1

Learning Objectives: Introduction to Economics
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
Chapter 1 (Macro) Limits, Alternatives, and Choices

6/22/2011
Building Blocks of Economics
What is Economics?
Economics is the social science concerned with how individuals, institutions and society make optimal choices under conditions of scarcity.
Two Branches of Economics

Economics is divided into two levels of analysis:
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
Chapter 1 - Limits, Alternatives, and Choices
6/22/2011
Examples of microeconomic and macroeconomic issues

Production
Microeconomics
Production/Output in Individual Industries and Businesses How much oil How many houses How much corn
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
Micro or Macro Issues?

A. How much will be saved and how much will
be produced in the entire economy?
B. What factors determine the price of
Macroeconomics
National Production/Output Total Industrial Output Gross Domestic Product Growth of Output
National Income Total wages and salaries Total corporate profits
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!
Micro or Macro Issue?

1. 2. 3. 4. The unemployment rate for the U.S. was 9.1% in May of 2011. The price of cotton rose to $ 1.305 a pound in New York, the highest level since the fiber started trading 140 years ago. the Fed can bolster aggregate demand by reducing interest rates. Lower interest rates encourage households and companies to borrow and spend. The large majority of the increase in the federal budget deficit in recent years is a direct result of the recession, which has left millions of workers unemployed or underemployed, reducing tax receipts and requiring increased safety net spending.
Chapter 1 - Limits, Alternatives, and Choices 7 6/22/2011
The Economic Problem

The core economic problem is scarcity Scarcity is the outcome of two facts
Multiple and unlimited wants
Limited resources
6/22/2011
The Nature of Economic Analysis
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
The Economic Perspective

Refers to three core ideas of how people make their choices: Economists assume that:
1. 2.
We must make choices Our choices depend on the incentives we face

6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 9 6/22/2011
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
Optimal Decisions are Made at the Margin

Marginal means extra, additional, or a change in. People compare the marginal cost and marginal benefit of one additional unit of the good or a small adjustment to an existent plan of action.
6/22/2011
11
6/22/2011
12
Example: Costs of Producing your Textbook
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.
Marginal Costs vs. Sunk Costs

Assume: initially 10,000 copies are produced
Total cost includes: authors costs of writing the book, editing, making the plates for printing, materials (paper and ink) - $600,000
Average cost per copy = $60
A sunk cost is a cost that occurred in the past and it is not recoverable.
It is irrelevant for our decision
Cost of a second printing: additional 10,000 copies

Costs of writing, editing and making plates are irrelevant sunk costs The only costs considered are the costs associated with the additional 10,000 copies marginal cost
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.
Marginal Benefit Curve

$
20 18 16 14 12 10 8 6 4 2
Price MB curve
1 2 3 4 5 6 7 8 9 10 11
Pizzas
16
6/22/2011
15
6/22/2011
Marginal Cost Curve

$
20 18 16 14 12 10 8 6 4 2
Optimal Decision
Decision to change a course of action or choose one good over another occurs when
MC curve
MB > MC
Price
An optimal decision is to continue any activity up to the point where
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
Optimal Allocation of Resources

Marginal Benefit & Marginal Cost 15
People Respond to Incentives

Incentives influence our behavior and choices People respond in predictable ways to changes in costs and benefits of their actions
When the cost of doing something increases people tend to avoid that activity When the benefits from something increases people tend to seek that activity
a
MB = MC
MC
10
MB
2 3 Quantity of Pizza (in thousands)
6/22/2011
19
1-19
6/22/2011
20
Will Women Have More babies if the Making the Government Pays Them To? Connection
What are the tradeoffs faced by:

A family deciding whether to buy a new car. Congress deciding whether to reduce drastically the budget deficit.
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
Recognize Optimal Allocation of Resources:

In the figure, if 4 million computers are produced per year then the MC is ________ (less/ greater) than the MB. _______ (more/fewer) computers should be produced to achieve the optimal allocation of resources. Optimal allocation of resources is achieved when ________ computers are produced and MB is ______ to the MC and the value is $ _______.
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.
Using marginal analysis, what is their decision?

23 6/22/2011 Chapter 1 - Limits, Alternatives, and Choices
6/22/2011
24
Societys Economizing Problem

Society makes choices under conditions of scarcity. It faces unlimited wants (better education, criminal system, health care) and limited resources.
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
Capital and Investment

Money, stocks and bonds are not capital. They are financial capital; they are used to finance the purchase of capital goods. Investment is the production or purchase of new capital goods. Which of the following is an economic resource? If it is a resource, which category? $1,000 in your money market account. An idle piece of farmland in Kansas. Steve Jobs. A tractor used by a farmer in Ohio.
1. 2. 3. 4.
6/22/2011
31
6/22/2011
32
Production Possibilities Model

Assumptions: Fixed Resources (quantity and quality) Full Employment Fixed Technology Two Goods
Consumer Goods (Pizzas) Capital Goods (Industrial Robots)

Production Possibilities Table
Production Alternatives
Type of Product
A 0
B 1
C 2
D 3
E 4
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
10
Plot Points to Create Graph

6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 34 6/22/2011 Chapter 1 - Limits, Alternatives, and Choices 35
Production Possibilities Curve

14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 A B C

It is a graph that shows all the combinations of goods and services that can be produced if all resources are used efficiently
Shows the boundary of the production capabilities of the economy
Industrial Robots
Unattainable
Attainable
E 1 2 3 4 5 6 7 8 9
Pizzas
Economic Concepts Illustrated by the PPC

Efficiency Full Employment Unemployment Tradeoffs Opportunity Costs Economic Growth Gains from Trade

14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 A B
Unattainable
C
Industrial Robots
U Under or Unemployment
E 1 2 3 4 5 6 7 8 9
Pizzas
A Line Graph and the Slope Revisited

A line is a continuous sets of (X,Y) values on a two-dimensional graph The slope of a line is constant b = slope of the line, or the
rate of change in Y given a change in X.
Opportunity Costs
It is a marginal cost a per unit cost
Opportunity cost of X =
Loss: in terms of good Y Gain: in terms of good 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
Calculating Opportunity Costs

Q 14
13 12 11 10 9 8 7 6 5 4 3 2 1 A B C D
Law of Increasing Opportunity Cost

States that as we increase the production of one good, the opportunity cost of each additional unit is greater than the opportunity cost of the preceding one.
This is reflected in the shape of the PPC. The curve is bowed outward
Robots
Law of Increasing Opportunity Cost Shape of the Curve
E 1 2
Pizzas
Q
Law of Increasing Opportunity Costs

Economic Rationale
Not all resources are equally productive in both industries. Some resources are specialized in the production of one particular good

14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 A B A B C C
Unattainable
Industrial Robots
Economic Growth
D
Attainable
E 1 2 3 4 5 6 7
Now Attainable
E 8 9
Pizzas
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
Capital Goods and Growth
Capital Goods and Growth in Poor and Rich Countries

Dilemma of Poor Countries
Rich countries find it easier than poor countries to devote resources to the production of capital, and the more resources that flow into capital production, the faster the rate of economic growth. Thus, the gap between poor and rich countries has grown over time.
Computation of Opportunity Costs

Calculate the opportunity cost of
1.
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

1

Enviado por

Dados do documento

Descrição original:

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

1

Enviado por

Direitos autorais:

Formatos disponíveis

Learning Objectives: Introduction to Economics

Chapter 1 (Macro) Limits, Alternatives, and Choices

Building Blocks of Economics

Building Blocks of Economics

Two Branches of Economics

Chapter 1 - Limits, Alternatives, and Choices

Chapter 1 - Limits, Alternatives, and Choices

Examples of microeconomic and macroeconomic issues

Micro or Macro Issues?

B. What factors determine the price of

National Income Total wages and salaries Total corporate profits

Building Blocks of Economics

Micro or Macro Issue?

The Economic Problem

Multiple and unlimited wants

Chapter 1 - Limits, Alternatives, and Choices

The Nature of Economic Analysis

The Economic Perspective

We must make choices Our choices depend on the incentives we face

Chapter 1 - Limits, Alternatives, and Choices

Optimal Decisions are Made at the Margin

Chapter 1 - Limits, Alternatives, and Choices

Chapter 1 - Limits, Alternatives, and Choices

Example: Costs of Producing your Textbook

Marginal Costs vs. Sunk Costs

Cost of a second printing: additional 10,000 copies

Chapter 1 - Limits, Alternatives, and Choices

Chapter 1 - Limits, Alternatives, and Choices

Marginal Benefit Curve

Chapter 1 - Limits, Alternatives, and Choices

Chapter 1 - Limits, Alternatives, and Choices

Marginal Cost Curve

An optimal decision is to continue any activity up to the point where

Chapter 1 - Limits, Alternatives, and Choices

Optimal Allocation of Resources

People Respond to Incentives

2 3 Quantity of Pizza (in thousands)

Chapter 1 - Limits, Alternatives, and Choices

Chapter 1 - Limits, Alternatives, and Choices

What are the tradeoffs faced by:

Chapter 1 - Limits, Alternatives, and Choices

Chapter 1 - Limits, Alternatives, and Choices

Recognize Optimal Allocation of Resources:

Using marginal analysis, what is their decision?

Chapter 1 - Limits, Alternatives, and Choices

Societys Economizing Problem

Chapter 1 - Limits, Alternatives, and Choices

Chapter 1 - Limits, Alternatives, and Choices

Capital and Investment

Chapter 1 - Limits, Alternatives, and Choices

Chapter 1 - Limits, Alternatives, and Choices

Production Possibilities Model

Production Possibilities Model

Plot Points to Create Graph

Production Possibilities Curve

Production Possibilities Curve

Economic Concepts Illustrated by the PPC

Production Possibilities Model

A Line Graph and the Slope Revisited

Loss: in terms of good Y Gain: in terms of good X

Calculating Opportunity Costs

Law of Increasing Opportunity Cost

Law of Increasing Opportunity Cost Shape of the Curve