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