101 lecture 2
DESCRIPTION
Lecture 2TRANSCRIPT
Microeconomics !
Lecture 2 !
Production Possibilities Frontier
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
Yabut
Intent !
Result
Fell Pushed Jumped
!
Result the same
Utopia vs. Reality
Utopia vs. Reality
Reality always loses
Utopia vs. Reality
Reality always loses
Realistic Alternatives
Positive
Normative
PositiveWhat is
Normative
PositiveWhat is
NormativeFact
PositiveWhat is
NormativeWhat ought to be
Fact
PositiveWhat is
NormativeWhat ought to be
Fact
Values
Facts
Values
FactsTrue or False
Values
FactsTrue or False
ValuesGood or Bad
Four Questions
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
or Individuals
Planned Economy vs.
Market Economy
Planned Economy vs.
Market Economy
Government Economy vs.
Individual Economy
Adam Smith !
Market Economy Individual Economy
Karl Marx !
Planned Economy Government Economy
Adam Smith The Wealth of Nations
1776
Invisible Hand
Invisible Hand
individual self interest promotes
wealth
Price System is a
Knowledge System
Voluntary Exchange
buyer and seller both win
Voluntary Exchange
Every Exchange
One Price Two values
Every Exchange
SAR
100
70
Buyer ValueSAR
100
70
Buyer ValueSAR
100
70
Buyer Value
Seller ValueSAR
100
70
Buyer Value
Seller ValueSAR
100
70
Buyer Value
Seller Value
Price Range?SAR
100
70
Buyer Value
Seller Value
Price Range?SAR
100
70
Buyer Value
Seller Value
Price Range?SAR
100
70
Buyer Value
Seller Value
Price Range?SAR
100
70
Buyer Value
Seller Value
Price Range?SAR
100
70What if the price
was 120?
Buyer Value
Seller Value
Price Range?SAR
100
70What if the price
was 120?
What if the price was 60?
Buyer Value
Seller Value
Price Range?SAR
100
70
Buyer Value
Seller Value
Price Range?SAR
100
70
Buyer Value
Seller Value
Price Range?SAR
100
70
Buyer Value
Seller Value
Price Range?SAR
100
70
Buyer Value
Seller Value
Price Range?
SAR
100
70
What can government do?
Protect property rights
What can government do?
Property Rights
the ability of an individual to own
and control resources
Property Rights
It’s cheaper to pay someone else than
to do it myself
It’s cheaper to pay someone else than
to do it myself
Opportunity Cost is too high
Opportunity Cost
Opportunity Cost
The highest valued alternative
Production Possibilities Frontier
iPhone
Production Possibilities Frontier
iPad
iPhone
Production Possibilities Frontier
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iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
520 200
400 400
250 500
0 600
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1000
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600 0
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
520 200
400 400
250 500
0 600
0
200
400
600
800
1000
0 200 400 600 800 1000
600 0
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
520 200
400 400
250 500
0 600
0
200
400
600
800
1000
0 200 400 600 800 1000
600 0
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
520 200
400 400
250 500
0 600
0
200
400
600
800
1000
0 200 400 600 800 1000
600 0
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
Impossible with current technology
520 200
400 400
250 500
0 600
0
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400
600
800
1000
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iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
Impossible with current technology
New innovation helps iPhone
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1000
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iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
Impossible with current technology
New innovation helps iPhone
0
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400
600
800
1000
0 200 400 600 800 1000
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
Impossible with current technology
New innovation helps iPhone
0
200
400
600
800
1000
0 200 400 600 800 1000
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
Impossible with current technology
New innovation helps iPhone
New innovation helps both
0
200
400
600
800
1000
0 200 400 600 800 1000
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
Impossible with current technology
New innovation helps iPhone
New innovation helps both
0
200
400
600
800
1000
0 200 400 600 800 1000
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
Impossible with current technology
New innovation helps iPhone
New innovation helps both
0
200
400
600
800
1000
0 200 400 600 800 1000
iPad
iPhone
Production Possibilities Frontier
Efficient Combinations
Inefficient
Impossible with current technology
New innovation helps iPhone
New innovation helps both
Now possible
Marshmallow Movie
How many marshmallows would
you have in 24 hours if you started with one and they were doubled every
15 minutes?
296
296
296
296
The number of marshmallows would fill 1,200 earths
296
The number of marshmallows would fill 1,200 earths
Slope Percentage Change
Relationships Cause and Effect
Areas
Formulas
Formulas
Percentage Change
% ∆ New - Old
Old
Notation % Percent Change !
% Percentage Change
% Percentage Change New - Old
Old
% Percentage Change New - Old
Old
7 - 5 5
% Percentage Change New - Old
Old
=7 - 5 5
% Percentage Change New - Old
Old
=7 - 5 5
2 5
% Percentage Change New - Old
Old
= =7 - 5 5
2 5
% Percentage Change New - Old
Old
= = .47 - 5 5
2 5
% Percentage Change New - Old
Old
= = .4 =7 - 5 5
2 5
% Percentage Change New - Old
Old
= = .4 = 40%7 - 5 5
2 5
Last year the price was 6. This year the price is 9. What is the percentage change? !
New - Old Old
Last year the price was 6. This year the price is 9. What is the percentage change? !
New - Old Old
9 - 6 6
Last year the price was 6. This year the price is 9. What is the percentage change? !
New - Old Old
=9 - 6 6
Last year the price was 6. This year the price is 9. What is the percentage change? !
New - Old Old
=9 - 6 6
3 6
Last year the price was 6. This year the price is 9. What is the percentage change? !
New - Old Old
= =9 - 6 6
3 6
Last year the price was 6. This year the price is 9. What is the percentage change? !
New - Old Old
= = .59 - 6 6
3 6
Last year the price was 6. This year the price is 9. What is the percentage change? !
New - Old Old
= = .5 =9 - 6 6
3 6
Last year the price was 6. This year the price is 9. What is the percentage change? !
New - Old Old
= = .5 = 50%9 - 6 6
3 6
X
Y
X
Y
Quantity
Price
X
Y
Quantity
Price
Q
$
Q
$
Q
$
Q
$
Q
$
Q
$
Q
$
Correlation !
Causation
Why are some rich and
others poor?
David Ricardo (1772 - 1823)
!Principles of
Political Economy and Taxation
!
Comparative Advantage
Absolute Advantage !
Produce more with the same resources
!
Comparative Advantage !
Produce at a lower opportunity cost
The basis for trade is comparative advantage,
not absolute advantage.
Gale Ali Total Hours
Make a Hook
3 2 5
Catch a Fish
4 1 5
Total Hours
7 3 10
No Trade 2 Hooks and 2 Fish
10 Hours - 5 Hours per Fish
Gale Ali Total Hours
Make a Hook
3 3/4 Fish
2 2 Fish
5
Catch a Fish
4 1 1/3 Hook
1 1/2 Hook
5
Total Hours
7 3 10
No Trade 2 Hooks and 2 Fish
10 Hours - 5 Hours per Fish
Gale Ali Total Hours
Make a Hook
2 hooks 6 hours
6
Catch a Fish
2 fish 2 hours
2
Total Hours
6 2 8
With Trade 2 Hooks and 2 Fish
8 Hours - 4 Hours Per Fish
Markets !
Where Buyers and Sellers Trade
Households
Individuals in a home
Sell Factors of Production
Buy Goods & Services
Firms
Buy Factors of Production
Sell Goods & Services
Product Markets
Markets for finished goods and services
!
- Stores -
Factor Markets
Markets for goods and services used to make
products
!
Households
!
Households
!
Firms
Labor Capital Natural
Resources Entrepreneurs
!
Households
!
Firms
Labor Capital Natural
Resources Entrepreneurs
Goods & Services
!
Households
!
Firms
Labor Capital Natural
Resources Entrepreneurs
SpendingWages & Payments
for Factors
Goods & Services
!
Households
!
Firms
Labor Capital Natural
Resources Entrepreneurs
SpendingWages & Payments
for Factors
Goods & Services
!
Households
!
Firms
Product Markets
Labor Capital Natural
Resources Entrepreneurs
SpendingWages & Payments
for Factors
Goods & Services
!
Households
!
Firms
Factor Markets
Product Markets
The Market System !
Trust Private Property Rights
Rule of Law