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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 l.jpg
Microeconomics

Economics 0105

Dr. McGahagan

Course web page:

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


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Textbook: Principles of Microeconomics

by

Robert Frank and Benjamin Bernanke

(New York, McGraw Hill, 2000)

At the UPJ bookstore now


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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


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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


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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 l.jpg
Is West Nile Virus “Scarce”? island of Corfu (Greece).

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


Scarcity means scarcity of goods west nile virus is rare but not scarce l.jpg
“Scarcity” means scarcity of “goods”; island of Corfu (Greece). West Nile Virus is “rare”, but not “scarce”


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Resources are limited; wants are unlimited island of Corfu (Greece).

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


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Adam Smith’s 3 resources: Land, Labor and Capital island of Corfu (Greece).

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.


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Identify the resources: island of Corfu (Greece).

Buena Vista Farm, Kern County, CA, around 1885

(Library of Congress)


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Identify the resources: island of Corfu (Greece).

Barthelemy L'Anglais, Le Livre des Proprietes des Choses

15th century. Bibliotheque Nationale, France.


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Identify the resources: land, labor, capital island of Corfu (Greece).

Trawling for shrimp (NOAA website)


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Identify the resources: land, labor, capital island of Corfu (Greece).

Gathering coal from a slag heap, Nanty Glo, 1937

(Photo by Ben Shahn, Library of Congress website)


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Identify the resources: land, labor, capital island of Corfu (Greece).

Electric furnace, Allegheny Ludlum (1941)


Scarcity means that choices are necessary l.jpg
Scarcity means that choices are necessary. island of Corfu (Greece).

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 l.jpg
Choices always involve tradeoffs island of Corfu (Greece).

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.


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Cadillacs ... 1944 and 1946 island of Corfu (Greece).

Opportunity cost of tank = 10 passenger autos

M5 Tank

Cadillac Coupe


Tradeoffs and the production possibility frontier l.jpg
Tradeoffs and the Production Possibility Frontier island of Corfu (Greece).

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)


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M5 tanks island of Corfu (Greece).

The tank-auto trade-off:

an economist's view using the

Production Possibility Frontier

500

Autos

5,000


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M5 tanks island of Corfu (Greece).

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


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M5 tanks island of Corfu (Greece).

The tank-auto PPF:

an IMPOSSIBLE point is

(4000 autos, 300 tanks)

500

300

Autos

4,000

5,000


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M5 tanks island of Corfu (Greece).

500

200

an INEFFICIENT point is

(1000 autos, 200 tanks)

Autos

1,000

5,000


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M5 tanks island of Corfu (Greece).

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


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M5 tanks island of Corfu (Greece).

  • 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


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What the intercept means: island of Corfu (Greece).

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


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What happens when the intercept changes: island of Corfu (Greece).

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


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What the slope means: island of Corfu (Greece).

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


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What happens when the slope changes: island of Corfu (Greece).

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 l.jpg
Costs and benefits island of Corfu (Greece).

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 l.jpg
Scarcity and use of time island of Corfu (Greece).

Exercise: Draw PPF for

1.Studying/Partying

2. Studying/Working

Think about intercepts, actual point chosen.


Opportunity cost l.jpg
Opportunity cost island of Corfu (Greece).

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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