topic 1 intro to economics

7/21/2019 Topic 1 Intro to Economics

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MICROECONOMICS

Topic 1Introduction to

Economics


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What is Economics?

Definition of Economics

Scarcity and Choice

The Economic Questions

Production PossibilitiesFrontier

Opportunity Cost

The Difference Between

Microeconomics andMacroeconomics

Key Terms


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Economics is a social science that studies the choicesthat individuals, businesses, governments, and entiresocieties make as they cope with scarcity and the

incentives that influence and reconcile those choices. Choices - To choose among the available alternatives

Scarcity our inability to satisfy all our wants; facedwith scarcity we must choose among the available

alternatives.


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Scarcity forces us to make choices among a limitedset of possibilities

Study the logic of rational choice among competingalternatives

Under scarcity, deciding to have more of one good orservice means deciding to have less of somethingelse. The relevant cost of a decision is the value ofthe best alternative foregone


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Needs vs. Wants

Needs what peoplemust have to live.

Food

Clothing

Shelter

Wants the thingswe would like tohave, but can live

without.


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The Difference BetweenMicroeconomics and Macroeconomics

Microeconomics:

The study of the choices that individuals andbusinesses make, the way these choices interact inmarkets, and influence of governments

Macroeconomics:

The study of the performance of the nationaleconomy and the global economy


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Macroeconomics vs. Microeconomics

MICROECONOMIC QUESTION MACROECONOMIC QUESTION

Go to business school or takea job?

How many people areemployed in the economy as awhole?

What determines the salaryoffered by Citibank to Cherie

Camajo, a new Columbia MBA?

What determines the overallsalary levels paid to workers

in a given year?


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Macroeconomics vs. Microeconomics

MICROECONOMIC QUESTION MACROECONOMIC QUESTION

What determines the cost to auniversity or college of offeringa new course?

What determines the overalllevel of prices in the economyas a whole?

What government policiesshould be adopted to make iteasier for low-income studentsto attend college?

What government policiesshould be adopted to promotefull employment and growth inthe economy as a whole?

What determines whetherCitibank opens a new office inShanghai?

What determines the overalltrade in goods, services andfinancial assets between theUS and the rest of the world?


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The Economic Questions

What, How and For Whom?

What goods and services get produced and howmuch?

How to get those goods and services produced? For whom the goods and services produced?


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What goods and services get produced andhow much?

Goods and services:

Are objects (tangible and intangible) that peoplevalue and produce to satisfy human wants

Goods: physical objects. E.g. books, pen Services: tasks performed for people. E.g. car wash,

hair cut

What goods and services get produced?

Agriculture product? Manufacturing product?

More cars, less clothes?

More hand phones, less corn?


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What goods and services get produced andhow much?

How much the quantities of goods and services getproduced?

A small number?

A large number?


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How to get those goods and servicesproduced?

Goods and services are produced by using productiveresources that called factors of production

4 grouped of factors of production:

Land Labor

Capital

Entrepreneurship


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Land

Refers as natural resources

It includes land in the everyday sense together

with oil, gas, coal, water and air.

The amounts are limited and nonrenewable


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Labor

The work time and work effort that people devoteto producing goods and services is called labor.

It includes the physical and the mental efforts.

The quality of labor depends on human capital i.e.the knowledge and skill that people obtain fromeducation, training, and work experience.


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Capital

Human made resources

Examples are tools, instruments, machines, buildings,

offices, plants and other constructions that businessesnow use to produce goods and services.


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Entrepreneurship

The human resource that organizes labor, land andcapital.

Come up with new ideas about what and how toproduce, make business decisions and bear the risksthat arise from these decisions.


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For whom the goods and services produced?

Who gets the goods and services that are produceddepends on the income that people earn.

A large income enables a person to buy large quantitiesof goods and services.

A small income leaves a person with a few options andsmall quantities of goods and services.


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For whom the goods and services produced?

People earn their incomes by selling the services of thefactors of production they own:

Land earns rent.

Labor earns wages/salaries. Capital earns interest.

Entrepreneurship earns profit.


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Production Possibilities Frontier

Quantities of goods and services that we can produceare limited by both our available resources and bytechnology.

And if we want to increase our production of one good,we must decrease our production of something elsewe face tradeoffs.


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Definition of PPF:

A graph that shows the maximum combinations of goodsthat can be produced when resources and technologyare used efficiently

To illustrate the PPF, we focus on two goods at a timeand hold the quantities produced of all the other goodsand services constant.

For simplicity, lets take a world with only 2 products


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The Production Possibility Curve

for an Individual

The production possibility curve demonstrates

that:

There is a limit to what you can achieve,given the existing institutions,resources, and technology.

Every choice made has an opportunitycostyou can get more of somethingonly by giving up something else.


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Possibility Fish

(hundreds)

Coconuts

(hundreds)

A

B

C

0

1

2

15

14

12

D

EF

3

45

9

50


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The PPF for CDs and cars shows the limits to theproduction of these two goods, given the total resourcesavailable to produce them.

The table lists some combinations of the quantities offish and coconuts that can be produced in a month giventhe resources available.


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Production Possibilities Frontier -Graph

Coconuts (hundreds)

Fish (hundreds)

01 2 3 4 5

5

10

15 A B

C

D

E

F

Z

Unattainable

Attainable

PPF

The curve has a

negative slope.The curve is

concave to theorigin.


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Production Efficiency

At a point on the PPF the production is efficient.

All points on the curve correspond to full use of

resources. Production Not Feasible

Points outside the PPF are not feasible /unattainable with existing resources.

It is feasible / attainable only when we add moreresources to the existing amount.


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Tradeoff Along the PPF

Every choice along the PPF involves a tradeoff

Tradeoff is a situation where we must give upsomething to get something else.

All tradeoffs involve a cost an opportunity cost.


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Opportunity Cost

Definition of opportunity cost Is the highest-valued alternative forgone.

Along the PPF, there are only two goods, so there isonly one alternative forgone: some quantity of the

other good. The opportunity cost of any alternative is defined as

the cost of not selecting the "next-best" alternative.

The opportunity cost is a ratio:

It is the decrease in the quantity produced of onegood divided by the increase in the quantity producedof another good as we move along the PPF.


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Woman who is considering whether to stayhome and take care of her children or work at ajob paying $9.50 per hour and hire a baby sitter

Opportunity Cost Examples

Seamstress who chooses to make blue shirtsinstead of striped shirts

A landowner decides to farm his own land

instead of renting it to a neighbor


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All economic decisions taken by individuals or society

are costly

If we want a missile defense system, we have to haveless of other goodsIf an individual wants to have a higher level ofconsumption during working years, then the person will

have to give up somethingHave a lower level of consumption in retirementWork harder and have less leisureGet more education or training

Opportunity Cost


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Measuring Opportunity Cost

Possibility Fish

(millions)

Coconuts

(millions)

A

B

C

0

1

2

15

14

12

DE

F

34

5

95

0

Table 1:


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Example:

Refer to Table 1:

From C to D, the opportunity cost of a fish is 3coconuts. The inverse of 3 is 1/3, so if we decreasethe production of fish and increase the production ofcoconuts by moving from D to C, the opportunity costof a coconut must be 1/3 of a fish.

Measuring Opportunity Cost


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Rightward shifts in PPFs

Increase in resources

Increased productivity

Improved technology

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Technological Change

What would happen to the PPF if a new and

improved variety of corn became available to

the Jonsons. It would not affect the

possibilities when only soybeans were beingproduced but it would shift the curve outward

and to the right.

If an improved fertilizer became available itcould shift the PPF out in all directions.


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Commodity-specific technological

change


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Changing the PPF: Other Factors

If the Jonsons became better informed about crophusbandry that could also shift the PPF outward

If the became more experienced at growing these crops,that could also shift the PPF outward

What would happen if they had more land?


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Economic growth

Economic growth indicatesan increase in the totaloutput of an economy.


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Can a PPF shift inward (to the left)?

YES!! For just the opposite reasons as an outward shiftsuch as a loss of resources

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Application to the Economy

The amounts of goods and services that can

be produced in any given year is limited by theamount and productivity of the land, labor,

and capital goods available. Choices have to be made regarding the

composition of output. How much nationaldefense, food, clothing, automobiles,

education, drugs, health care, capital goods,etc. The PPF can be used to capture thechoices.


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The End

Next Topic:

Demand and Supply

topic 1 intro to economics

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