaper to pay someone else than

to do it myself

Opportunity Cost is too high

0

200

400

600

800

1000

0 200 400 600 800 1000

6000

iPad

iPhone

Production Possibilities Frontier

EfficientCombinations

Inefficient

Impossiblewith currenttechnology

New innovationhelps iPhone

New innovationhelps both

Now possible520200

400400

250500

0600

Exam 1 review

• Terms and Concepts

• Formulas

• Blog

• Book

• 25 multiple choice questions

• No cell phones - bring calculator

Terms and Concepts• Scarcity

• Choices

• Tradeoffs

• Rational

• Incentives

• Behavior

• Utility

• Margin

• Markets

• Circular-Flow Diagram

• Production Possibilities Frontier

• Macro vs. Micro

• Positive vs. Normative

• Absolute Advantage

• Comparative Advantage

Formulas

Percentage Change

% ∆New - Old

Old