1

CHAPTER 1 (partial) - OVERHEAD NOTES

POSITIVE ECONOMICS: objective and logical, the facts, empirically supportable by
data
NORMATIVE ECONOMICS: subjective and opinionated, personal value judgements,
how things should be (differs for different people)
Examples:
POSITIVE STATEMENTS: Government spending and taxes have risen over the last few
decades., The unemployment rate is 5.6%., Higher taxes lower disposable
income.
NORMATIVE STATEMENTS : Taxes are too high., "The unemployment rate is too high.",
We do not spend enough on social programs., Green is the best color.

Economics generally has a high emphasis on Positive as opposed to Normative since in world of
Normative there are no right or wrong answers if opinion.

SCARCITY - limited resources exist to satisfy unlimited wants

TRADEOFFS - choices involve weighing costs and benefits including Opportunity Costs or what is
given up to get more of something else
UTILITY - measure of individual total happiness or well-being or welfare, also includes pleasure
gained from happiness of others, dependent on individual preferences and quantity of
things consumed or state of world
RATIONAL BEHAVIOR - individuals (and firm owners) compare trade-offs (cost and benefits) in
making decisions always seeking to maximize expected Utility (irrational or non-Utility
maximizing behavior does not exist in economics), a seminal assumption in economics
E.g., an individual constrained by limited income selects a certain market basket of goods
and services from which he or her derives the highest expected level of Utility or happiness.
Mainly done by Marginal Analysis - weighing the incremental costs and benefits of an
action, including opportunity costs. Marginal means added as opposed to total. E.g. the
decision to purchase one more of an item is based on the marginal costs and benefits
derived. Eating the first piece of pizza may bring the more added benefit then the second
slice since hungry, marginal benefit falls as more is consumed while marginal cost may
remain constant (or rise). The decision how many slices of pizza to consume is based on
marginal benefit (which falls) compared to marginal cost, to maximize net gain, buy more
if MB > MC since gain, but stop when equal.

RESOURCES or INPUTS OR FACTORS OF PRODUCTION :

- Things Transformed Into, or Used to Produce, Final Goods and Services or Outputs.
Categories (exhaustive list):
LAND
S
natural resources, raw materials
S
farmland, mineral and oil deposits, water, etc.
LABOR

human resources, workers, their physical and mental skills

CAPITAL (a.k.a. REAL INVESTMENT GOODS)
S
factories, warehouses, machines, equipment, etc.
ENTREPRENEURIAL ABILITY
S
makes business decisions
S
combines the other factors of production
S
innovates, introduces new products, processes, or organization
S
bears risk
RESOURCE PAYMENTS OR INCOMES RECEIVED BY SELLERS OR PRICE :
Land:
Labor:
Capital:
Entrepreneurs:

Rents
Wages, Salaries, & Commissions
Interest
Profits/Losses

4444444444444444444444444

3 = National Income

PRODUCTION POSSIBILITIES MODEL :

Assumptions:
! Full-Employment
S
full utilization of available resources
S
no idle factories and high unemployment wasting capital and labor
! Fixed Resources and Technology
Eg. One Economy Producing Only Two Goods
Production Alternatives
Type of Product
Pizza (100,000 units)
Robots (1,000 units)
PRODUCTION POSSIBILITIES CURVE:

0
10

1
9

2
7

3
4

4
0

OPPORTUNITY COSTS OF PRODUCTION

Marginal Cost of producing an additional item in terms of producing less of another

Opportunity Cost of:
1st unit of Pizzas - 1 unit of Robots forgone (move from point A to B)
2nd unit of Pizzas - 2 units of Robots (point B to C)
3rd unit of Pizzas - 3 units of Robots (point C to D)
4th unit of Pizzas - 4 units of Robots (point D to E)
!

Opportunity Costs are Increasing

As Production Rises, so do Opportunity Costs (normally assumed), ie. what is given up in
order to produce one more rises and more is produced
Why? ... Some resources are better inputs for making certain products than others
Reason why the PP is curved (if constant opportunity costs, then would be flat)

PRODUCTION EFFICIENCY:

Available Resources Not Underemployed

Best Input Mix or Resource Combination Used in Production
Impossible to Produce More Output with the same Resources
Anywhere Strictly on PP Curve, Not Inside
Is that what Society prefers most? [note extreme points A and E on PP curve are production
efficient, but a combination on middle of curve could be is more preferred by society]

ALLOCATIVE EFFICIENCY OR OPTIMALITY:

The Output Mix (or Level of Production) Maximizing Satisfaction of Societal Wants
Assumes Production Efficiency (or subset of such)
Production Level where Added or Marginal Cost (MC) to Produce One More Item Equals the
Marginal Benefit (MB) or Added Happiness Society Gains from One More Consumed
i.e. (Assume MC increasing and MB decreasing with output/consumption level)
*
If MC = MB, then Allocatively Efficient or Optimal.
If MC < MB, then Inefficient (Too Little Produced - Resources Valued less than Output)
If MC > MB, then Inefficient (Too Much Produced - Resources Valued More than Output)

ECONOMIC GROWTH
How? 1.)
2.)
3.)

More Resources
Better Technology
Investments in Capital Stock
Increasing Future Productivity

1.) INCREASING RESOURCES

More Land, new resources discovered

More Labor, larger or more productive

population

More Capital Goods (increases productivity

of other inputs)
2.) TECHNOLOGICAL ADVANCEMENTS

improved technology

the same resources can produce more output

e.g. inventions, better computers,

superconductors, etc.
3.)

CAPITAL INVESTMENTS
Higher Levels of Capital Goods Increase the Productivity of other Resources

Opportunity Cost of Producing More Capital Goods is Less Current Consumer Goods, yet Allows
Higher Levels of Both Future Consumer & Capital Goods.
Suppose only two Goods Produced :
a.) Current Consumption Goods, or
b.) Capital, a.k.a. Real Investment, Goods (replace goods for future on graph below)

Producing more capital goods and less consumption goods at present, augments economic growth
since the capital base grows more allowing higher future production.