Professional Documents
Culture Documents
Definition of economics Distinguish between microeconomics and macroeconomics 3. Economic Perspective: Three core ideas that define the economic way of thinking 4. The economizing problem: the production possibilities model 5. Present Choices and Future Possibilities
1. 2.
1 6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 2
What is Economics?
Economics is the social science concerned with how individuals, institutions and society make optimal choices under conditions of scarcity.
Macroeconomics
studies the economy as a whole (aggregates and economy-wide issues)
Microeconomics
studies how the economic units make their choices (a firm, a household, an industry)
6/22/2011
6/22/2011
Prices
Price of Individual Goods and Services Price of medical care Price of gasoline Food prices Apartment rents Aggregate Price Level Consumer prices Producer Prices Rate of Inflation
Income
Distribution of Income and Wealth Wages in the auto industry Minimum wages Executive salaries Poverty
Employment
Employment by Individual Businesses & Industries Jobs in the auto industry Number of employees in a firm Employment and Unemployment in the Economy Total number of jobs Unemployment rate
Macroeconomics
National Production/Output Total Industrial Output Gross Domestic Product Growth of Output
gasoline? C. What determines the wage of auto workers? D. Factors that explain changes in the unemployment rate over time. E. The Federal Reserve's policy decisions.
6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 6
Quick Quiz!
Limited resources
6/22/2011
Scarcity
Scarcity means that our economic wants far exceed the productive capacity of our scarce resources
It is our inability to satisfy all our wants
3.
People make rational choices Make optimal decisions at the margin People respond to incentives
10
Rational Choices
(Purposeful Behavior)
Economists assume that people make rational decisions
Use all the information available as they act to achieve their goals Seek their own self-interest Maximize their utility Compare costs and benefits of their choices
6/22/2011
11
6/22/2011
12
Marginal Cost
Every choice involves a cost. The cost of an action is the opportunity cost of that particular action
The value of what must be given up to get it.
The highest-valued alternative forgone.
A sunk cost is a cost that occurred in the past and it is not recoverable.
It is irrelevant for our decision
6/22/2011
13
6/22/2011
14
Marginal Benefit
The benefit of an activity is the gain or pleasure that it brings.
Economists measure the benefit of something by what a person is willing to give up.
Price MB curve
1 2 3 4 5 6 7 8 9 10 11
Pizzas
16
6/22/2011
15
6/22/2011
Optimal Decision
Decision to change a course of action or choose one good over another occurs when
MC curve
MB > MC
Price
MB = MC
1 2 3 4 5 6 7 8 9 10 11
Pizzas
17 6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 18
6/22/2011
a
MB = MC
MC
10
MB
6/22/2011
19
1-19
6/22/2011
20
Will Women Have More babies if the Making the Government Pays Them To? Connection
More than 45 countries in Europe and Asia have taken steps to try to raise their birthrates. These policies suggest that people may respond to economic incentives even when making the very personal decision of how many children to have.
6/22/2011
21
6/22/2011
22
Find the optimal decision for a group of people using marginal analysis:
Three friends (Pam, Pru and Pat) are deciding how they will celebrate the New Year together. Given their preferences:
Pam prefers to go on a cruise, is happy to go to Hawaii, but does not want to go skiing. Pru prefers to go skiing, is happy to go to Hawaii, but does not want to go on a cruise. Pat prefers to go to Hawaii or to take a cruise, but does not want to go skiing.
6/22/2011
24
Resources
are means of production; they are also called factors of production or inputs. Four basic resource categories:
Land (natural resources) Capital (manufactured resources) Labor (human resource) Entrepreneurial Ability (human resource)
6/22/2011
29
6/22/2011
30
1. 2. 3. 4.
6/22/2011
31
6/22/2011
32
Type of Product
A 0
B 1
C 2
D 3
E 4
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
10
Industrial Robots
Unattainable
Attainable
E 1 2 3 4 5 6 7 8 9
Pizzas
6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 36 6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 37
Unattainable
C
Industrial Robots
U Under or Unemployment
E 1 2 3 4 5 6 7 8 9
Pizzas
6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 38 6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 39
Opportunity Costs
It is a marginal cost a per unit cost
Opportunity cost of X =
b=
Y Y Y = 1 0 X X1 X 0
6/22/2011
What is the opportunity cost of one pizza? What is the opportunity cost of one robot?
Chapter 1 - Limits, Alternatives, and Choices 41
Robots
E 1 2
Pizzas
Q
6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 43
Unattainable
Industrial Robots
Economic Growth
D
Attainable
E 1 2 3 4 5 6 7
Now Attainable
E 8 9
Pizzas
6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 44 6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 45
Economic Growth
Economic Growth refers to the expansion of potential output over time (a larger total output is produced) Graphically: The PPF shifts outward Sources of Economic Growth:
Increased supplies of resources Improved quality of the resources An advance in technology
6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 46
2.
3.
A bushel of wheat when Ohio produces 380 million bushels per year. A bushel of corn when Ohio moves from D to C. A bushel of corn when Ohio produces 510 million bushels per year.
6/22/2011
48
6/22/2011
49
The End
3. Calculate the
opportunity cost of
A bushel of wheat when Ohio produces 100 million bushels. A bushel of wheat when Ohio produces 500 million bushels. What is the shape of Ohios PPF?
Production Possibility Schedule for Total Corn and Wheat Production in Ohio TOTAL CORN PRODUCTION (MILLIONS OF BUSHELS PER YEAR) 700 650 510 400 300 TOTAL WHEAT PRODUCTION (MILLIONS OF BUSHELS PER YEAR) 100 200 380 500 550
Read chapter 1. Practice with key questions. Chapter 1: Key questions 3, 5, 10, 11, 13 and 14.
POINT ON PPF A B C D E
6/22/2011
50
6/22/2011
54