topic 1 intro to economics
TRANSCRIPT
-
7/21/2019 Topic 1 Intro to Economics
1/39
MICROECONOMICS
Topic 1Introduction to
Economics
-
7/21/2019 Topic 1 Intro to Economics
2/39
What is Economics?
Definition of Economics
Scarcity and Choice
The Economic Questions
Production PossibilitiesFrontier
Opportunity Cost
The Difference Between
Microeconomics andMacroeconomics
Key Terms
-
7/21/2019 Topic 1 Intro to Economics
3/39
Definition of Economics
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.
-
7/21/2019 Topic 1 Intro to Economics
4/39
Definition of Economics
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
-
7/21/2019 Topic 1 Intro to Economics
5/39
Needs vs. Wants
Needs what peoplemust have to live.
Food
Clothing
Shelter
Wants the thingswe would like tohave, but can live
without.
-
7/21/2019 Topic 1 Intro to Economics
6/39
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
-
7/21/2019 Topic 1 Intro to Economics
7/39
7
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?
-
7/21/2019 Topic 1 Intro to Economics
8/39
8
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?
-
7/21/2019 Topic 1 Intro to Economics
9/39
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?
-
7/21/2019 Topic 1 Intro to Economics
10/39
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?
-
7/21/2019 Topic 1 Intro to Economics
11/39
What goods and services get produced andhow much?
How much the quantities of goods and services getproduced?
A small number?
A large number?
-
7/21/2019 Topic 1 Intro to Economics
12/39
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
-
7/21/2019 Topic 1 Intro to Economics
13/39
How to get those goods and servicesproduced?
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
-
7/21/2019 Topic 1 Intro to Economics
14/39
How to get those goods and servicesproduced?
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.
-
7/21/2019 Topic 1 Intro to Economics
15/39
How to get those goods and servicesproduced?
Capital
Human made resources
Examples are tools, instruments, machines, buildings,
offices, plants and other constructions that businessesnow use to produce goods and services.
-
7/21/2019 Topic 1 Intro to Economics
16/39
How to get those goods and servicesproduced?
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.
-
7/21/2019 Topic 1 Intro to Economics
17/39
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.
-
7/21/2019 Topic 1 Intro to Economics
18/39
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.
-
7/21/2019 Topic 1 Intro to Economics
19/39
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.
-
7/21/2019 Topic 1 Intro to Economics
20/39
Production Possibilities Frontier
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
-
7/21/2019 Topic 1 Intro to Economics
21/39
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.
-
7/21/2019 Topic 1 Intro to Economics
22/39
Production Possibilities Frontier
Possibility Fish
(hundreds)
Coconuts
(hundreds)
A
B
C
0
1
2
15
14
12
D
EF
3
45
9
50
-
7/21/2019 Topic 1 Intro to Economics
23/39
Production Possibilities Frontier
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.
-
7/21/2019 Topic 1 Intro to Economics
24/39
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.
-
7/21/2019 Topic 1 Intro to Economics
25/39
Production Possibilities Frontier
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.
-
7/21/2019 Topic 1 Intro to Economics
26/39
Production Possibilities Frontier
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.
-
7/21/2019 Topic 1 Intro to Economics
27/39
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.
-
7/21/2019 Topic 1 Intro to Economics
28/39
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
-
7/21/2019 Topic 1 Intro to Economics
29/39
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
-
7/21/2019 Topic 1 Intro to Economics
30/39
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:
-
7/21/2019 Topic 1 Intro to Economics
31/39
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
-
7/21/2019 Topic 1 Intro to Economics
32/39
Rightward shifts in PPFs
Increase in resources
Increased productivity
Improved technology
32
-
7/21/2019 Topic 1 Intro to Economics
33/39
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.
-
7/21/2019 Topic 1 Intro to Economics
34/39
Commodity-specific technological
change
-
7/21/2019 Topic 1 Intro to Economics
35/39
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?
-
7/21/2019 Topic 1 Intro to Economics
36/39
Economic growth
Economic growth indicatesan increase in the totaloutput of an economy.
-
7/21/2019 Topic 1 Intro to Economics
37/39
Can a PPF shift inward (to the left)?
YES!! For just the opposite reasons as an outward shiftsuch as a loss of resources
37
-
7/21/2019 Topic 1 Intro to Economics
38/39
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.
-
7/21/2019 Topic 1 Intro to Economics
39/39
The End
Next Topic:
Demand and Supply