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Microeconomics. Economics 0105 Dr. McGahagan . Course web page:. http://www.pitt.edu/~upjecon. Textbook: Principles of Microeconomics by Robert Frank and Benjamin Bernanke (New York, McGraw Hill, 2000). At the UPJ bookstore now.

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microeconomics
Microeconomics

Economics 0105

Dr. McGahagan

Course web page:

http://www.pitt.edu/~upjecon

slide2

Textbook: Principles of Microeconomics

by

Robert Frank and Benjamin Bernanke

(New York, McGraw Hill, 2000)

At the UPJ bookstore now

slide3

Scarcity ... the fundamental problem of economics

Resources are limited ... wants are not

White Sands, New Mexico in the1950s, during a water shortage

photo from National Park Service

slide4

Projected water scarcity

(R. Svadlenka, "The emerging water crisis")

Color codes:

Green => "little or no scarcity"

Red => "Physical water scarcity"

Orange => "Economic scarcity"

In economics, ALL COUNTRIES face economic scarcity

slide5

This photo illustrated an article on water scarcity on the island of Corfu (Greece).

No physical scarcity of water ... but no USABLE water.

Scarcity is always relative to human wants, hence it is always with us.

is west nile virus scarce
Is West Nile Virus “Scarce”?

In US in 2002 (to Aug.23) – 371 cases, 16 deaths http://www.cdc.gov/od/oc/media/wncount.htm

slide8

Resources are limited; wants are unlimited

Scarcity = not enough resources to produce the goods to satisfy

our wants.

Resources: Adam Smith in his Wealth of Nations (1776)

divided resources into land, labor and capital.

http://www.adamsmith.org/smith/won-intro.htm

slide9

Adam Smith’s 3 resources: Land, Labor and Capital

1. LAND: used as shorthand for any natural resource,

not simply for agricultural land.

2. LABOR: manual power + skill ("human capital")

3. CAPITAL: produced means of production

for example, hammers, drill presses, computers ...

or even flint arrowheads of American Indians,

which Smith used as an example.

Although money is used to BUY all the above,

money is not itself a productive resource.

Capital grows through investment – and requires foregoing current consumption. The Indian must take time away from gathering berries to make the arrowheads.

slide10

Identify the resources:

Buena Vista Farm, Kern County, CA, around 1885

(Library of Congress)

slide11

Identify the resources:

Barthelemy L\'Anglais, Le Livre des Proprietes des Choses

15th century. Bibliotheque Nationale, France.

slide12

Identify the resources: land, labor, capital

Trawling for shrimp (NOAA website)

slide13

Identify the resources: land, labor, capital

Gathering coal from a slag heap, Nanty Glo, 1937

(Photo by Ben Shahn, Library of Congress website)

slide14

Identify the resources: land, labor, capital

Electric furnace, Allegheny Ludlum (1941)

scarcity means that choices are necessary
Scarcity means that choices are necessary.

When you can’t have all you want of everything, you must make choices.

Microeconomics is the study of how to make the best possible ( or the optimal) choice under the constraint of limited resources.

choices always involve tradeoffs
Choices always involve tradeoffs

Because of the scarcity of resources, we can have more of one thing only if we are willing to do with less of another.

The tradeoffs are very evident in wartime –

the following slide shows Cadillacs from 1944 and 1946.

The productive resources in the lower pictures could be used to make either tanks or cars.

slide17

Cadillacs ... 1944 and 1946

Opportunity cost of tank = 10 passenger autos

M5 Tank

Cadillac Coupe

tradeoffs and the production possibility frontier
Tradeoffs and the Production Possibility Frontier

Economists would want to develop a more precise model of the tradeoffs involved –

And that model can be represented graphically by a “Production Possibility Frontier”, showing the choices which are

-- possible (on or within the frontier)

-- efficient (exactly on the frontier)

-- inefficient (within the frontier)

-- impossible (beyond the frontier)

slide19

M5 tanks

The tank-auto trade-off:

an economist\'s view using the

Production Possibility Frontier

500

Autos

5,000

slide20

M5 tanks

The tank-auto PPF:

one POSSIBLE point is

(2000 autos, 300 tanks)

another POSSIBLE point is

(4000 autos, 100 tanks)

500

300

Autos

5,000

2,000

slide21

M5 tanks

The tank-auto PPF:

an IMPOSSIBLE point is

(4000 autos, 300 tanks)

500

300

Autos

4,000

5,000

slide22

M5 tanks

500

200

an INEFFICIENT point is

(1000 autos, 200 tanks)

Autos

1,000

5,000

slide23

M5 tanks

The tank-auto equation:

TANKS = 500 – 0.1 AUTOS

Check out a few values:

AUTOS TANKS

0 500

1000 400

2000 300

2001 299.9

500

Autos

5,000

slide24

M5 tanks

  • Equation in general form:
  • TANKS = a + b AUTOS
  • How to find the equation from the graph:
  • a = Y-INTERCEPT = 500
  • b = SLOPE = rise over run = - 500 divided by 5000 = - 0.1

500

Autos

5,000

slide25

What the intercept means:

TANKS = 500 – 0.1 AUTOS

IF we produced zero autos, we could produce up to

500 tanks, since

TANKS = 500 – 0.1 (0) = 500

M5 tanks

500

Autos

5,000

slide26

What happens when the intercept changes:

TANKS = 600 – 0.1 AUTOS

IF we produced zero autos, we could produce up to

600 tanks, since

TANKS = 600 – 0.1 (0) = 600

The PPF would shift OUT and parallel to itself.

M5 tanks

600

500

This might be due to an increase in the resources available for production – for example, an increase in the labor force, and a new assembly line in the factory

Autos

5,000

6000

slide27

What the slope means:

TANKS = 500 – 0.1 AUTOS

IF we were producing 2000 autos and 300 tanks

and if we decided to produce one more auto, we would have to reduce tank production to 299.9

The OPPORTUNITY COST of an auto is

one-tenth of a tank.

M5 tanks

500

Autos

5,000

slide28

What happens when the slope changes:

TANKS = 500 – 0.05 AUTOS

If autos = 0, TANKS = 500

If autos = 5,000, TANKS = 250

If autos = 10,000, TANKS = 0

The possibility exists of producing more autos – perhaps some way of producing auto transmissions (but NOT tank transmissions) more rapidly has been discovered.

M5 tanks

500

Autos

5000

10,000

costs and benefits
Costs and benefits

The Production Possibility Frontier shows us the economically efficient possibilities, but

does not help us choose among them.

To choose, we must weigh costs and benefits:

take an action (move along the PPF)

if and only if the EXTRA benefits of the action are at least as great as the EXTRA costs.

scarcity and use of time
Scarcity and use of time

Exercise: Draw PPF for

1.Studying/Partying

2. Studying/Working

Think about intercepts, actual point chosen.

opportunity cost
Opportunity cost

Consider the last slide:

1. What is the opportunity cost of studying?

2. What is the opportunity cost of working?

3. Why do rational people make different choices?

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